Farmers market denied business-league exemption

Plain-English summary

An organization whose earlier section 501(c)(5) exemption had been automatically revoked applied for reinstatement under section 501(c)(6) after its membership evolved to include both farmers and processors. It operated a year-round weekly market where members sold products to the public, promoted the venue, managed member logistics and disputes, and exchanged benefit-card or credit-card payments for market tokens. The IRS concluded that these activities provided particular services and economic conveniences to members and resembled a regular for-profit business. Because the organization served its members rather than improving conditions for an industry or all commercial enterprises in the community, the IRS denied business-league exemption.

Ruling snapshot

• Question: Did an organization operating and promoting a market for its members qualify as a section 501(c)(6) business league?
• Outcome: Denied because it provided particular services and private economic benefits to members.
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Ruls. 56-65, 58-224, 68-264, 73-411.

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201639016 Date: June 30, 2016

Release Date: 9/23/2016

UIL Code: 501.06-00 Employer ID number:
501.06-01

Contact person/ID number:
Contact telephone number:
Form you must file:

Tax years:

Dear [redacted]:

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(6) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

You must file federal income tax returns for the tax years listed at the top of this letter using the required form
(also listed at the top of this letter) within 30 days of this letter unless you request an extension of time to file.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at
1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Letter 4040 (Rev. 7-2014)
Catalog Number 47635Z

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Notice 437
Redacted Letter 4034, Proposed Adverse Determination under IRC Section 501(a) Other Than 501(c)(3)

Redacted Letter 4040, Final Adverse Determination under IRC Section 501(a) Other Than 501(c)(3) - No
Protest

Letter 4040 (Rev. 7-2014)
Catalog Number 47635Z

Department of the Treasury
Internal Revenue Service

Cincinnati, OH 45201

Date: May 2, 2016

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

B = State 501.06-00
C = Date of formation 501.06-01
Dear

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify
for exemption under 501(c)(6) of the Code. This letter explains the basis for our conclusion. Please keep it for
your records.

Issue

Do you qualify for exemption under Section 501(c)(6) of the Code? No, for the reasons stated below.

Facts

You were previously exempt under Section 501(c)(5) of the Code and your exemption was automatically
revoked because you did not file timely Form 990 series annual returns for three consecutive years. You applied
for reinstatement under Section 501(c)(6). You applied under Section 501(c)(6) rather than Section 501(c)(5)
because your membership has evolved and now consists of about half farmers and half processors.

You were formed in the State of B on C. Your Articles of Incorporation state that you are formed to provide an
outlet for farmers, cheesemakers, bakers, and crafts people to sell their products. Your bylaws state that your
purpose is to provide a venue for open competition among your members without restriction or limitation on
specific products, to provide the agriculture producers of mid-coast B with a venue to present their products
directly to consumers, and to provide the consumers in your region with the very best quality farm-fresh
produce and products possible that are made or grown in B.

Membership is open to B residents who are agriculture producers of vegetables, fruit, flowers, fungi, meat,
poultry, fiber, dairy, fish or value-added items such as baked goods and preserves. You have full-time members
and provisional members. Provisional members do not have voting rights and their conversion to full-time
membership is contingent upon a vote by the full-time members.

You host a market for the general public every Saturday throughout the year. The market exists to provide a
venue for your members to sell their products directly to consumers. You spend 40% of your time organizing,

preparing for, participating in and conducting meetings. The meetings consist of admitting new members,
converting provisional members to full-time members, advertising/promoting the market, supporting and
participating in local community programs compatible with your market, marketing layout and member
logistics, regulatory issues affecting the market and reporting on the financial status of the market.

You spend approximately 35% of your time managing payments to market members in exchange for tokens.
You’ve conducted the token program for several years. This program allows low and no-income individuals
receiving public assistance to swipe their benefits card to receive tokens that can be exchanged for goods at
your market. In addition, regular customers can exchange credit card payments for tokens so they can purchase
goods from members who cannot receive credit card payments. You prepare and distribute checks to market
members in exchange for market tokens received by your members.

You spend approximately 25% of your time managing the market during market days. This involves resolving
market logistics problems, resolving disputes between market members, interviewing potential market
members, preventing encroachment into the market space by hawkers and peddlers, and notifying your local
police department when there are problems with pickpockets, abusive customers, or counterfeit currency.

