Determination 1205014: IRS denies exemption to a farmers market organization

Plain-English summary

The IRS finalized its denial of tax-exempt status to an organization that operated a farmers market with educational activities, food-bank donations, and community programming. The organization sought recognition under IRC § 501(c)(6) as a business league and, alternatively, under § 501(c)(4) as a social-welfare organization. The IRS concluded that the organization's primary activity was operating a marketplace and providing marketing, management, and sales opportunities for vendor members, which served private economic interests. The IRS therefore found that the organization did not improve business conditions generally under § 501(c)(6) or operate primarily for community social welfare under § 501(c)(4). The organization did not protest within 30 days, so the proposed adverse determination became final.

Ruling snapshot

• Question: Whether the organization qualified for exemption under IRC § 501(c)(6) or § 501(c)(4).
• Outcome: denied
• Key authorities: IRC §§ 501(a), 501(c)(4), 501(c)(6), and 6110; Treas. Reg. §§ 1.501(c)(4)-1 and 1.501(c)(6)-1; Rev. Ruls. 58-224, 59-391, 68-264, 73-411, and 78-86; American Automobile Association v. Commissioner of Internal Revenue, 19 T.C. 1146 (1953); Veterans Foundation v. United States, 281 F.2d 912 (10th Cir. 1960).

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Release Number: 201205014 Contact Person:
Release Date: 2/3/2012
Date: November 16, 2011 Identification Number:
UIL Code: 501.04-00
501.06-00 Contact Number:
501.06-01
Employer Identification Number:
Form Required To Be Filed:
Tax Years:
Dear

This is our final determination that you do not qualify for exemption from federal income
tax as an organization described in Internal Revenue Code section 501(c)(4) and
501(c)(6). Recently, we sent you a letter in response to your application that proposed
an adverse determination. The letter explained the facts, law and rationale, and gave
you 30 days to file a protest. Since we did not receive a protest within the requisite 30
days, the proposed adverse determination is now final.

You must file federal income tax returns on the form and for the years listed above
within 30 days of this letter, unless you request an extension of time to file.

We will make this letter and our proposed adverse determination letter available for
public inspection under Code section 6110, 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, you should follow the instructions in Notice 437. If you agree with
our deletions, you do not need to take any further action.

If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter. If you have any questions
about your federal income tax status and responsibilities, please contact IRS Customer
Service at

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2

1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933.
The IRS Customer Service number for people with hearing impairments is 1-800-829-
4059.

Sincerely,

Lois G. Lerner
Director, Exempt Organizations

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

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DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Date: September 29, 2011 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:

Legend: UIL:

B = date 501.04-00

C = date 501.06-00

G = city 501.06-01

H = city

L = county

M = county

N = county

R = river

Q = date

S = date

T = county

V = date

W = state

x = dollar amount
y = dollar amount
z = dollar amount

Dear Applicant:

We have considered your application for recognition of exemption from federal income
tax under Internal Revenue Code section 501(a). Based on the information provided,
we have concluded that you do not qualify for exemption under Code sections 501(c)(4)
or 501(c)(6). The basis for our conclusion is set forth below.

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Issue
Do you qualify for exemption under section 501(c)(6) of the Internal Revenue Code?
No, for the reasons given below.

Alternate Issue
Do you qualify for exemption under section 501(c)(4) of the Internal Revenue Code?
No, for the reasons given below.

Facts

You originally incorporated in the state of W on S, organized to provide food at a low
cost to low income people. You submitted amended Articles of Incorporation dated B
which stated that you are organized exclusively for charitable purposes under IRC
section 501(c)(3). An additional amendment was submitted dated C, which states that
you are organized to provide a forum for small local growers and others to make
produce available to residents and support farming efforts in T.

You were formed by a small group of vendors that wanted a place to sell their produce
as well as stimulate interest in and demand for locally grown farm products. To
accomplish this, you operate a traditional farmers market in G, W. You state that %
of your time and funds are spent on the farmers market. The market operates out of a
building that is owned by the City of G on land owned by the H. In addition to running
the market, your staff also organizes and coordinates visiting tax-exempt organizations,
collects food from vendors for donation to local food banks, and operates an
educational booth. Tax-exempt organizations use space at the market to promote their
missions and Master Gardeners are present each day that the market is open.
Approximately % of the market space is used by vendors and customers and
approximately % of the space is used by community organizations. Currently, all of
your board members are vendors, as stipulated by your Bylaws.

