Farmers market loses exemption for commercial private benefit

View official IRS release (PDF)

Plain-English summary

A nonprofit operated several farmers markets where farmers, food producers, artisans, and other vendors sold goods directly to the public. Vendors paid membership dues and market fees, while the organization selected vendors, advertised the markets, maintained a vendor list, and provided selling space and other overhead support. The organization also offered cooking demonstrations, food education, charitable food donations, and access for nutrition-program participants. The IRS concluded that these activities were secondary to operating a commercial marketplace that primarily benefited the vendors, and at least two officers were themselves vendors. Because the organization had a substantial nonexempt commercial purpose, conferred private benefits, and produced inurement for governing-body members, the IRS revoked its section 501(c)(3) status effective January 1 of a redacted year.

Ruling snapshot

• Question: Did the farmers market remain exempt when its main activity promoted and facilitated sales for fee-paying vendors?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3) and 511; Treas. Reg. § 1.501(c)(3)-1; Rev. Ruls. 61-170, 67-216, 68-167, 71-395, 73-127, 78-86, and 80-287

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES Date: FEB 08 2017
DIVISION
Taxpayer Identification Number:
Number: 201731012 Person to Contact:

Release Date: 8/4/2017
Employee Identification Number:

Employee Telephone Number:

(Phone)
(Fax)

UIL: 501.03-00

CERTIFIED MAIL — Return Receipt Requested
Dear

This is a Final Adverse Determination Letter as to your exempt status under section
501(c)(3) of the Internal Revenue Code. Your exemption from Federal income tax under
section 501(c)(3) of the Code is hereby revoked effective January 1, 20XX.

Our adverse determination was made for the following reasons:

Organizations described in section 501(c)(3) of the Code and exempt under
section 501(a) of the Code must be both organized and operated exclusively for
exempt purposes and must serve public rather than private interests. Our
examination of your activities and finances revealed that you more than
insubstantially served private interests. Such actions are inconsistent with the
requirements to operate exclusively for purposes set forth in section 501(c)(3) of
the Code and to maintain exempt status.

Contributions to your organization are no longer deductible under section 170 of the
Internal Revenue Code.

You are required to file Federal income tax returns on Form 1120. If you have not already
filed these returns and the agent has not provided you instructions for converting your
previously filed Form 990 to Form 1120, you should file these income tax returns with the
appropriate Service Center for the tax year ending December 31, 20XX and for all tax years
thereafter in accordance with the instructions of the return.

Processing of income tax returns and assessments of any taxes due will not be delayed
should a petition for declaratory judgment be filed under section 7428 of the Internal
Revenue Code.

If you decide to contest this determination, you may file an action for declaratory judgment
under the provisions of section 7428 of the Code in one of the following three venues:
United States Tax Court, the United States Court of Federal Claims, or the United States

District Court for the District of Columbia. A petition or complaint in one of these three
courts must be filed before the 91st day after the date this determination was mailed to you
if you wish to seek review of our determination. Please contact the clerk of the respective
court for rules and the appropriate forms regarding filing petitions for declaratory judgment
by referring to the enclosed Publication 892. Please note that the United States Tax Court is
the only one of these courts where a declaratory judgment action can be pursued without the
services of a lawyer. You may write to the courts at the following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that
can help protect your taxpayer rights. We can offer you help if your tax problem is causing a
hardship, or you’ve tried but haven’t been able to resolve your problem with the IRS. If you
qualify for our assistance, which is always free, we will do everything possible to help you.
Visit taxpayeradvocate.irs.gov or call 1-877-777-4778.

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

Sincerely yours,

Mary A. Epps
Acting Director, EO Examinations

Enclosures:
Publication 892

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities Division
Exempt Organizations Examinations
324 25th St Rm 6025 Mail Stop 1112
Ogden, UT 84401

Date: November 02, 2016
Taxpayer Identification Number:
Form:

Tax year(s) ended:
Person to contact/ ID number:

Contact numbers:

Toll Free

Long Distance

Fax:

Manager’s name/ ID number:

Manager’s contact number:

Response due date:

Certified Mail - Return Receipt Requested

Dear

Why you are receiving this letter
We propose to revoke your status as an organization described in section 501(c)(3) of the Internal

Revenue Code (Code). Enclosed is our report of examination explaining the proposed action.

What you need to do if you agree
If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action —

Section 7428, and return it to the contact person at the address listed above (unless you have already
provided us a signed Form 6018). We'll issue a final revocation letter determining that you aren't an

organization described in section 501(c)(3).

