Dear Nonprofiteer, How Close is Too Close?

Dear Nonprofiteer,

I am a member of a very small art guild which gained 501(c)(3) status about 3 years ago.  We use funds raised by shows and card sales for local school art programs, to fund a monthly art walk, and to otherwise promote art in our small beach town.

Last year, two guild officers started a for-profit art gallery in town.  Some guild members are wondering about conflict of interest and possible loss of nonprofit status.  So far, we have held guild meetings in the gallery (no cost involved to anyone) and are planning a joint art show this summer.  The guild stands to gain financially from the show because the opportunity for sales commissions is improved and some costs are avoided.  The artists participating in the show stand to gain because their work will hang longer and in a better setting than the public town space we used in the past.  The gallery forgoes a portion of its commission for part of the show so the guild can get its traditional sales commission.  I don’t see a financial benefit to the gallery.  The officers have not taken any actions in their nonprofit guild roles to cause guild funds to be used for gallery benefit, and we are documenting why the gallery is the only workable place to have our judged show this year.

Are we endangering the nonprofit status of the guild by such activities with the gallery?  Where can we find guidance on this issue?

Signed, Aboveboard Above All

Dear Aboveboard:

Nothing you’ve said suggests that the guild is being used to conceal gallery profits, which is the IRS’s chief concern in examining nonprofit returns.  As the agency says on its Website, "Misuse [of tax-exempt organizations] includes arrangements to improperly shield income or assets from
taxation, attempts by donors to maintain control over donated assets or
income from donated property and overvaluation of contributed property."  Holding an event at a Board member’s place of business doesn’t fall into any of these categories.

So it’s not your 501(c)(3) status the Nonprofiteer would worry about based on the relationship you describe, but
your ability to operate your nonprofit in service of its mission independent of any other considerations.  You say that the gallery-owning Board members haven’t "taken any actions in their nonprofit guild roles to cause guild funds to be used for gallery benefit," but that formulation strikes the Nonprofiteer as a bit legalistic.  The reality is, as members of the guild board they’re in a position to decide where the guild holds its show; they’ve made that decision in a way that will drive traffic to their for-profit business.  Unless they’re recusing themselves from all these decisions, the decisions are inherently corrupt because the people making them have a conflict of interest.

So the issue isn’t where you hold your Board meetings (Board members routinely donate office space for their agencies’ meetings), or even where you hold your events (Board members likewise often donate space for those); it’s who decides.  The best possible location may actually be the gallery, and it may actually be in the guild’s best interest to conduct its show jointly with the gallery; but no one with a financial interest in the gallery can possibly decide that on an impartial basis.

You don’t say how big your Board is, but the Nonprofiteer suspects it’s tiny and that regular or permanent recusal of two members is impossible.  That leaves you with only two choices: immediate expansion of your Board by the addition of members who have no pecuniary interest in the guild’s work, or immediate agreement by the existing Board to undertake no further cooperative efforts with the gallery.

Look, all business donors contribute to charities because they want the favorable publicity that generates, and they’re more than entitled to have it.   And Board members’ donations are as praise- and publicity-worthy as anyone else’s.  But every nonprofit has to evaluate every donation, or offer of sponsorship or partnership, to see whether what it’s getting (donation) is worth what it’s giving (positive publicity); and that evaluation can’t be made properly by a group that includes the prospective donor–and certainly not by a small group that includes two prospective donors. 

In any case, unless your little tiny organization already has universal public awareness and acceptance, you don’t want to risk having the guild be confused in the public mind with a for-profit gallery.  That confusion–which no amount of "documentation" will erase–will make it hard to raise money from individuals, perhaps from foundations, and certainly from other community businesses; it suggests a "sugar-daddy" relationship in which the gallery is paying the guild’s bills.

As for sources of information, the IRS now provides an on-line version of its workshop on keeping your 501(c)(3) shiny and bright.  The "Charities and Exempt Organizations" section of the IRS Website is full of advice about what the agency considers appropriate, abusive, amoral, actionable, et alia.  And for more about conflict of interest, please take a look at this earlier post.  And this one.

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