Commercial hog farm denied 501(c)(3) exemption

Plain-English summary

An organization proposed a self-sustaining hog farm that would use donated surplus or waste inputs, sell part of its output, and donate the balance to related charities. It expected its product to command a premium and planned to operate on a ranch owned by one director, reimbursing a below-market share of specified costs. The IRS found that the articles did not limit the organization to section 501(c)(3) purposes and did not dedicate assets to an exempt purpose on dissolution. It also concluded that raising and selling hogs was a substantial commercial purpose, while charitable donations were incidental and absent from the proposed expense budget. The organization therefore failed both the organizational and operational tests.

Ruling snapshot

• Question: Does a farm that sells part of its output and plans incidental charitable donations qualify under section 501(c)(3)?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 73-127; Better Business Bureau of Washington, D.C., Inc. v. United States; Airlie Foundation v. Commissioner

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
Cincinnati, OH 45201

Date:

January 9, 2020
Release Number: 202014017 Employer ID number:
Release Date: 4/3/2020
UIL Number: 501.00-00, 501.03-30, Contact person/ID number:

501.35-00, 501.36-01
Contact telephone number:

Form you must file:

Tax years:

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(3) 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.

Because you don’t qualify as a tax-exempt organization under Section 501(c)(3) of the Code, donors can’t
deduct contributions to you under Section 170 of the Code. 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.

We’ll also notify the appropriate state officials of our determination by sending them a copy of this final letter
and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state
officials if you have questions about how this determination will affect your state responsibilities and

requirements.

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Notice 437

Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501(c)(3)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) - No Protest

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
Date:
October 28, 2019

Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

V = Number 501.00-00
W = State 501.03-30
X = Date 501.35-00
Y = Organization 501.36-01
Z = Ranch

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)(3).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues
Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.

Facts
You submitted Form 1023-EZ, Streamline Application for Recognition of Exemption Under Section 501(c)(3) of

the Internal Revenue Code. You attested that you are organized and operated exclusively to further charitable
purposes. You also attested that you have not conducted and will not conduct prohibited activities under IRC

Section 501(c)(3).

The description of your activities provided in your application states that your business is to from
and then donate to charity while selling to
sustain the operation. The would otherwise end up in a landfill if not utilized. During a

review of your Form 1023-EZ, detailed information was requested supplemental to the above attestations.

We obtained a copy of your Articles of Incorporation from the Secretary of State of W and shared it with you.
Your Articles confirm that you were formed as a corporation on X in the state of W. Your Articles state that you
were formed for the purpose of . Your Articles further state that for the

will primarily utilize spent originally intended for

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

2

, but pass the stage of consumer preference in terms of
Your Articles are silent regarding the disposition of your assets upon your dissolution.

You aspire to be a self-sustaining entity that is able to donate and financial assistance to -related
charities such as the Y. You plan to maintain a maximum of V . A portion of the produced
will be sold to and these funds will be used to sustain your operations. The balance of the product

will be donated to the Y.

Your activities will be conducted at Z, a ranch owned by one of your directors. Transactions with Z will be
overseen and approved by the board to ensure they are reasonable in nature and comply with ethical concerns.
The expenses you pay to Z will be limited to defraying a prorated portion of insurance, land costs, and utilities.
An evaluation of prevailing land rates and comparable expenses will be used to make sure that these expenses
remain below prevailing market rates to avoid any appearance of impropriety.

Your goal is to produce a product that is in high demand not only for its quality, but also due to
the positive social and . You expect your will command a market price roughly double
that of typical , due to your surrounding circumstances.
You plan to operate in a more cost-effective manner than other commercial operations, since you plan to
have reduced expenses due to the reliance on such as

. You, as a nonprofit, would likely be the preferred choice of most ,
which is a byproduct of the and often thrown away. The potential for their donation to be

a tax-deductible charitable contribution to you provides further enticement, as does the good cause.

You will select a more robust, of which will be a cost-saving measure. The

you choose will be more
. You said the main goal of this enterprise is to provide a template for other small-scale farmers to

copy the model of utilizing to convert surplus/waste into a valuable commodity.

You indicated that percent of your total time will be spent on care, percent on administrative
items, percent on customer engagement and marketing, and percent on the procurement of

Your proposed budgets indicate that all your income will come from the sale of the produced. Your

expenses are typical of a farm operation, which includes ;
paid to the Z. There is no listing of proposed revenue or to donated to

Y or any other -related charities.

