A farmers' market does not qualify under section 501(c)(3) because it primarily benefits vendors

Plain-English summary

A nonprofit farmers' market sought section 501(c)(3) status based on goals involving healthy food access, sustainable agriculture, community development, and public education. It operated regular markets where regional farmers, craftspeople, artisans, and food vendors sold goods, while also offering free or discounted space to some nonprofits and beginning producers and providing information about nutrition programs. Vendor fees covered marketing and market-management costs. The IRS found that the market's primary activity was furnishing and promoting a retail outlet that increased vendors' sales and saved them marketing and overhead expenses. Those private benefits were substantial, while the educational booth and free nonprofit spaces were incidental. The market therefore failed the operational test and was denied exemption.

Ruling snapshot

• Question: Is a farmers' market operated exclusively for charitable or educational purposes when its primary activity provides vendors a managed and marketed place to sell goods?
• Outcome: denied (the market's substantial nonexempt purpose was promoting vendors' private sales)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 69-175; Rev. Rul. 71-395; Rev. Rul. 73-127; Rev. Rul. 77-111

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
Date: February 27, 2020

Number: 202021025 Employer ID number:
Release Date: 5/22/2020

Contact person/ID number:

Contact telephone number:

UIL Number: 501.03-00, 501.33-00
Form you must file:

1120

Tax years:
All

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.

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

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: December 23, 2019

Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date 501.03-00
M = State 501.33-00
C = Date

N = City

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, on B. You attested on Form 1023-EZ that you are organized and operated
exclusively to further charitable and educational purposes. You also attested that you have not conducted and
will not conduct prohibited activities under IRC Section 501(c)(3).

During review of your Form 1023-EZ, detailed information was requested supplemental to your attestations.
You incorporated in the state of M on C. Your Articles of Incorporation state that your primary purpose is to
support a local-based food system that:

• improves public health and well-being by increasing dietary intake of fresh fruits and vegetables;

• improves access to fresh fruits and vegetables by limited resource families;

• enhances the capacity for sustainable food production, processing, and distribution by addressing the
educational needs of producers;

• supports tourism and economic development in the region by providing a profitable retail outlet for local
agriculture producers, artisans, crafters, food vendors, and their goods, and;

• strengthens the social fabric of the local community by increasing awareness and support of local
agriculture and the arts.

Your Articles of Incorporation also provide that you have two categories of members: producer/vendor and
individual/non-vendor.

You operate a bi-weekly farmers’ market from May to October with an additional [redacted] indoor markets in
November and December. Regional farmers and craftspeople within [redacted] miles of N who grow, produce, or
make craft items are eligible to be vendors at the market.

You grant regional non-profit organizations, support groups, and clubs that conduct programs involving health
and well-being free access to the market in the form of booth space, supplies and equipment, labor, and
technical assistance at or before the market. You also provide discounted space for beginning farmers and

young entrepreneurs.

In addition, your governing body, market manager, and volunteers operate a booth providing information on
local programs addressing food access, senior coupons, SNAP, WIC, and other federal and state nutritional

programs.

You are supported by vendor fees that are set to cover your marketing and market manager costs.

Law
IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and

operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net
earnings may inure to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order 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.

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 which 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.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) 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.

Treas. Reg. Section 1.501(c)(3)-1(d)(2) provides the term "charitable" is used in IRC Section 501(c)(3) in its
generally accepted legal sense and includes relieving the poor and distressed or the underprivileged, combating
community deterioration, lessening neighborhood tensions, and eliminating prejudice and discrimination.

Treas. Reg. Section 1.501(c)(3)-1(d)(3)(i) provides that the term "educational," as used in IRC Section
501(c)(3), relates to the instruction of the public on subjects useful to the individual and beneficial to the

community.

Revenue Ruling 69-175, 1969-1 C.B. 149, describes an organization created to provide bus transportation for
school children to a tax-exempt private school. The organization was formed by the parents of pupils attending
the school. The organization provided transportation to and from the school for those children whose parents
belonged to the organization. Parents were required to pay an initial family fee and an additional annual charge
for each child. The Service determined that “when a group of individuals associate to provide a cooperative
service for themselves, they are serving a private interest.”

In Revenue Ruling 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 IRC Section
501(c)(3). It served the private purposes of its members, even though the exhibition and sale of paintings may
be an educational activity in other respects.

In Revenue Ruling 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 job 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 a recognized charitable purpose, the organization was not organized and operated exclusively

for charitable purposes.

