202047013: A farmers' market nonprofit is denied 501(c)(3) status because it mainly benefits its paying vendors
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This page covers one taxpayer's ruling from 2020, which can't be cited as precedent. Ezel answers your situation under the current Code and IRS guidance, with citations.
Plain-English summary
A community farmers' market organization applied for charitable exemption under Section 501(c)(3) using the streamlined Form 1023-EZ. It runs a seasonal market where growers and vendors pay a fee for space to sell food directly to the public, and it adds some educational touches (children's activities, canning workshops, a local-artist table). Its main revenue is vendor fees, and its largest expense is paying market management. The IRS denied exemption. To qualify, a group must operate exclusively for exempt purposes and serve public, not private, interests. Here the market's core function is to give vendors a paid venue to boost their own sales, which is a substantial private benefit and a commercial purpose. The IRS compared the taxpayer to Rev. Rul. 77-111 (promoting business), Better Business Bureau (a substantial non-exempt purpose defeats exemption), and Living Faith (commercial operations). The group's history (a prior private-foundation status that was auto-revoked for not filing Form 990-PF, then re-incorporation) did not change the outcome, because it still had to prove it operates exclusively for charity and did not. The taxpayer did not protest within 30 days, so the denial became final.
Ruling snapshot
- Question: Does a farmers' market nonprofit that charges vendors for selling space 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); Rev. Rul. 77-111; Better Business Bureau v. United States, 326 U.S. 279; Harding Hospital v. United States; Living Faith, Inc. 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
Form you must file:
Cincinnati, OH 45201
Tax years:
Number: 202047013
Person to contact:
Release Date: 11/20/2020 Name:
ID number:
Telephone:
UIL Number: 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. 7-2014)
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 501.35-00
Y = Date
Z = Organization
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 submitted Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3)
of the Internal Revenue Code, on B. You attested on Form 1023-EZ you were incorporated on Y, in the state of
X. You attested that you are operated exclusively to further charitable and educational purposes. You also
attested that you have not conducted and will not conduct prohibited activities under IRC Section 501(c)(3).
Your mission statement on the Form 1023 EZ stated that you are a non-profit community venue that brings
together farmers and neighbors in order to promote the important nutritional, environmental and community
health benefits of purchasing food locally.
During review of your Form 1023-EZ, detailed information was requested supplemental to your attestations.
Information in your bylaws shows that your purposes are:
To provide growers and vendors within several miles of your community the opportunity to sell directly
to the public;
To promote the nutritional, environmental and the community health benefits of sustainable living;
Letter 4034 (Rev. 11-2018)
Catalog Number 47628K
2
To create a unique atmosphere in which to appreciate the agriculture, arts, culture and character of the
local community.
You accomplish your purposes through operating a farmer’s market from Memorial Day weekend to the
Saturday before Thanksgiving which operates on the lawn of a local family owned store who has been
supportive of your operations. There is no cost to operate at this venue except for the permit fees required by the
township.
You charge a fee to vendors to sell at the farmer’s market which are based on your costs. Vendors have the
option of selling periodically by paying a fee each time or vendors can choose to pay a seasonal fee and operate
during the entire season. To encourage a new generation of farmers, first year participants at the farmers may
request to have their first-year fees waived.
In addition, you provide a local artist table where a member of the local art council can display and sell their art.
You also have a nonprofit table where community nonprofit organizations can set up to inform the community
about their organizations. Furthermore, you:
Offer special days during the year where you host activities for children and families such as scavenger
hunts to teach about how food is grown;
Have hosted workshops for community members including the basics of canning and freezing produce;
Have collected bicycles for the local girls’ and boys’ clubs and shoes for recycling programs.
Your main source of revenue is vendor fees. However, you also receive some revenue from donations and
sponsorships. Your largest expense is wages for the persons who provide administrative assistance such as
management and coordination including paying a market manager consultant. The remainder of your
expenditures are related to your operations including music and entertainment expenses, insurance and
publicity.
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.
Treasury Regulation (Treas. Regs.) Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an
organization described in Section 501(c)(3) of the Code, an organization must be both organized and operated
exclusively for one or more of the purposes specified in such Section. If an organization fails to meet either the
organizational test or the 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 that accomplish one or more of such
exempt purposes specified in Section 501(c)(3) of the Code. 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 exempt purposes unless it serves a public rather than a private interest. To meet this
Letter 4034 (Rev. 11-2018)
Catalog Number 47628K
3
requirement, it is necessary for an organization to establish that it is not organized or operated for the benefit of
private interests.
Revenue Ruling 77-111, 1977-1 C.B. 144, in Situation 1, held that an organization formed to increase business
patronage in a deteriorated area by providing information on the area's shopping opportunities, local
transportation, and accommodations is not operated exclusively for charitable purposes and does not qualify for
exemption under Section 501(c)(3) of the Code. The overall thrust is to promote business rather than to
accomplish Section 501(c)(3) objectives exclusively.