Law

Section 501(c)(6) of the Internal Revenue Code provides for exemption of business leagues, chambers of
commerce, real estate boards, boards of trade, and professional football leagues (whether or not administering a
pension fund for football players), which are not organized for-profit and no part of the net earnings of which
inures to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(6)-1 states that a business league is an association of persons having some
common business interest, the purpose of which is to promote such common interest and not to engage in a
regular business of a kind ordinarily carried on for profit. It is an organization of the same general class as a
chamber of commerce or board of trade. Thus, its activities should be directed to the improvement of business
conditions of one or more lines of business as distinguished from the performance of particular services for
individual persons. An organization, whose purpose is to engage in a regular business of a kind ordinarily
carried on for profit, even though the business is conducted on a cooperative basis or produces only sufficient
income to be self-sustaining, is not a business league.

Rev. Rul. 56-65, 1956-1 C.B. 199, holds that a local organization whose principal activity consists of furnishing
particular information and specialized individual services to its individual members engaged in a particular
industry, through publications and other means to effect economies in the operation of their individual
businesses, is performing particular services for individual persons. Such organization is not entitled to
exemption under Section 501(c)(6) of the Code as a business league, even though it performs functions that are
of benefit to the particular industry and the public generally.

Rev. Rul. 58-224, 1958-1 C.B. 242, held that an organization which operated a trade show as its sole activity,
primarily for the purpose of rendering particular services to individual persons was not entitled to exemption as
a business league under Section 501(c)(6) of the Code. The organization's sole activity consisted of staging an
annual merchandise show (primarily exhibits by manufacturers), under the sponsorship of the chamber of
commerce. The ruling concluded that the activities of the organization substantially served the exhibitors and
retailers as a convenience and economy in the conduct of their businesses by providing selling opportunities for

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

3

the distributors, which was found to be considered rendering particular services for individuals as distinguished
from the improvement of business conditions generally.

Rev. Rul. 68-264, 1968-1 C.B. 264, defined a particular service for the purpose of Section 501(c)(6) of the Code
as including an activity that serves as a convenience or economy to members of the organization in the
operation of their own businesses.

In Rev. Rul. 73-411, 1973-2 C.B. 180, the history of Section 501(c)(6) of the Code was described while
discussing the exempt status of a shopping center. In the case of a chamber of commerce or similar
organization, the common business interest is usually the general economic welfare of a community. An
organization seeking exemption as a chamber of commerce must be one whose efforts are directed at promoting
the common economic interests of all commercial enterprises in a given trade community. The ruling also
stresses that membership in Section 501(c)(6) organizations is voluntary and open generally to all businesses
and professional persons in the community.

Application of law

To be exempt under Section 501(c)(6) of the Code, your activities must be directed to the improvement of
business conditions of one or more lines of business, and not benefit any private shareholder or individual. As
stated in Treas. Reg. Section 1.501(c)(6)-1, the purpose of a business league is to promote a common interest
with activities directed to the improvement of business conditions of one or more lines of business as
distinguished from the performance of particular services for individual persons.

You are not as described in Treas. Reg. Section 1.501(c)(6)-1 because you are formed to provide particular
services to your members.

By operating and marketing a venue for your members to sell their products to the public, you are not operated
to improve the business conditions of one or more lines of business because your activities only serve as a
means for your members to market and sell their products to the public. This is in stark contrast to the purpose
of Treas. Reg. Section 1.501(c)(6)-1. In addition, the operation of a market where the general public purchases
goods for consumption is akin to a regular business of a kind ordinarily carried on for profit.

You are similar to the organization described in Rev. Rul. 56-65 and 58-224 in that you are formed to promote
the economic interests of your members by providing a venue for them to sell their goods to the public. By
marketing the activity to the general public and providing the venue, you are performing a particular service to
your members rather than directing your activities to the improvement of business conditions of your industry
as a whole.

Serving your members in this manner provides a convenience and economy of scale in the conduct of their
business they would otherwise not have without your operation. Given that your primary activity is directed at
providing a particular service to your members, you are similar to the situation described in Rev. Rul. 68-264.

You are like the organization in Rev. Rul. 73-411 and not described as a chamber of commerce because you do
not direct your efforts at promoting the common economic interests of all the commercial enterprises in your
given trade community. Your activities are directed at promoting the general business interest of your members
only, rather than all the commercial enterprises in your given trade community.

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

Conclusion

Based on the information provided we conclude that you are not operated as a business league described in
Section 501(c)(6) of the Code. Your operations provide specific services to members and allow a convenience
and private economic benefit. You do not improve business conditions along one or more lines of business or of
a certain area but instead provide services for the convenience of your members. Therefore, you do not qualify
for exemption under Section 501(c)(6).

If you don’t agree
You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you
must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone
number

• A copy of this letter highlighting the findings you disagree with
• An explanation of why you disagree, including any supporting documents
• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including

accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we’ll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

5

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

Where to send your protest
Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable
address:

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you
within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your
income tax filing requirements.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If
you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K