After we issue the final revocation letter, we'll announce that your organization is no longer eligible for
contributions deductible under section 170 of the Code.

If we don’t hear from you
If you don’t respond to this proposal within 30 calendar days from the date of this letter, we'll issue a

final revocation letter. Failing to respond to this proposal will adversely impact your legal standing to
seek a declaratory judgment because you failed to exhaust your administrative remedies.

Effect of revocation status
If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax

year(s) shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation

If you disagree with our proposed revocation, you may request a meeting or telephone conference
with the supervisor of the IRS contact identified in the heading of this letter. You may also file a
protest with the IRS Appeals office by submitting a written request to the contact person at the
address listed above within 30 calendar days from the date of this letter. The Appeals office is
independent of the Exempt Organizations division and resolves most disputes informally.

Letter 3618 (06-2012)
Catalog Number 34809F

For your protest to be valid, it must contain certain specific information including a statement of the
facts, the applicable law, and arguments in support of your position. For specific information needed
for a valid protest, please refer to page one of the enclosed Publication 892, How to Appeal an IRS
Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498, The Examination
Process. Publication 3498 also includes information on your rights as a taxpayer and the IRS
collection process. Please note that Fast Track Mediation referred to in Publication 3498 generally

doesn’t apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication 892.
Please contact the individual identified on the first page of this letter if you are considering requesting
technical advice. If we issue a determination letter to you based on a technical advice memorandum
issued by the Exempt Organizations Rulings and Agreements office, no further IRS administrative

appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn’t a substitute
for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can't
reverse a legally correct tax determination or extend the time you have (fixed by law) to file a petition
in a United States court. They can, however, see that a tax matter that hasn’t been resolved through
normal channels gets prompt and proper handling. You may call toll free 1-877-777-4778 and ask for
Taxpayer Advocate assistance. If you prefer, you may contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

Phone Number:

For additional information
If you have any questions, please call the contact person at the telephone number shown in the

heading of this letter. If you write, please provide a telephone number and the most convenient time
to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

Margaret Von Lienen
Director, Exempt Organizations Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

Letter 3618 (06-2012)
Catalog Number 34809F

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

Date of Notice: November 02, 2016
Issues:

Whether continues to qualify for exemption
from Federal income tax under Section 501(c)(3) of the Internal Revenue Code.

Facts:

applied for tax-exempt status by filing Form 1023-EZ, Streamlined Application for
Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, on
October 27, 20XX, and was granted tax-exempt status as a 501(c)(3) on November 07,
20XX, with an effective date of January 01, 20XX.

was incorporated on January 01, 20XX the state of

was selected for audit to ensure that the activities and operations align with their
approved exempt status.

was sent letter 3606 with attachments on March 22, 20XX. One of the
attachments, Form 4564, Information Document Request, item 14, requested the
organization provide complete copy of your original organizing document and any
amendments.

As part of the response received by by the Internal Revenue Service on April 25,
20XX, the organizing documents stated “(See Attachment)” for the purpose, the
attachment was not provided. Tax Compliance Officer (TCO) contact the organization
and provided the Articles of Incorporation-Nonprofit filed with the State of

on March 19, 20XX, were it states the purpose of the organization is “to improve the
marketing of local farm products in the farm markets of :

Due to the purpose of filed with the state of on March 19, 20XX, not
meeting the organization test of a 501(c)(3) organization, Tax Compliance Officer
(TCO) recommended amended the organizing documents, in order to meet the

organization test of a 501(c)(3) organization.

on 9/13/20XX amended the organization documents to add the following to the

Articles of Incorporation with the state of has follows:
• clause:
Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -1-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX
• Clause:
• Clause:
Per the response received by by the Internal Revenue Service on April 25,
20XX, provides the surrounding community with = market place locations from

May through December, as well as a winter market in one location where farmers,
businesses, and artisans sell their goods directly to the public. The markets are

conducted daily in , Thursdays 4-7pm; , Monday 3:30 -6:30 pm;
, Saturdays 10am — 1 pm; , Wednesdays 3:30 — 6:30 PM;

, Wednesdays 3:30-6:30pm; and , Tuesdays, 3:30-6:30 pm,

also provide:

• Special events where local vendor can sell their products;

• Cooking demonstrations and other educational programs for adults and
educational events for children. may hold one to two of these types of

events a month.
• Space at the marked for local non-profits to promote their activities.

