## Facts

- Goldsboro Art League, Inc. was a North Carolina nonprofit corporation formed to promote participation in and appreciation of the visual arts, provide fine-arts education, and sponsor an arts center for instruction and display.
- Its charter limited its purposes and activities to those consistent with I.R.C. § 501(c)(3) and § 170(c)(2).
- The League conducted educational programs, including sponsoring art classes at a community college, providing instruction and demonstrations for children, giving lectures at a local high school, organizing museum tours, and placing art in public buildings for public enjoyment.
- In addition to these programs, the League operated two galleries that exhibited and sold artworks selected through jury procedures intended to maintain artistic quality and integrity, often featuring experimental works.
- More than 100 artists exhibited; none were officers or directors, and only two were League members.
- From sales, about 80% of proceeds went to artists; the League retained about 20% to defray gallery expenses.
- Annual gross receipts from the galleries were modest (never exceeding about $6,500), and annual net profits were limited (never exceeding about $750).
- The IRS issued a final adverse ruling denying recognition of exemption, asserting the League operated with a substantial commercial purpose and served private rather than public interests.
- The League sought declaratory judgment in the U.S. Tax Court under I.R.C. § 7428 on a stipulated administrative record.

## Issues

1. Whether the League was organized and operated exclusively for one or more exempt purposes under I.R.C. § 501(c)(3).
2. Whether operating galleries that sell artworks constituted a substantial nonexempt commercial purpose.
3. Whether the gallery operations conferred more than incidental private benefit on the artists whose works were sold.

## Decision

- The Tax Court entered decision for the League.
- The court held the League satisfied the organizational test because its charter expressly limited purposes and activities to those consistent with § 501(c)(3) and § 170(c)(2).
- The court held the League satisfied the operational test because its primary activities were educational and charitable, and the galleries served an educational function integrated with that mission.
- The court concluded the sales activity was secondary and incidental to art education, not evidence of a substantial commercial purpose.
- The court rejected the IRS’s private-benefit theory, finding the public educational benefit predominated and any benefit to artists was incidental.

## Legal Principles

- Qualification under I.R.C. § 501(c)(3) requires meeting both (1) the organizational test (charter limited to exempt purposes) and (2) the operational test (no more than an insubstantial nonexempt purpose).
- Revenue-generating activity does not defeat exemption when it is functionally subordinate to an exempt purpose and does not reflect a substantial commercial objective.
- The commerciality inquiry considers the nature of the activity and its scale, including whether receipts and profits reflect a profit-driven enterprise.
- Private benefit must be incidental—both qualitatively (a byproduct of pursuing public purposes) and quantitatively (not substantial relative to the public benefit).
- Payments to non-insiders (e.g., artists receiving sale proceeds) may be consistent with exemption when structured to support the exempt program and not to serve private interests as an end.

## Conclusion

The court recognized the League as a § 501(c)(3) organization because its educational arts programs, including jury-selected gallery exhibitions, served public art education, while artwork sales and payments to artists were financially modest and incidental to the exempt mission rather than a substantial commercial or private-benefit purpose.


Goldsboro Art League, Inc. v. Commissioner, 75 T.C. 337 (1980)