Revenue Ruling 77-111, 1977-1 C.B. 144, in Situation 1, held that an organization formed to increase business
patronage in a deteriorated area by providing information on the area's shopping opportunities, local
transportation, and accommodations is not operated exclusively for charitable purposes and does not qualify for
exemption under IRC Section 501(c)(3). The overall thrust is to promote business rather than to accomplish

Section 501(c)(3) objectives exclusively.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 179 (1945), the Supreme Court
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy a claim for
exemption regardless of the number or importance of truly exempt purposes. The Petitioner's activities were
largely animated by non-exempt purposes directed fundamentally to ends other than that of education.

In Ginsberg v. Commissioner, 46 T.C. 47 (1966), the court considered a collective organization created to
dredge waterways. The majority of the funds for this activity came from owners of property adjacent to the
waterways. The court found that the primary beneficiaries were the adjacent property owners. Any benefit to the
general public because these dredged waterways would be a safe harbor for boats during a storm was secondary.
Therefore, the organization was not exempt because of the significant private benefit provided.

Application of law
You are not described in IRC Section 501(c)(3) because you fail the operational test set forth in Treas. Reg.

Section 1.501(c)(3)-1(a)(1). Specifically, you are not operated exclusively for an exempt purpose as described
in Treas. Reg. Section 1.501(c)(3)-1(c)(1). The facts show that you are not operated exclusively for charitable
purposes. You are operated to facilitate sales for the benefit of growers and producers at your farmers' market.
For a fee, you provide space at which your vendor members sell their goods directly to the public. The fee

covers the cost of marketing and your market manager. Your operations result in substantial private benefit to
vendors of products at your market.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) requires an organization show that it is not organized or operated for
private interests. Although your market includes educational information and you provide free space to non-
profit organizations, more than an insubstantial part of your activities are in furtherance of the non-exempt
purpose of being a profitable outlet for your vendors to increase their sales. You not only provide the outlet for
them to sell their products, you provide marketing and cover overhead expenses that the vendors would
otherwise have to expend. Your activities provide a substantial private benefit to vendors. Therefore, you do not

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

Treas. Reg. Section 1.501(c)(3)-1(d)(2) provides the term "charitable" is used in IRC Section 501(c)(3) in its
generally accepted legal sense and includes relieving the poor and distressed or the underprivileged, combating
community deterioration, lessening neighborhood tensions, and eliminating prejudice and discrimination. You
did not provide evidence that you limit your services to the poor and distressed, or that your operations are in a
deteriorated or blighted area. While you do plan to offer some charitable services, such as giving space to local
non-profit organizations conducting programs related to public health, this is incidental to your operation of a
market for the sale of goods.

Treas. Reg. Section 1.501(c)(3)-1(d)(3)(i) provides, in part, that the term "educational" as used in IRC Section
501(c)(3) relates to the instruction of the public on subjects useful to the individual and beneficial to the
community. While you will provide some educational services, such as offering information on government
nutritional programs, this is incidental to your operation of a market for the sale of goods.

You are like the organization described in Rev. Rul. 69-175 because you were formed by a group of vendors
joining together to sell their products. Vendors pay a fee to participate in the market. By associating together
and providing a cooperative service among themselves, your vendors are serving a private rather than a public

interest.

Similar to the cooperative art gallery described in Rev. Rul. 71-395, you provide a venue for selling items that
advance private interests. As explained in the ruling, an organization that operates for the purpose of exhibiting
and promoting the sales of products for the benefit of private individuals does not qualify for exemption under
IRC Section 501(c)(3). Similar to the organization described in the ruling, you are not operated exclusively for
charitable or educational purposes. Even though providing space to non-profit organizations and offering
educational information may be charitable and educational in some respects, it is not your primary purpose.

You are similar to the organization described in Rev. Rul. 73-127 because the operation of the farmers' market,
the granting of free space to non-profit organizations, and the operation of an educational booth are three
distinct purposes. Because the operation of your market is not an exclusively charitable or educational purpose,

you are not operated exclusively for exempt purposes.

Your activities are similar to the management and marketing activities conducted by the organization described
in Rev. Rul. 77-111. Like that organization, by conducting advertising and marketing as well as managing the
market facility, you are engaged in activities that promote business in the market place generally rather than
accomplish exclusively charitable purposes described in IRC Section 501(c)(3).

As held in Better Business Bureau of Washington. D.C., Inc, a single non-exempt purpose, if substantial, will
preclude tax exemption under IRC Section 501(c)(3). The operation of your farmers' market, a substantial part
of your activities, is a non-exempt purpose.

You are similar to the organization described in Ginsberg. The primary beneficiaries of the activities of your
market are your members who are selling their products. Any public benefit is secondary to the sale of goods.

Conclusion

You do not qualify for recognition of exemption under IRC Section 501(c)(3) because you fail the operational
test. You operate for the private benefit of your vendors by providing them with a forum to sell their products to
the public. This is a substantial non-exempt purpose, which precludes you from 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
• 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.

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