Farmers' market denied section 501(c)(5) status

Plain-English summary

A nonprofit farmers' market applied for exemption as an agricultural organization under IRC § 501(c)(5). It rented stalls, promoted the market, and covered site and operating expenses with vendor fees, while vendors sold their own agricultural products, prepared foods, and crafts. The IRS concluded that these activities primarily provided members with a direct business service by giving them a sales location and promotion they otherwise would have to arrange themselves. Sales proceeds benefited the individual vendors, and the organization did not principally improve industry conditions, product quality, or occupational efficiency. The IRS therefore denied exemption, and the denial became final after the organization did not protest within 30 days.

Ruling snapshot

• Question: Did operating and promoting a farmers' market qualify as an exempt agricultural purpose under section 501(c)(5)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(5); Treas. Reg. § 1.501(c)(5)-1; Rev. Ruls. 66-105, 74-195, and 77-153

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
Date: 11/26/2014

Employer ID number:

Number: 201508011
Release Date: 2/20/2015 Contact person/ID number:

Contact telephone number:
Form you must file:

Tax years:

UIL: 501.05-01

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.

Sincerely,

Director, Exempt Organizations

Letter 4040 (Rev. 7-2014)
Catalog Number 476352

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: 9/25/2014
Employer ID number:
Contact person/ID number:
Contact telephone number:
Contact fax number:

Legend:
O =
P =
Q =

UIL:
501.05-01

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 given below.

Facts
You were formed in the State of O on Q. Per your Articles of Incorporation, you were formed for the purpose
of organizing and promoting a non-profit farmers’ market in P, to serve P and the surrounding area.

Per your Bylaws, you were established to provide quality locally grown and produced agricultural products,
prepared foods and crafts, all of which are to be bought, sold or bartered for the benefit of both consumers and
producer; to stimulate economic growth and a greater variety of farm and home industry activities and products;
to educate the public in the value of these products and activities. To promote the agricultural purpose of the
market you will provide and maintain at least sixty percent agricultural or food products and forty percent craft
products. You indicated 100% of your time and funds is spent on these activities.

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

Your Bylaws provide for six different types of membership; Vendor, Shared Vendor, Substitute Vendor,
Community Table, Fund-raisers, and Patrons. Voting is limited to Vendor Members, in good standing and
Patrons who support you, if on record to vote. Vendors are allocated two votes and Patrons may be allocated
one vote. Substitute Vendors, Community Table Vendors, and Fundraisers are not allocated a vote.

Per the financial information you submitted, you are supported by vendor fees. Your vendor agreement
provides that vendor fees collected for rental of stalls are applied to cover rent and expenses for the market site,
site liability insurance, market manager compensation, entertainment, advertising, sign expenses, and operation
costs.

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

Section 1.501(c)(5)-1 of the Income Tax Regulations describe organizations covered by Code section 501(c)(5)
as labor, agricultural, and horticultural organizations that have no net earnings inuring to the benefit of any
member and have as their object the betterment of the conditions of persons engaged in those pursuits, the
improvement of the grade of their products, and the development of a higher degree of efficiency in their
respective occupations.

Rev. Rul. 66-105, 1966-1 C.B. 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 section 501(c)(5) of the Code. Therefore, the organization does not meet the requirements of section
1.501(c)(5)-1 of the Regulations and is not exempt under section 501(c)(5) of the Code.

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. 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.

Revenue Ruling 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. Accordingly, the organization does not qualify for exemption from
federal income tax under section 501(c)(5) of the Code as an agricultural organization.

Application of law
You do not meet the qualifications under section 1.501(c)(5)-1 of the Income Tax Regulations as your activities
are not aimed at the overall betterment of conditions within the farming industry. You operate to aid your

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

vendors to sell 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 the member/vendor of your organization. Providing a location and
promotion for sale of products merely relieves your members of work they would either have to perform
themselves or have performed for them, which precludes exemption under section 501(c)(5).

You are similar to the organization in Revenue Ruling 66-105 in that you provide the market place for members
to sell their wares where they in turn receive revenue from sales and the proceeds, which precludes exemption
under section 501(c)(5) of the Code.

You are similar to the organization in Revenue Ruling 74-195. By providing a similar service (an outlet for
sales of member products), 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
main activity of operating a market or providing a location for sales of members’ products, precludes exemption
under section 501(c)(5) of the Code.

You are similar to the organization in Revenue Ruling 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, which
precludes exemption under section 501(c)(5).

Conclusion

Based on the facts above, we concluded you are not operating as an organization described in section 501(c)(5)
of the Code. You provide a service that benefits your members. The net earnings of the sale of member
products inures to the benefit of your members. 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 your members’ economic benefit. 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
• 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:

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

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.

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

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.

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

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,

Director, Exempt Organizations

Enclosure:
Publication 892

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