Your mission is to promote the development of local agriculture by supporting the
development and expansion of the small family farm, to increase public awareness of
nutritional values of local fresh farm produce and to make the highest quality, locally
grown produce available in one location. You have approximately 115 vendors who are
given opportunities to improve growing techniques and merchandising through formal
workshops and through close proximity to each other at the market. You participate in
the Food Stamp and WIC programs in order to raise nutritional levels within the
community. Customers are able to pick up information on recycling, sustainable
agriculture, nutritional information on fresh produce, and hints for shopping at the
market. Along with shopping opportunities daily entertainment is provided for market
patrons, generally in the form of musical acts, at a main stage on the premises.

The market operates from April to October, Thursday to Sunday, and in November and
December on Saturday and Sunday, from 10am to 3pm. The following products are

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offered: produce, flowers, meat, seafood, dairy and eggs, condiments and honey,
lotions and soaps, baked goods and confections, and various artisan products such as
glass, wood, paper and metal work, puzzles, pottery and jewelry.

Membership includes vendor members and supporting members. Supporting members
are simply non-profits or individuals who want to help your market. Vendor members
who sell at your market are broken down into four categories:

Farmers: those who raise produce such as fruits, vegetables, herbs, flowers, crops,
beekeepers, growers of animals, egg farmers, fish or shellfish growers (approximately
% of members)

Processors: those offering fresh products such as meat, fish, baked goods meeting all
state, county and local legal requirements with proper permits and licenses
(approximately % of members)

Farmer/Processors: those farmers who have a Board approved processed/unprocessed
food or animal item meeting all health and legal requirements with proper permits and
licenses (approximately % of members)

Crafters: those who craft the products offered for sale requiring tool skills, personal
handling and/or guidance (approximately % of members)

Anyone may be a member as long as they live in T, M, L, or parts of N and they must
grow or make their own product. Membership is limited to individuals or small family
farms. Any new vendor applicants with established businesses or businesses which do
not meet the individual or small family farm guidelines must apply to and receive
approval from your Board of Directors before they are able to sell at the market. These
memberships are granted only when individual or small family or farm units are not
available. All of your members are required to be vendors; this is one of your member
benefits.

Vendor members cannot buy and resell commodities that are or can be grown or
processed locally. You define local as being from L, M, N, T or east of the R.
Membership also requires that all vendors submit to being inspected to make sure that
all products sold are vendor produced and that the vendor lives and works within the
geographical boundaries outlined in the Bylaws. Members pay a fixed, annual
membership fee of z dollars.

You are funded by stall fees, membership fees, and parking and merchandise sales.
Vendors also pay a percentage of daily gross sales or a minimum fee, whichever is
greater, of x dollars on Thursday and Friday and y dollars on Saturday and Sunday. The
percentage for sales based fees are broken down as follows:

Farmers/Crafters/Farmer/Processors/Processors I/Food Carts— %
Processors II— %
Crafter II/Farmer II/Food Concessionaires— %
Fruit Vendors— %

Your expenses include occupancy, advertising, salaries and benefits, market
entertainment, supplies, taxes and licenses. You submitted a copy of a lease held
between the H and the City of G for premises to be used for a market. While the
majority of your expenses cover advertising and market entertainment, you were unable
to provide any copies of advertising materials when asked.

You have three paid employees, a general manager, assistant manager and
maintenance personnel. You indicated 80% of the employees time is spent on the
market, which included workshops, sales and educational activities, however, you then
stated % of employees time is spent on educational activities. These employees are
neither members nor vendors.

You did submit a brochure that was used in the past as promotional material. It includes
a brief history of the market in that it was originally formed by a small group of vendors
and eventually revived which led to your current location. The brochure you submitted
states that the market is the jewel of the H’s new waterfront development and publicizes
the unique waterfront location’s proximity to other entertainment and dining attractions
as well as the ability for customers to access the market by most modes of
transportation.

Law — Section 501(c)(6)

Section 1.501(c)(6)-1 of the Income Tax Regulations states, in part: "A business league
is an association of persons having some common business interest, the purpose of
which is to promote such common interest... 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."

Revenue Ruling 58-224 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

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their businesses by providing selling opportunities for the distributors, which was found
to be considered rendering particular services for individuals as distinguished from the
improvement of business conditions generally.

Rev. Rul. 59-391, 1959-2 C.B. 151, describes an organization of individuals, firms,
associations, and corporations, each representing a different trade, business,
occupation, or profession. It was created for the purpose of exchanging information on
business prospects and has no common business interest other than a desire to
increase sales of members. Held, such an organization is not entitled to exemption from
federal income tax as a business league under section 501(c)(6) of the Internal
Revenue Code of 1954.

Revenue Ruling 68-264 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 Revenue Ruling 73-411 the history of section 501(c)(6) 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) organization is voluntary and open
generally to all businesses and professional persons in the community.