A due of $XXX per year is charged to each member for participation in the markets. A
fee of $XX-$XX per spot is charged to participate in a market and is determined by the
size of the spot a member uses.

is managed through their board of directors. The board meets on a monthly
basis to discuss the weekly markets and how to improve them, the various community
and children’s projects, and marketing strategies.

Since beginning, they have engaged in a market where farmers and other
vendors sell their products to the community at large. The “other vendors” are allowed
to sell prepared food products such as cookies, bread, coffee, etc. at minimal overhead
and marketing expenses. At least two of officers sell products as vendors at the
market.

Vendors are selected by the board of directors after submitting a pre-application form
and the board will then decide whether or not to accept an application based on the
product(s) the person is looking to sell, membership requirements and vacancies. Food
vendors are charged small fees depending on the market location they chose to

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

participate in.

has promoted the market through the dissemination of newspaper ads in
several papers, bill board ads, banner, radio, brochure, Facebook, building and hosting
a website, and building a presence in the local farmers’ market community. The
website includes basic information regarding the location and hours that the markets
operate. In addition, a list of all vendors along with their products is provided.

also provide a month by month consumer's guide to fresh product grown or
produced in , farmer's markets local growers times and locations, Special
events planned for 20XX, and XXth annual program.

The budget indicate that the gross receipts consist almost exclusively of fees received
from vendors to rent space at the market and dues. You also have a small amount of
gross income from chili cook off and Fall dinner. Your expenses include salaries/wages,
program, advertising, professional fees, insurance, meeting, bonding, dues, donations,
and miscellaneous operating expenses.

Law:

Internal Revenue Code (IRC) §501(c)(3) of the Code exempts from federal income tax:
corporations, and any community chest, fund, or foundation, organized and operated
exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purposes, or to foster national or international amateur sports competition, or
for the prevention of cruelty to children or animals, no part of the net earnings of which
inures to the benefit of any private shareholder or individual.

IRC §511 of the Internal Revenue Code imposes a tax at corporate rates under section 11
on the unrelated business taxable income of certain tax-exempt organizations.

Treasury Regulations (Regulation) §1.501(c)(3)-1(a)(1) of the regulations 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.

Regulation §1.501(c)(3)-1(c)(1) of the regulations 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.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

Regulation §1.501(c)(3)-1(d)(1)(ii) of the regulations 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 requirement, it is necessary for an organization to
establish that it is not organized or operated for the benefit of private interests.

Regulations §1.501(c)(3)-1(d)(2) of the regulations provides that the term “charitable,” is
used in section 501(c)(3) in its generally accepted legal sense and includes: Relief of the
poor and distressed or of the underprivileged; advancement of religion; advancement of
education or science; erection or maintenance of public buildings, monuments, or works;
lessening of the burdens of Government; and promotion of social welfare by organizations
designed to accomplish any of the above purposes, or (i) to lessen neighborhood
tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights
secured by law; or (iv) to combat community deterioration and juvenile delinquency.
Regulations §1.501(c)(3)-1(d)(3)(i) of the regulations provides that the term “educational,”
as used in section 501(c)(3) of the code, relates to:

(a) The Instruction or training of the individual for the purposes of improving or
developing his capabilities; or

(b) The instruction of the public on subjects useful to the individual and beneficial to the
community.

Rev. Rul. 61-170, 1961-2 C.B. 112, held that an association composed of professional
private duty nurses and practical nurses which supported and operated a nurses’ registry
primarily to afford greater employment opportunities for its members was not entitled to
exemption under section 501(c)(3) of the Code. Although the public received some
benefit from the organization’s activities, the primary benefit of these activities was to
organization’s members.

Rev. Rul. 67-216, 1967-2 C.B. 180, established that a nonprofit organization formed and
operated exclusively to instruct the public on agricultural matters by conducting annual
public fairs and exhibitions of livestock, poultry, and farm products may qualify for
exemption from Federal income tax under section 501(c)(3) of the Internal Revenue Code
of 1954. The principal activities and exhibits of the fair are educational. They are planned
and managed by persons whose business it is to inform the public in general, and farmers
in particular, about the resources of the region, and the methods by which they may be
conserved, utilized, and improved. In addition, the overall activities of the fair are
conducted in such a fashion and on such subjects as will enlighten the viewers and
participants on the newest and best techniques of farming, and on other matters useful
and beneficial to them and to the community.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -4-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

Rev. Rul. 68-167, 1968-1 C.B. 255, held that a nonprofit organization created to market
the cooking and needlework of needy women may be exempt from tax under section
501(c)(3) of the Code. The organization operated a market where it sold the cooking and
needlework of these women who were not otherwise able to support themselves and their
families. The organization provided a necessary service for needy women by giving them
a market for their products and sources of income.

