Farmers’ market denied agricultural-organization exemption

Plain-English summary

An organization sought section 501(c)(5) status for operating a farmers’ market that charged farmers and vendors to sell directly to consumers. It also ran a winter market for crafts, furniture, and other nonagricultural products. The IRS found that the organization chiefly provided members with promotion and a sales location, relieving them of work they would otherwise perform themselves. That direct business service and the members’ receipt of sales proceeds did not improve farming conditions, product quality, or occupational efficiency for the agricultural industry as a whole. The winter market also served people outside agriculture. Because the organization did not protest the proposed denial, the IRS issued a final adverse determination.

Ruling snapshot

• Question: Did the fee-supported farmers’ market qualify as an agricultural organization under section 501(c)(5)?
• Outcome: denied
• Key authorities: IRC §§ 501(c)(5), 501(g); Treas. Reg. § 1.501(c)(5)-1; Rev. Ruls. 66-105, 74-195, 75-287, 76-399, 77-153

Full text (IRS public release)

Department of the Treasury Date:

Internal Revenue Service 11/06/2023

Tax Exempt and Government Entities Employer ID number:
IRS P.O. Box 2508

Cincinnati, OH 45201

Form you must file:

1120
Tax years:
Release Number: 202405015 All
Release Date: 2/2/2024 Person to contact:

UIL Code: 501.05-01

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)(5). 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 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 Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
IRS PO Box 2508
Cincinnati, OH 45201
Date: 08/14/2023

Employer ID number:

Person to contact:
Name:

ID number:
Telephone:
Fax:

Legend: UIL:
B = State of Formation 501.05-01
C = Date of Formation

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a) We determined that you don’t qualify for exemption under IRC Section 501(c)(5).
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)(5)? No, for the reasons stated below.

Facts

You were formed in the state of B on C. Your amended Articles of Incorporation state the agricultural purposes
for which you are organized include the supporting and strengthening of small farms and farming families by
operating a farmers’ market. Your Bylaws state in the Mission Statement that you support and strengthen -
farms and farming families by creating and operating a vibrant local market that provides direct sales
opportunities for small farms.

Your farmers’ market allows local farmers and vendors to sell their products, and because of the low barrier to
entry, new and beginning farmers can start small as they learn and grow. Farmers and vendors must be fee
paying members to sell at your market. Your market also gives consumers access to locally grown fresh foods
and knowledge of local agriculture. You promote local farmers and their products within the area and
surrounding counties.

You state that you are structured to provide farmers an outlet to sell their products directly to consumers without
the licenses, fees, and capital costs associated with conventional marketing outlets. You also operate a winter
market for the sale of crafts, wood furniture, and other non-agricultural products. You state that your regular
season market is for producers of agricultural and food-based products, while your winter market is more for
craft and artisan producers.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

2

Your sources of revenue include fees from farmers and vendors. Your expenses include advertising, cost of
operating your farmers’ market and salaries and wages.

Law

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

IRC Section 501(g) provides for purposes of subsection (c)(5), the term “agricultural” includes the art or
science of cultivating land, harvesting crops or aquatic resources, or raising livestock.

Treasury Regulation Section 1.501(c)(5)-1(a) provides that the organizations contemplated by IRC Section
501(c)(5) as entitled to exemption from income taxation are those which (1) have no net earnings inuring to the
benefit of any member, and (2) have as their objects the betterment of the conditions of those engaged in such
pursuits, the improvement of the grade of their products, and the development of a higher degree of efficiency
in their respective occupations.

Revenue Ruling 66-105, 1966-1 CB 145, held that an organization composed of agricultural producers whose
principal activity is marketing livestock as an agent for its members does not qualify for exemption. The sale of
members’ products with the return to them of the sale proceeds is neither an object nor an activity within the
ambit of IRC Section 501(c)(5). Therefore, the organization does not meet the requirements of Treas. Reg.
Section 1.501(c)(5)-1 of and is not exempt under IRC Section 501(c)(5).

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 IRC
Section 501(c)(5). The principal purpose of the organization was to provide a direct business service for its
members’ economic benefit. The organization was denied exemption under IRC Section 501(c)(5).

Rev. Rul. 75-287, 1975-2 C.B. 211, establishes that if the activities of an organization are directed toward the
betterment of the conditions of those engaged in some pursuit outside the scope of the term agricultural, it does
not qualify for exemption from federal income tax as an agricultural organization described under IRC Section
501(c)(5). ,

Rev. Rul. 76-399, 1976-2. C.B. 152, held that a nonprofit organization of growers and producers of a particular
agricultural commodity formed principally to negotiate with processors for the price to be paid to members for
their crops qualifies for exemption under IRC Section 501(c)(5).

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 Treas. Reg. Section 1.501(c)(5)-
1 of the Regulations. Accordingly, the organization does not qualify for exemption from federal income tax

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

under IRC Section 501(c)(5).

Application of law

You do not meet the qualifications under IRC Section 501(c)(5) or Treas. Reg. Section 1.501(c)(5)-1 as your
activities are not aimed at the overall betterment of conditions within the farming industry. You operate to aid
your farmers and vendors to sell their goods. You are providing, in return for a fee, promotion and a location for
members to generate sales of their goods. Where members would otherwise have to promote and sell their
goods themselves, you are relieving them of this responsibility by providing the service of operating the farmers’
market. The earnings from the sale of products inures to benefit of your members/vendors. Providing a location
and promotion for the sale of products merely relieves your members of work they would either have to perform
themselves or have performed for them.

You are similar to the organization in Rev. Rul. 66-105 in that you provide the market place for members to sell
their goods where they in turn receive revenue from sales.

Like the organization in Rev. Rul. 74-195, you are providing an outlet for sales of member products, 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 main activity is operating a farmers’ market
and providing a location for the sales of products.

Like the organization in Rev. Rul. 75-287, your winter market is dedicated to the sale of crafts, wood furniture,
and other non-agricultural products. This activity is directed toward the betterment of the conditions of those
engaged in some pursuit outside the scope of the term agricultural.

Like the organization in Rev. Rul. 77-153, the operation and leasing of a facility relieves your members of work
they would either have to perform themselves or have performed for them

You differ from the organization in Rev. Rul. 76-399 where the primary purpose is for growers and producers
of a particular agricultural commodity formed principally to negotiate with processors for the price to be paid to
members for their crops. In your case, you are operating a farmers’ market that provides direct sale
opportunities for farmers and vendors.

Conclusion

Based on the facts and information submitted, you are not operated exclusively for exempt purposes under IRC
Section 501(c)(5). Your activities are not directed to the betterment of the conditions of farmers, the
improvement of the grade of their products, and the development of a higher degree of efficiency in the farming
industry, rather, you provide an economic outlet to enable farmers and vendors to sell their products directly to
consumers. Accordingly, you do not qualify for exemption under IRC Section 501(c)(5).

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

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

4

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 Determination 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

PO 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.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

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. 01-2021)
Catalog Number 47628K