202047010: A pop-up market organizer for small businesses is denied 501(c)(3) status as a commercial operation

Plain-English summary

An organization that produces large public events and markets for small-business vendors (makers, artists, chefs, and similar) applied for charitable exemption under Section 501(c)(3). The events are mostly free for the public to attend, but the vendors pay booth fees, which are the organization's only revenue and cover its production costs. The IRS denied exemption. To qualify, a group must operate exclusively for exempt purposes and serve public, not private, interests. Here the core activity, renting booth space so vendors can promote and sell their goods for a fee, is a commercial business ordinarily run for profit and provides substantial private benefit to the vendors. The IRS applied the "commerciality" doctrine and compared the group to Better Business Bureau, B.S.W. Group, Living Faith, and Airlie Foundation, all denied for substantial commercial or private purposes. Sponsoring a few "micro vendor" booths and hosting nonprofit tables did not change the result. The taxpayer did not protest within 30 days, so the denial became final.

Ruling snapshot

• Question: Does an organization that charges vendors booth fees to run public markets operate exclusively for exempt purposes under § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a), (c), (d); Better Business Bureau v. United States, 326 U.S. 279; B.S.W. Group v. Commissioner; Living Faith v. Commissioner; Airlie Foundation v. Commissioner

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service Date: August 25, 2020

Tax Exempt and Government Entities Employer ID number:
PO Box 2508
Cincinnati, OH 45201 Form you must file: 1120

                                                           Tax years: ALL

Number: 202047010
Person to contact:
Release Date: 11/20/2020 Name:
ID number:
Telephone:
UIL Number: 501.00-00, 501.33-00, 501.35-00

Dear :
This letter is our final determination that you don’t qualify for exemption from federal income tax
under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section
501(c)(3). 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.

Because you don’t qualify as a tax-exempt organization under IRC Section 501(c)(3), donors
generally can’t deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c),
by sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from
the date of this letter unless you request an extension of time to file. For further instructions,
forms, and information, visit www.irs.gov.

We’ll make this final adverse determination letter and the proposed adverse determination letter
available for public inspection after deleting certain identifying information, as required by IRC
Section 6110. 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 call the contact person shown above. If you have
questions about your federal income tax status and responsibilities, call our customer service
number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for
businesses at 800-829-4933.

                                                                                   Letter 4038 (Rev. 5-2020)
                                                                                Catalog Number 47632S
                     Sincerely,



                   Stephen A. Martin
                   Director, Exempt Organizations
                   Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034
Redacted Letter 4038

                                               Letter 4038 (Rev. 5-2020)
                                            Catalog Number 47632S
       Department of the Treasury
       Internal Revenue Service
       P.O. Box 2508
       Cincinnati, OH 45201
                                                                         Date: June 26, 2020

                                                                         Employer ID number:


                                                                         Contact person/ID number:


                                                                         Contact telephone number:


                                                                         Contact fax number:

Legend: UIL:
X = State 501.00-00
Y = Date 501.33-00
Z = City 501.35-00
p = Numbers
q dollars = Amount
r = Number

Dear :
We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (Code) Section 501(a). We determined that you don’t qualify for exemption under Code Section
501(c)(3). This letter explains the reasons for our conclusion. Please keep it for your records.

Issues

Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.

Facts

You were incorporated in X on Y. Your Articles of Incorporation state that you will be operated exclusively for
charitable and educational purposes within the meaning of IRC Section 501(c)(3).

Your mission is to provide tools and opportunities for small business owners to build their brands, connect with
their audiences, and hire more employees. To accomplish this, you will host events and talks for small
businesses mostly consisting of vendors to make connections. Vendors include jewelry makers, packaged
goods, artists, creators, chefs, woodworkers, clothing designers, tea makers, and leather good makers.

You have held many of these events in Z but are starting to expand to other cities. You produce up to large
scale events a year and then multiple smaller gatherings in between. The large-scale events run between and
days and have attracted in the range of p individuals. The events are mostly free for members of the general
public to attend.

                                                                                  Letter 4034 (Rev. 11-2018)
                                                                                   Catalog Number 47628K
                                                      2

For each event, you obtain a large venue that can accommodate the participating vendors typically up to r
vendors. These venues may consist of spaces that you rent, closed streets and other public spaces that you
obtain permits to use. You offer booth spaces and assign all vendors their own space. You decorate the space to
encourage attendees to take photos and post to social media. You promote the events and vendors through social
media. You also obtain the local news to cover your events.

To fund your events, you charge vendors booth fees in the range of q dollars that you stated are lower than other
events of similar size. The fee charged depends on the amount of space the particular vendor needs. These fees
are meant to help cover the cost of production. You also provide several "micro vendor" booth spaces. These
are spaces for businesses that are not in a financial position to pay for a booth, so you sponsor most of their fee.

At every event you offer a DJ playing music and numerous food trucks selling food and drinks. You also offer a
space at the venue dedicated to art, where attendees can just walk around, look at art from local artists, eat food,
listen to music and talk with local makers and creators. Attendees can generally make purchases from the
vendors. There are also informational booths dedicated to specific nonprofits.

All revenue comes from fees paid by vendors for booths and sponsorships. Expenditures are related to your
events. Before every event, you offer educational meetings for any vendor looking to maximize their impact at
the market. Although we asked, you did not submit any information on the content of these meetings.

Law

IRC Section 501(c)(3) provides, in part, for the exemption from Federal income tax to organizations organized
and operated exclusively for charitable, religious or educational purposes, where no part of the net earnings
inures to the benefit of any private shareholder or individual.