Rev. Rul. 71-395, 1971-2 C.B. 228, a cooperative art gallery was formed and operated by
a group of artists for the purpose of exhibiting and selling their works and did not qualify
for exemption under section 501(c)(3) of the Code. It served the private purposes of its
members, even though the exhibition and sale of paintings may be an educational activity
in other respects.

Rev. Rul. 73-127, 1973-1 C.B. 221, the Service held that an organization that operated a
cut-price retail grocery outlet and allocated a small portion of its earnings to provide on-
the-job training to the hard-core unemployed did not qualify for exemption. The
organization’s purpose of providing training for the hardcore unemployed was charitable
and educational within the meaning of the common law concept of charity; however the
organization’s purpose of operating a retail grocery store was not. The ruling concluded
that the operation of the store and the operation of the training program were two distinct
purposes. Since the former purpose was not recognized charitable purpose, the
organization was not organized and operated exclusively for charitable purposes.

Rev. Rul. 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.

Rev. Rul. 80-287, 1980-2 C.B. 185, involved a nonprofit lawyer referral service that
arranged, at the request of any member of the public, an initial half-hour appointment for a
nominal charge with a lawyer whose name was on an approved list maintained by the
organization. As a general rule, providing services of an ordinary commercial nature in a
community, even though the undertaking is conducted on a nonprofit basis, is not
regarded as conferring a charitable benefit on the community unless the service directly
accomplishes one of the established categories of charitable purposes. The
organization’s activities were directed toward assisting individuals in obtaining preventive
or remedial legal services and, as such, were not specifically designed to confer a
charitable benefit on the community. Although the lawyer referral service provided some
public benefit, a substantial purpose of the program was promotion of the legal profession.

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 a single non-exempt purpose, if

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -5-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

substantial in nature, will preclude exemption under section 501(c)(3) of the Code,
regardless of the number or importance of truly exempt purposes. Thus, the operational
test standard prohibiting a substantial non-exempt purpose is broad enough to include,
inurement, private benefit, and operations that further nonprofit goals outside the scope of
section 501(c)(3).

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
section 501(c)(3) of the Code because its activities 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 Easter House v. U.S., 12 Cl. Ct. 476, 486 (1987), aff'd, 846 F. 2d 78 (Fed. Cir.) cert.
denied, 488 U.S. 907, 109 S. Ct. 257, 102 L. Ed. 2d 246 (1988), the court found an
organization that operated an adoption agency was not exempt under section 501(c)(3) of
the Code because a substantial purpose of the agency was a nonexempt commercial
purpose. The court concluded that the organization did not qualify for exemption under
section 501(c)(3) because its primary activity was placing children for adoption in a
manner indistinguishable from that of a commercial adoption agency. The court rejected
the organization's argument that the adoption services merely complemented the health
related services to unwed mothers and their children. Rather, the court found that the
health-related services were merely incident to the organization's operation of an adoption
service, which, in and of itself, did not serve an exempt purpose. The organization's sole
source of support was the fees it charged adoptive parents, rather than contributions from
the public. The court also found that the organization competed with for-profit adoption
agencies, engaged in substantial advertising, and accumulated substantial profits.
Accordingly, the court found that the "business purpose, and not the advancement of
educational and charitable activities purpose, of plaintiff's adoption service is its primary
goal" and held that the organization was not operated exclusively for purposes described
in section 501(c)(3). Easter House, 12 Cl. Ct. at 485-486.

In American Institute for Economic Research V. United States, 302 F.2d9 934 (Ct. Cl.
1962), the Court considered the status of an organization that provided analysis of
securities and industries and of the economic climate in general. It sold subscriptions to
various periodicals and services providing advice for purchases of individual securities.
The Court noted that education is a broad concept, and assumed that the organization

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -6-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

had an educational purpose. The Court concluded, however, that the totality of the
organization’s activities, which included the sale of many publications as well as the sale
of advice for a fee to individuals, was more indicative of a business than that of an
educational organization. The Court held that the organization had a significant non-
exempt commercial purpose that was not incidental to the educational purpose and that
the organization was not entitled to be regarded as exempt.