In Better Business Bureau of Washington. D.C., Inc, v. United States, 326 U.S. 179 (1945), the Supreme Court
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy a claim for
exemption regardless of the number or importance of truly exempt purposes. The Petitioner's activities were
largely animated by non-exempt purposes directed fundamentally to ends other than that of education.
In Harding Hospital, Inc. v. United States, 505 F.2d 1068 (6th Cir. 1974), the court held that an organization
seeking a ruling as to recognition of its tax-exempt status has the burden of proving that it satisfies the
requirements of the particular exemption statute.
In Living Faith. Inc, v. Commissioner. 950 F.2d 365 (7th Cir. 1991), the Court of Appeals affirmed
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 under Section 501(c)(3) of the Code. The court found substantial
evidence that the organization's activities furthered a substantial nonexempt purpose, including that the
operations were presumptively commercial. The organization competed with restaurants and food stores, used
profit-making pricing formulas consistent with the food industry and incurred significant advertising costs.
Application of law
You are not described in IRC Section 501(c)(3) because you fail the operational test set forth in Treas. Reg.
Section 1.501(c)(3)-1(a)(1). Specifically, you are not operated exclusively for an exempt purpose as described
in Treas. Reg. Section 1.501(c)(3)-1(c)(1). The facts show that you are not operated exclusively for charitable
purposes. You are operated to facilitate sales for the benefit of vendors at your farmers' market. For a fee, you
provide space at which your vendor members sell their goods directly to the public. The fee covers the cost of
your operations. This results in substantial private benefit to the vendors of products at your market.
Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) requires an organization show that it is not organized or operated for
private interests. Although you may conduct some charitable and educational activities at the market, more than
an insubstantial part of your activities are in furtherance of the non-exempt purpose of being a profitable outlet
for your vendors to increase their sales. Your activities provide a substantial private benefit to vendors.
Therefore, you do not qualify for exemption under IRC Section 501(c)(3).
Similar to the organization denied exemption in Rev. Rul. 77-111, Situation 1, your overall thrust is to
accommodate the sales of your vendors through conducting advertising and marketing as well as managing the
market facility. Although you do provide some educational information, your objective is to provide a venue
for the vendors to sell their wares.
Letter 4034 (Rev. 11-2018)
Catalog Number 47628K
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Like the organization described in Better Business Bureau of Washington D.C., you have a substantial
nonexempt purpose. For example, you devote a substantial amount of your time, resources and activities to
creating an event for vendor sales. Your expenses are directed towards attracting potential buyers and
facilitating sales. This substantial nonexempt purpose precludes exemption under IRC Section 501(c)(3).
Similar to the organization in Living Faith, you further a non-exempt commercial purpose. You have
established a marketplace for vendors to come together and sell products to the general public. at vendor
established prices. Your activities are aimed at pairing potential buyers with sellers and facilitating sales
transactions. This disqualifies you from the recognition of exemption under IRC Section 501(c)(3).
Your position
You provided a brief history of your operations. You previously operated under the fiscal sponsorship of Z. You
then operated separately as a private foundation, which was automatically revoked for failure to file Form
990PF for three consecutive fiscal periods. All of this happened under a different federal employer
identification number.
In an attempt to get back in good standing and change your classification from private foundation to public
charity, you obtained a new federal employer identification number, incorporated and filed the current
application (Form 1023) on which we are ruling. You feel that your exemption should be restored.
Our response to your position
You failed to provide any additional information from which it can be concluded that your activities exclusively
further or advance a purpose described in IRC Section 501(c)(3). Although you indicated that you previously
operated under the fiscal sponsorship of Z and then separately as a Private Foundation under a different federal
identification number, you have the burden of proving that you satisfy the requirements for tax exemption.
Similar to the organization in Harding Hospital, Inc. v. United States, 505 F2d 1068 (1974), you have failed to
provide sufficient information to prove to us that you are operating exclusively for purposes described in
Section 501(c)(3). Further, determinations are based on the very facts and circumstances contained within each
individual application.
Conclusion
Based on the facts and circumstances presented, you do not qualify for exemption from federal income tax as an
organization described in IRC Section 501(c)(3) because you are not operated exclusively for exempt purposes.
By providing vendors with an opportunity and venue to sell their products for a fee, you are operated for the
substantial purpose of private benefit to vendors at your market as well as for commercial purposes.
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.
Letter 4034 (Rev. 11-2018)
Catalog Number 47628K
5
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.
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:
Letter 4034 (Rev. 11-2018)
Catalog Number 47628K
6
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,
Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements
Letter 4034 (Rev. 11-2018)
Catalog Number 47628K
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