Treas. Reg. Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization described in IRC
Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the
purposes specified in Section 501(c)(3). If an organization fails to meet either the organizational or operational
test, it is not exempt.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as “operated exclusively”
for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of
such exempt purposes specified in IRC Section 501(c)(3). An organization will not be so regarded if more than
an insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated
exclusively for one or more exempt purposes unless it serves a public rather than a private interest.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
held that the presence of private benefit, if substantial in nature, will destroy an organization's tax-exempt status
regardless of the organization's other charitable purposes or activities.

In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the court found that a corporation formed to provide
consulting services did not satisfy the operational test under IRC Section 501(c)(3) because its activities

                                                                                    Letter 4034 (Rev. 11-2018)
                                                                                     Catalog Number 47628K
                                                     3

constituted the conduct of a trade or business that is ordinarily carried on by commercial ventures organized for
profit. Its primary purpose was not charitable, educational, or scientific, but rather commercial. In addition, the
court found that the organization's financing did not resemble that of the typical Section 501(c)(3) organizations.
It had not solicited, nor had it received, voluntary contributions from the public. Its only source of income was
from fees from services, and those fees were set high enough to recoup all projected costs and to produce a profit.
Moreover, it did not appear that the corporation ever planned to charge a fee less than “cost.” And finally, the
corporation did not limit its clientele to organizations that were Section 501(c)(3) exempt organizations.

In Living Faith, Inc. v. Commissioner, 950 F.2d 365 (1991), the Court of Appeals upheld a Tax Court decision
that an organization operating restaurants and health food stores in a manner consistent with the doctrines of the
Seventh Day Adventist Church did not qualify for exemption under Section 501(c)(3) of the Code because the
organization was operated for a substantial nonexempt commercial purpose. The court found that the
organization's activities were "presumptively commercial" because the organization was in competition with other
restaurants, engaged in marketing, and generally operated in a manner similar to commercial businesses.

In Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C., 2003), the court relied on the “commerciality”
doctrine in applying the operational test. Because of the commercial manner in which this organization conducted
its activities, the court found that it was operated for a non-exempt commercial purpose, rather than for a tax-
exempt purpose.

Application of law

You do not meet the requirements for recognition of tax exemption under IRC Section 501(c)(3) because you
fail the operational test as described in Treas. Reg. Section 1.501(c)(3)-1(a)(1). A substantial portion of your
activities consists of organizing events for small businesses for a fee in order for them to promote their
businesses and sell their goods and/or services. Because you operate for substantial nonexempt private and
commercial purposes, you are not operating exclusively per Treas. Reg. Section 1.501(c)(3)–1(c)(1).

You do not meet the requirements of Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) . You are organizing events for
small businesses for fees that are in the range of q dollars in order for them to promote and sell their products.
This shows you are operating for the private interests of the small businesses and precludes exemption under
IRC Section 501(c)(3).

You are similar to the organization described in Better Business Bureau of Washington, D.C., Inc. v. United
States. Although you may have some educational purposes, the presence of the non-exempt commercial and
private purposes of organizing events for small businesses for a fee precludes exemption under IRC Section
501(c)(3).

Similar to the organization in B.S.W. Group, Inc., your revenue consists only of booth fees and your expenses
are dedicated to organizing events for vendors to sell their products. There is no indication you will charge fees
that are below cost. Although you do sponsor some micro businesses and offer informational booths to non-
profits, this is not your purpose. Organizing events for small businesses to promote and sell their products is not
an inherently exempt activity but is a business that is ordinarily carried on by commercial ventures organized
for profit.

You are similar to the organization described in Living Faith, Inc. that was denied tax exemption due to the

                                                                                   Letter 4034 (Rev. 11-2018)
                                                                                    Catalog Number 47628K
                                                      4

commercial nature of its operations. Your activity of organizing events for small businesses for a fee is
indistinguishable from any ordinary commercial business. The fact that this activity accounts for your revenues
and expenses shows this is a substantial purpose, precluding you from exemption under IRC Section 501(c)(3).

You are operated for a substantial nonexempt purpose like the organization described in Airlie Foundation.
Applying the factors stated in this case, your provision of organizing events and renting booths for a fee directly
competes with other providers of similar services. Like an ordinary business, your services are generally
available to any individual or organization willing to pay your fees. Because of this demonstrated substantial
nonexempt purpose, you are not exempt under IRC Section 501(c)(3).

Conclusion

You are primarily operated to promote for-profit businesses. This is a nonexempt purpose which is not
insubstantial in nature. A substantial nonexempt purpose prevents exemption under IRC Section 501(c)(3) .
Thus, your request for exemption under Section 501(c)(3) is denied. Donations to you are not deductible by the
donor.

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.

If you don't agree

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

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

• A statement of the facts, law, and arguments supporting your position

• A statement indicating whether you are requesting an Appeals Office conference

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

• The following declaration:
For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, and such facts are true, correct,
and complete.

                                                                                    Letter 4034 (Rev. 11-2018)
                                                                                      Catalog Number 47628K
                                                     5

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 they haven’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 gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we’ll send your case to the Appeals Office and notify you. You can find more information
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 later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2).

Where to send your protest
Send your protest, Form 2848, if applicable, 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
   Mail Stop 6403                                   550 Main Street, Mail Stop 6403
   P.O. Box 2508                                    Cincinnati, OH 45202
   Cincinnati, OH 45201

You can also fax your protest 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 they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your
taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you’ve tried but haven’t
been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

                                                         Sincerely,



                                                                                  Letter 4034 (Rev. 11-2018)
                                                                                    Catalog Number 47628K

6

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements




                        Letter 4034 (Rev. 11-2018)
                         Catalog Number 47628K