Law

IRC Section 501(c)(3) provides for the exemption from federal income tax of organizations organized and
operated exclusively for educational purposes.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that to be exempt as an organization described in IRC
Section 501(c)(3) 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.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

3

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) provides that an organization will be regarded as “organized
exclusively” for one or more exempt purposes only if its articles of organization limit the purposes of such
organization to one or more exempt purposes and do not expressly empower the organization to engage,
otherwise that as an insubstantial part of its activities, in activities which in themselves are not in furtherance of

one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) provides that an organization is not organized exclusively for one or
more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization's articles or by operation of law, be distributed for one or more exempt purposes,
or to the federal or state or local government for a public purpose.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as "operated exclusively"
for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such
exempt purposes specified in IRC Section 501(c)(3). An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose.

In Revenue Ruling 73-127, 1973-1 CB 221, it was found that a nonprofit organization that operated a cut-price
retail grocery outlet and allocates a small portion of its earnings to provide on-the-job training to hard core
unemployed does not qualify for exemption under IRC Section 501(c)(3). The store operated in a similar
manner to profit-making businesses in the area, and its gross earnings are used to principally pay salaries and
other customary operating expenses incurred in the operation of a grocery store and to expand the operations of
the store. It was concluded that the operation of the store and operation of the training program were two
distinct purposes sought to be accomplished by the organization through its use of resources. Since the
commercial operation of a grocery store is not a recognized exempt purpose and this activity was substantial
and conducted on a scale larger than reasonably necessary to conduct the training program, the organization was
found not to be exempt.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), it states that the
presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption regardless of the
number and importance of truly exempt purposes.

In Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C. 2003), the organization operated a
conference facility made available primarily to exempt organizations and governmental units. It was found that
even though the organization argued that serving non-profit and governmental clients is indicative of an exempt
purpose, the organization was found not to be exempt under IRC Section 501(c)(3). This was because it was
found to be operating in a manner not significantly distinguishable from a commercial endeavor, and thus
furthering a substantial non-exempt purpose. The court also found that the organization’s patrons were not
limited to exempt entities, or a charitable class.

Application of law

Section IRC 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests to qualify for exempt
status. An organization must be both organized and operated exclusively for purposes described in Section
501(c)(3). You have failed to meet both requirements. as explained below.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

4

Your Articles of Incorporation do not limit your purposes to exclusively IRC Section 501(c)(3) purposes as
required by Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i). You also do not meet the provisions of Treas. Reg.
Section 1.501(c)(3)-1(b)(4) because your assets are not dedicated to an exempt purpose upon your dissolution.
As a result, you do not meet the organizational test and are precluded from exemption under Section 501(c)(3).

While your goal/mission does have an incidental charitable aspect, your primary activity of operating a
farm does not constitute a charitable purpose under Section IRC 501(c)(3). Therefore, you have not satisfied the
operational test required by Treas. Reg. Section 1.501(c)(3)-1(c)(1).

You are operating similarly to the organization described in Rev. Rul. 73-127. You plan on assisting local

with the that you don’t sell to . However, you indicated that percent of your total time
will be spent on the of the , and at least percent will be spent on customer
engagement, marketing, and brand development. You did not mention how much time you spend conducting
charitable activities, if any. The scale of your farm operations is larger than reasonably necessary to accomplish
a charitable purpose as described in IRC Section 501(c)(3).

As with the case of the Better Business Bureau of Washington D.C., Inc., operating a business to raise and sell
hogs is a substantial non-exempt purpose. As this case outlines, any evidence of a substantial non-exempt
purpose precludes exemption under IRC Section 501(c)(3).

You are like the organization described in Airlie Foundation. Your primary purpose is to which will
be sold to , with the balance of the product donated to charity. Your expenses primarily relate to
maintaining and operating the farm. Your proposed expenses did not include charitable giving. Even though
your mission involves assisting related charities, your operation of a farm in the manner indicated serves
a substantial non-exempt purpose and precludes you from exemption under IRC Section 501(c)(3).

Conclusion

Based on the information provided, you do not qualify for exemption because you are neither organized nor
operated exclusively for IRC Section 501(c)(3) purposes. While you may conduct some incidental charitable
activities, your primary operation of a farm is a substantial non-exempt purpose. Therefore, you do not qualify

for exemption under Section 501(c)(3).

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
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

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

5
• A statement indicating whether you are requesting an Appeals Office conference

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization or your authorized representative

• The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, and such facts are true, correct,
and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we’ll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Mail Stop 6403 550 Main Street, Mail Stop 6403

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you
fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Letter 4034 (Rev. 11-2018)
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. 11-2018)
Catalog Number 47628K