In Living Faith, Inc. V. Commissioner, 950 F.2d 365 (7th Cir. 1991), the Court of Appeals
upheld a Tax Court decision, T.C. memo. 1990-484, 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 to support a conclusion 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

is not organized and operated exclusively for charitable, educational, or religious
purposes consistent with Section 501(c)(3) of the Code nor Section 1.501(c)(3)-1(a)(1) of
the Income Tax Regulations and therefore fail to meet the operational test. You help
facilitate the sale of produce, baked goods and other items for the benefit of the seller,
advertise, promote and inform potential buyers about your market, and your primary
activities revolve around setting up the vendor spaces as a catalyst for facilitating the sale
of goods for local farmers and other organizational members alike.

Section 1.501(c)(3)-1(c)(1) of the regulations 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. You engaged in a substantial non-exempt activity similar to
commercial enterprise by operating a market selling various goods to the public. Vendors
participating in your market pay a fee to rent their space and then are free to set sales
prices to maximize sales and profits for their own benefit. You therefore do not operate
exclusively for exempt purposes.

Contrary to section 1.501(c)(3)-1(d)(1)(ii) of the regulations, you are operated for the
substantial purpose of providing private benefit to vendors of the products at your market.
Although the market includes educational events, more than an insubstantial part of your
activities are in furtherance of the non-exempt purpose of being a profitable outlet for your
vendors. You not only provided the outlet for them to sell their products, you provided
marketing and cover overhead expenses that the vendors would otherwise have to

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -7-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

expend. Because your governing body members are also vendors, this private benefit
constitutes inurement.

Section 1.501(c)(3)-1(d)(3)(i) of the regulations provides, in part, that the term
‘educational’ as used in section 501(c)(3) of the Code relates to the instruction of the
public on subjects useful to the individual and beneficial to the community. As described
above, your facilitation of produce sales is not educational nor is advertising your farmer's
market. Within your organization, only a limited amount of time and resources are
devoted to educational and charitable activities and purposes with the meaning of section
501(c)(3) of the Code. Any consumer education you provide is incidental to the sale of the
vendors’ products.

You are similar to the organization described in Rev. Rul. 61-170. In your case, your
primary purpose is to provide a commercial market for vendors. While the public may
benefit from an increase in market selection and the educational programs that you
provide, the overall purpose of your organization is to serve and benefit the vendors selling
at the market and not the general public.

You are unlike the organization in Revenue Ruling 67-216 because your principle purpose
is to facilitate vendor sales and connect buyers with sellers. You devote a majority of your
time and resources to this purpose. You utilize resources to assist local and regional
farmers as well as other producers to gain visibility to potential buyers through the vehicle
of your farmer’s market. Your website includes a vendor list that includes his/her product
sold at the market. You encourage the public so support the vendors at your market. Each
vendor would otherwise bear the expense of providing the same services on an individual
basis. Therefore, you do not qualify for exemption.

Unlike the organization described in Rev. Rul. 68-167 you do not serve needy individuals
who are not otherwise able to support themselves and their families.

Your activities are, in effect, identical to those of the cooperative art gallery described in
Rev. Rul. 71-395. You operate for the purpose of providing space to local farmers and
vendors to exhibit and sell their products. Exhibiting and promoting the sales of products
for the benefit of private individuals does not qualify for exemption under section 501(c)(3)
of the Code.

You are similar to the organization described in Rev. Rul. 73-127 because the operation of
the farmers’ market and your provision for educational programs are two distinct purposes.
Because the operation of a market is not recognized charitable or educational purpose,
you are not operated exclusively 501(c)(3) purposes.

You are similar to the organization in Revenue Ruling 80-287 which provided that where
regular commercial services, even if offered on a non-profit basis, did not directly

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -8-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

accomplish one of the established types of charitable purposes an organization does not
qualify for exemption. Because your activities are directed at promoting and facilitating the
sale of products selected by vendors for the purpose of increasing sales; and you were
formed to provide an improved market for products and expand sales opportunities you
were not formed to further exclusive section 501(c)(3) purposes. While consumers at the
market may receive information about products this is not serving an exclusive educational
purpose. Also, since vendor set their own prices, sales of products confer no charitable
benefit to the community. Therefore, you are not substantially serving established section
501(c)(3) purposes and do not qualify for exemption.

An organization is not operated exclusively for charitable purposes, and thus will not
qualify for exemption under Section 501(c)(3), if it has a single non-charitable purpose that
is substantial in nature (Better Business Bureau of Washington, D.C. v. United States).
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 produce sales. You maintain a vendor list and are actively involved in the
sales process. As these are not serving exclusively 501(c)(3) purposes and are not
insubstantial in nature you are similar to the organization in the above ruling.

