The Met and MOMA: Nonprofit Luxuries?

Seven years ago, in 2004, New York City’s Museum of Modern Art generated headlines by becoming the first major art museum in the United States to establish a standard admission fee of $20.

$20? For a nonprofit organization that claimed — and still claims — to be “accessible to a public that ranges from scholars to young children”? At the time, many critics believed that the charge was a bit steep.

Nevertheless, the year 2004 was a time of economic growth and prosperity in the United States. Perhaps the executive team at MOMA believed that, at a time of low unemployment, $20 represented a reasonable and affordable charge for access to world-class cultural exhibits.

Our current recessionary climate, though, appears to represent a different economic environment … and yet the guardians of our cultural heritage are once again increasing their prices! Just last week, for instance, the Metropolitan Museum of Art in New York announced that it would be lifting its standard admission charge on July 1st from $20 to $25.

Broadway? The Yankees?

The Met, somewhat predictably, explained its decision to institute a $25 ticket price by noting various daunting budgetary challenges, including lower rates of donations and reduced levels of government support payments. The weak economy has likely damaged other sources of cash flow as well, such as the Met’s lavishly extravagant on-site facility rental and catering businesses.

$25 tickets? A catering business? Although the Met and MOMA both help support the Big Apple’s global reputation as a center of world culture, such characteristics are more commonly found at for-profit businesses than at nonprofit institutions. After all, New York’s Broadway theaters and its champion New York Yankees baseball club also serve food and produce entertainment events while charging high ticket prices, and yet they do not enjoy the benefits of nonprofit status.

All of these institutions produce high quality cultural experiences that enrich their local and global communities. And all are well known to their global audiences as world-class icons of the United States in general, and of New York City in particular. For that reason, all of these organizations receive some level of financial and operational support from local government sources. But if they all share these common characteristics, why are museums — but not theaters or baseball clubs — permitted to classify themselves as nonprofit organizations?

Nonprofit? Tax Exempt?

According to the Internal Revenue Service (IRS), tax exempt organizations must dedicate themselves to charitable, religious, educational, scientific, literary, or similar endeavors. Among other additional requirements, they cannot distribute their earnings to private shareholders or individuals, and cannot attempt to influence political legislation or elections. Instead, they must reinvest any net proceeds into these same charitable endeavors, and must remain completely apolitical at all times.

Interestingly, although all of the fifty states of the United States maintain their own nonprofit requirements, they do not necessarily need to synchronize their laws and regulations with those of the IRS. Thus, one can always find organizations that are registered as nonprofit entities at the state level, but that nevertheless pay income taxes to the federal government and other entities. In fact, some local taxation authorities skirt the IRS’s tax exempt regulations by mandating and collecting Payments In Lieu Of Taxes (PILOTs) from such charitable organizations.

The New York Yankees baseball team, as well as many Broadway show organizations, are controlled by owners that benefit financially from the earnings of these organizations; thus, these institutions cannot be classified as nonprofit or tax exempt in nature. The Met and MOMA, though, do not repatriate their earnings to owners and thus can legally exploit the benefits of nonprofit, tax exempt status.

Hybrid Entities

The clarity of this distinction is surprisingly sharp, isn’t it? Basically, even though museums may charge high ticket prices, their profits are plowed back into charitable purposes and do not enrich any organizational owners. Thus, unlike civic-minded family businesses like those of the Shuberts and even the Steinbrenners, the museums are not required to pay income taxes on their earnings from ticket revenues.

Nevertheless, hybrid entities are now emerging in forms that obfuscate the distinctions between nonprofit and for-profit organizations. Socially responsible investors and companies, for instance, dedicate themselves to serving the public interest even though they maintain for-profit, privately owned firms and pay corporate income taxes. Conversely, even the Smithsonian Institution in Washington D.C. — a museum that declines to charge any ticket prices — operates restaurants, gift shops, and publishing houses in order to raise funds to support its charitable activities.

So the next time you find yourself paying more for a set of museum tickets than you do for a decent dinner, please don’t complain that the institution is engaging in profit-gouging! As long as it adheres to the requirements of its nonprofit, tax exempt status, no private individual or organization will prosper from your ticket revenues, except for the museum itself and the public whom it serves.