The American Automobile Association v. Commissioner of Internal Revenue, 19 T.C.
1146 (1953) held that an organization whose principal activities consist of performing
particular services, and securing benefits, for its members, does not qualify for
exemption under section 501(c)(6) of the Code.

Law — Section 501(c)(4)

Treasury Regulation 1.501(c)(4)-1 provides that an organization is operated exclusively
for the promotion of social welfare if it is primarily engaged in promoting in some way the
common good and general welfare of the people of the community. An organization
embraced within this section is one which is operated primarily for the purpose of
bringing about civic betterments and social improvements and is not an action
organization as set forth in paragraph (c)(3) of Regulation 1.501(c)(3)-1.

Section 1.501(c)(4)-1(a)(2)(ii) of the regulations provides that an organization is not
operated primarily for the promotion of social welfare if its primary activity is carrying on
a business with the general public in a manner similar to organizations that are operated
for profit.

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Revenue Ruling 78-86 held denial of an organization formed by various merchants to
provide customer parking. A parking arrangement whereby merchants join together to
provide parking for their customers at a reduced rate serves the merchants’ private
interests by encouraging the public to patronize their stores. Thus it cannot be said to
be operated exclusively for charitable purposes under section 501(c)(3) of the Code or
primarily for social welfare purposes under section 501(c)(4).

Veterans Foundation v. United States, 281 F.2d 912 (10th Cir. 1960). Thrift stores—A
foundation reselling donated goods for a profit was held taxable even though its net
profits were payable to a veterans’ organization exempt under IRC 501(c)(4). In that
case, the primary purpose of the organization, as evidenced by its activities, was to
engage in a business, and it did not qualify under 501(c)(4).

Application of Law — Section 501(c)(6)

You do not meet the qualifications under Section 1.501(c)(6)-1 of the Regulations as
your activities are not aimed at the improvement of business conditions of one or more
lines of business but rather you are performing particular services for members. By
operating and marketing a venue under which a member may sell their products you are
providing a direct service to that member. Also, operating a market for selected vendors
does not improve business conditions of any industry or line of business but rather
serves only as a convenience to those vendors chosen to sell at that market.

Based on the information submitted, your primary purpose is to provide a sales facility
for your members, similar to the organization in Revenue Ruling 58-244. An activity
such as this is providing a particular service to individuals. The facility serves as a
convenience and economy to anyone who uses the marketplace to sell their products.
Serving your members in this manner provides a convenience and economy in the
conduct of their businesses by providing selling opportunities they otherwise would not
have. Revenue Ruling 68-264 defines this as providing a particular service to members.
Performing services for members constitutes a prohibited activity under 501(c)(6)
thereby disqualifying you from exemption under this Code section.

You are like the organization in Rev. Rul. 58-294 in that you were formed to conduct
advertising and marketing activities to promote the farmers market where the sale of
products occurs. The sales activities at the market are carried on for profit for the
members/vendors. Like the organization in Rev. Rul. 58-294, you are engaged in
furthering the business interests of the members/vendors instead of focusing on the
improvement of one or more lines of business.

The information you submitted indicates that your members have no common business
interest other than a mutual desire to have a location to increase their individual sales.
Your marketplace activities are not directed at the improvement of business conditions

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of one or more lines of business, but rather to the promotion of the private interests of
those producers who rent stalls at your market. The facts you submitted indicate that
you are not promoting the general welfare of the community or promoting the common
economic interests of all of the commercial enterprises in a given trade community.
Rather, you are simply providing a convenient place for individuals to market their
products for their exclusive benefit. As noted in Revenue Ruling 73-411, by providing
such service, you are not considered to be the type of organization contemplated by
section 501(c)(6) of the Code. Therefore, you do not qualify for exemption as an
organization described in section 501(c)(6) of the Code.

Like the organization in Rev. Rul. 59-391, your membership consists of individuals and
farmers representing different products and crafts. You were created for the purpose of
conducting a farmers market. You have no common business interest other than a
desire to increase the sales of your members/vendors.

You are like the organizations in American Automobile Association v. Commissioner of
Internal Revenue. By conducting a farmers market, your primary purpose is the
operation of a regular business of a kind ordinarily carried on for profit. You advertise
and promote the farmers market as well as provide paid management services for the
operation of the market and are therefore rendering particular services for your
members/vendors.

Application of Law — Section 501(c)(4)

Treasury Regulation 1.501(c)(4)-1 provides that an organization is operated for the
promotion of social welfare if it is primarily engaged in promoting in some way the
common good and general welfare of the people of the community. An organization that
primarily benefits a private group of citizens cannot qualify for exemption. You are
formed to benefit your members who have joined as members to sell products as
vendors at your market. While the community at large derives some benefit from the
availability of certain products, the reason you were formed was to provide a place for
these vendors to sell their products. Because you are primarily benefitting a group of
private individuals, your members, you do not qualify under 501(c)(4).

