Deer-herd loss plan denied agricultural exemption

Plain-English summary

A membership organization sought exemption as an agricultural organization under IRC § 501(c)(5). Its members would contribute money after covered deer-herd losses so the affected member could recover part of the herd's appraised value. The IRS concluded that this arrangement primarily provided an insurance-like business service to individual members. It did not improve conditions across the farming industry, improve the grade of agricultural products, or increase occupational efficiency as required by the regulations. The IRS therefore denied the exemption, and the proposed denial became final when the organization did not file a protest.

Ruling snapshot

• Question: Did the member-funded deer-herd loss plan qualify as an exempt agricultural organization under IRC § 501(c)(5)?
• Outcome: denied
• Key authorities: IRC § 501(c)(5); Treas. Reg. § 1.501(c)(5)-1; Rev. Rul. 70-372, Rev. Rul. 74-195, and Rev. Rul. 77-153

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
IRS Cincinnati, OH 45201

Release Number: 201716049
Release Date: 4/21/2017
UIL Code: 501.05-01

Date: January 25, 2017

Employer ID number:

Contact person/ID number:

Contact telephone number:

Form you must file:

Tax years:

Dear :

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(5) 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: November 23, 2016

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:
X = State 501.05-01
Y = Date
b dollars = dollar amount

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 Section 501(c)(5) of the Code. This letter explains the basis for our conclusion. Please
keep it for your records.

Issues

Do you qualify for exemption under section 501(c)(5) of the Code? No, for the reasons stated below.

Facts

You were formed in the state of X on Y. According to your Articles of Incorporation, the purpose for which you
were formed is the preservation of nature and animals.

You are a membership organization; anybody that wants to join the membership is welcome. The only cost to
become an active member is to pay an annual fee of b dollars. There may be a small processing fee to cover
administrative costs if there is a claim.

In your application for exemption, you stated that your purpose is to protect your members from significant loss
if their deer herd experiences [redacted]. If there are deer losses, the membership will
contribute on a pro-rated basis to the organization to limit the loss experienced by the member(s). You state that
your goal is not to create a profit for any farmer, but to limit members’ losses and prevent great hardship on any
one member.

Only breeding farms are covered under your plan; hunting preserves are not. Only deer that are legal and owned
by an active member are considered when indemnity is sought.

As members experience deer losses, the membership as a whole is solicited to provide funds to partially
reimburse the member for their losses, based on the value of their herd.

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

2

There will be an operating committee which will appoint appraisers in various states. The committee will send
genetics and production records to five appraisers. The final value of a whole herd or the trace outs will be the
average of a minimum of five appraisers. [redacted]% of the final appraised value would be available to a member
through your plan. The herd owner would absorb the remaining loss.

Your regulations advise your members to sell the [redacted] infected herd to the governing agent and collect
indemnity if possible. If that amount is less than the appraised value then the herd owner is eligible to collect
the rest from your plan, up to 85% of appraised value. The committee reserves the right to see the inventory
records and contact any necessary parties to confirm the positive herd or traceback animals or mandated
eradications as deemed necessary.

There will be no collections made from the membership until a [redacted] positive herd or trace outs are dispersed
of. The date used to determine payouts will always be the date that a deer is found to be positive. There will be
no coverage for any member not signed in at least 45 days prior to a positive test.

Law

Internal Revenue Code Section 501(c)(5) provides for the exemption from federal income tax of labor,
agricultural, or horticultural organizations.

Section 1.501(c)(5)-1(a) of the Income Tax Regulations states that organizations described under Code section
501(c)(5) are those which have no net earnings inuring to the benefit of any member, and have as their objects
the betterment of the conditions of persons engaged in the pursuits of labor, agriculture, or horticulture, the
improvement of the grade of their products, and the development of a higher degree of efficiency in their
respective occupations.

In Revenue Ruling 70-372, 1970-2 C.B. 118, an organization composed of agricultural producers was formed
to process production data for farmers for use in improving the milk production of their dairy herds. Each
farmer sent the organization his milk production and test records for each cow in the herd. The sole activity of
the organization was to process the records and produce statistical analyses that enabled farmers to make
comparisons with standards established by the State college of agriculture. The analyses were sent to each
farmer on a fee basis.

The costs of the organization’s operations were met solely from the fees charged. The Service held that the
organization was not exempt under Section 501(c)(5) of the Code because the processing of production and test
records for individual farmers does not better the conditions of those engaged in agricultural pursuits, improve
the grade of their products, or develop a higher degree of efficiency in their operations.

Rev. Rul. 74-195, 1974-1 C.B. 135, held that a nonprofit organization formed to manage, graze and sell its
members' cattle did not of itself better the conditions of those engaged in agricultural pursuits, improve the
grade of their products, or develop a higher degree of efficiency in their operations within the meaning of
section 501(c)(5) of the Code. In actual operation the organization provided such supplies, materials, feed and
equipment as may be useful or necessary for the handling and breeding of said livestock. The principal purpose
of the organization was to provide a direct business service for its members' economic benefit. The organization
was denied exemption under section 501(c)(5) of the Code.

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

3

Rev. Rul. 77-153, 1977-1 C.B. 147, held that a nonprofit organization that owns and operates a livestock facility
and leases it to local members of a nonexempt national association of farmers for use in implementing the
association's collective bargaining program with processors does not qualify for exemption as an agricultural
organization. The operation and leasing of a facility for collecting, weighing, sorting, grading, and shipping of
livestock, the organization's principal activity, is the providing of a business service to those members who
make use of the national association's collective bargaining program. This service merely relieves the members
of the organization of work they would either have to perform themselves or have performed for them. Such
activity does not serve an exempt purpose of an agricultural organization under section 1.501(c)(5)-1 of the
Regulations.

Application of law

You do not meet the qualifications under section 1.501(c)(5)-1 of the Income Tax Regulations because your
activities are not aimed at the overall betterment of conditions within the farming industry. You operate to aid
your members in mitigating their losses. You work with other members to insure losses on member herds.
Where members would otherwise have to insure themselves, you are relieving them of this responsibility by
providing this service.

You are similar to the organization in Revenue Ruling 70-372. Providing insurance services to members does
not serve an exempt purpose under section 1.501(c)(5)-1 of the Income Tax Regulations because your activities
are not aimed at the overall betterment of conditions within the farming industry generally. Instead, you
specifically benefit your individual members.

You are similar to the organization in Revenue Ruling 74-195. By providing an insurance service, you are not
bettering the conditions of those engaged in agricultural pursuits, improving the grade of their products or
developing a higher degree of efficiency in their operations. Your principal purpose is to provide a direct
business service for your members.

You are similar to the organization in Revenue Ruling 77-153. Insuring member herds is a business service
which operates for the benefit of members. This service relieves your members of having to maintain their own
insurance. Such activity does not serve an exempt purpose under section 1.501(c)(5)-1 of the Regulations.

Conclusion

Based on the facts above, we concluded you are not operating as an organization described in section 501(c)(5)
of the Code. Your operations are not aimed at the overall betterment of conditions, improvement of the grade of
products, or the development of a higher degree of efficiency within the farming industry, but provide a direct
business service for the benefit of your members. Therefore, we have determined that you do not qualify for
exemption under section 501(c)(5) of the Code.

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

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

4

• 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.

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

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

5

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