A substantial part of your activities consist of providing a marketplace for private
individuals to sell their produce and other goods to members of the public at prices
established by the vendor. Vendors are selected based upon consumer demand for their
products and not for any charitable or educational purposes. Vendors select and set
product prices for sale to maximize profits and sales. As seen in B.S.W. Group and Easter
House, a lack of public support is further evidence that an organization is operating for
commercial purposes and not for charitable purposes. Essentially all of your income is
derived from vendor fees and dues. Because you conduct activities similar to a
commercial business you do not meet the requirements for exemption under section
501(c)(3) of the Code.

You are similar to the organizations described in the American Institute for Economic
Research v. United States and Living Faith, Inc. V. Commissioner. You are operating a
market in competition with other commercial markets. Your sale of products such as
fruits, vegetables, cookies, wines, breads, and coffee is indicative of a business. Your
sources of revenues are mainly from vendor dues and vendor fees and your expenses are
mainly for marketing, supplies, insurance, and professional fees. Your market is a
significant non-exempt commercial activity that is not incidental to the achievement of
other educational purposes.

Organization’s Position

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -9-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

You state that your markets are our way to reach the public and allow a forum to
bring the farm to them. It allows to provide nutrition education, community
fellowship, as well as a support for other nonprofit organizations. helps to build

community by serving as a gathering point for community outreach.

You also state provides support for other Nonprofits — allows other nonprofits a way
to conserve resources and reach the community through use of the market set up.

The markets provide an avenue for recipients of the WIC Farmers’ Market Nutrition
Program (FMNP) and Senior market Nutrition Program (SNAP) to redeem their
checks for locally grown fruits and vegetables as they are required to by the
program. The markets provide opportunities and resources on the usage of the
checks for their purchases.

Distribution location for Senior Farmers’ Market Nutrition Program (SNAP). The
markets provide a location for the recipients of the program to receive their checks
if they participate in the program. It gives the recipients an area to receive their
checks in a platform where they can also be used. Increasing the amounts of
seniors that can benefit from the program.

Provide weekly food donations to area food pantry’s, such as the Food
Pantry.
Provide all fruits and vegetables for Banquet.

Library System provides as an outreach of

their services.

Public Education

Provide displays at various events within the community on eating local and the
benefit of eating farm fresh to educate the community on the value of farm
produced products.

o These events are at the Senior Day at the Mall, the Home &
Garden Show.

Display information on Fruits and Vegetables at the annual event.

Provide multiple cooking demonstrations.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service

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Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

• Teaches children how to plant their own garden to show them an emphasis on
healthy eating.

• Holds a chili cook-off as a fundraiser of which the proceeds are donated to an area
of need in the community.

• Provides training on food safety and preservation.
Encourage economic opportunities for small family farmers and local business

• Provides a venue for members to sell their products as well as test new products
with low overhead.

• Allows the market to improve the economic activity of the community through
emphasis on buying local.

Facilitate food safety in the community

• Require food certifications of all sellers in the markets, current license and
inspection of facility.

• Provide consumers with access to fresh, local nutritious food.
Government’s Position

By providing a profitable outlet for local farmers and vendors, you are primarily serving
the private interests of the businesses and individuals who come to your market to sell
their products. The facts show the gathering of local residents for educational purposes
is secondary to the commercial activities that occur at your market.

Conclusion:

You do not qualify for recognition of exemption from federal income tax as an
organization described in section 501(c)(3) of the Code because you do not meet the
operational test. Your activities are indistinguishable from the similar activities of an
ordinary commercial enterprise, and these activities provide substantial private benefits
to your vendors. Since members of your governing body are vendors, this private
benefit also constitutes inurement. Therefore, we conclude that you do not meet the
operational test for exemption under section 501(c)(3) of the Code.

Based on the facts and information provided, you are not organized or operated
exclusively for exempt purposes within the meaning of section 501(c)(3) of the Internal

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -11-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December 31,
20XX

Revenue Code. The provision of a marketplace for the sale of goods is not an
educational activity nor is it charitable because it is not limited to a charitable class.
You do not serve a public rather than a private interest. Therefore, you are not
described in section 501(c)(3).

You help facilitate the sale of produce for the benefit of the seller. We have concluded
that you are not an organization described in section 501(c)(3) of the Code because
you are not operated exclusively for one or more exempt purposes set forth in section
501(c)(3) of the code.

Based on the foregoing reasons, the organization does not qualify for exemption under
section 501(c)(3) and its tax exempt status should be revoked.

Form 1120 returns should be filed for the tax periods after January 1, 20XX.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
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