Section 1.501(c)(4)-1(a)(2)(ii) of the regulations provides that an organization is not
operated for the promotion of social welfare if it is carrying on a business similar to
organizations that are operated for profit. You carry on a business similar to any for
profit market in providing a varied array of products for customers. Members are
selected based on the types of products provided, measured by quality standards and
legal licensing requirements enabling them to sell, and are allowed to operate
generating maximized profits through individual sales at their own vendor stall. Activities

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of this type are no different from any grocery that sells food and food related products.
Although you indicate you are the only market of this type in the area the goods you
offer are not so unique as to not be in competition with any other store selling similar
products.

In Revenue Ruling 78-86 an organization formed by various merchants to provide
parking for their customers at a reduced rate was found to be serving the merchants’
private interests by encouraging the public to patronize their stores.

Rather than providing their own parking, merchants were able to join together to provide
a common parking facility in which all share the benefits. In that ruling, although there
was some public benefit derived from the construction and operation of the parking lot, it
was not formed to be operated primarily for social welfare purposes under section
501(c)(4). Your market was formed by vendors looking for a place to sell goods. The
market is serving the private interests of your members, merchants, by providing a
common venue for the sale of those goods. Rather then these vendors having to handle
their own marketing, promotion or advertising, this is done by you. Customers are in
turn encouraged by you to patronize and purchase goods sold by your members at your
market. For these reasons you are serving private members interests and, much like the
ruling, although the public derived some benefit from the use of the parking lot and they
derive benefit from the convenience or selection of goods sold at your market, this was
not the reason behind your formation.

You are similar to the organization in Veterans Foundation. Although you allow for the
sale of goods to those of a disadvantaged class, through the WIC and food stamp
programs, which in turn helps the betterment of the community, the operation of the
market itself is still a regular business. Your primary purpose is to engage in a business
of operating a market and therefore do not meet 501(c)(4) qualifications.

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 Internal Revenue Code. Your operations
provide specific services to members and allow them 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 IRC 501(c)(6).

In addition, we conclude that you are not primarily operated as described in section
501(c)(4) of the Code. You were not formed for an overall community benefit and/or for
social welfare purposes but to provide a direct business service for your members’
economic benefit. Accordingly, you do not qualify for recognition of exemption under
section 501(c) (4) of the Internal Revenue Code.

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You have the right to file a protest if you believe this determination is incorrect. To
protest, you must submit a statement of your views and fully explain your reasoning.
You must submit the statement, signed by one of your officers, within 30 days from the
date of this letter.

We will consider your statement and decide if that information affects our determination.
If your statement does not provide a basis to reconsider our determination, we will
forward your case to our Appeals Office. You can find more information about the role
of the Appeals Office in Publication 892, Exempt Organization Appeal Procedures for
Unagreed Issues.

Types of information that should be included in your appeal can be found on page 2 of
Publication 892, under the heading “Regional Office Appeal”. The statement of facts
(item 4) must be declared true under penalties of perjury. This may be done by adding
to the appeal the following signed declaration:

“Under penalties of perjury, I declare that I have examined the statement of facts
presented in this appeal and in any accompanying schedules and statements and, to
the best of my knowledge and belief, they are true, correct, and complete.”

Your appeal will be considered incomplete without this statement.

If an organization’s representative submits the appeal, a substitute declaration must be
included stating that the representative prepared the appeal and accompanying
documents; and whether the representative knows personally that the statements of
facts contained in the appeal and accompanying documents are true and correct.

An attorney, certified public accountant, or an individual enrolled to practice before the
Internal Revenue Service may represent you during the appeal process. To be
represented during the appeal process, you must file a proper power of attorney, Form
2848, Power of Attorney and Declaration of Representative, if you have not already
done so. For more information about representation, see Publication 947, Practice
Before the IRS and Power of Attorney. All forms and publications mentioned in this
letter can be found at www.irs.gov, Forms and Publications.

If you do not intend to protest this determination, you do not need to take any further
action. If we do not hear from you within 30 days, we will issue a final adverse
determination letter to you. That letter will provide information about filing tax returns
and other matters.

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

Mail to: Deliver to:
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 may also fax your statement using the fax number shown in the heading of this
letter. If you fax your statement, please call the person identified in the heading of this
letter to confirm that he or she received your fax.

If you have any questions, please contact the person whose name and telephone
number are shown in the heading of this letter.

Sincerely,

Lois Lerner
Director, Exempt Organizations

Enclosure, Publication 892

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