Farmers’ market denied exemption for commercial activity and vendor benefit

Plain-English summary

An organization applied for section 501(c)(3) status to operate a farmers’ market offering stalls to local farmers, artisans, food vendors, clubs, and other organizations. Vendors paid weekly or annual fees, the organization’s funding was mainly fee-based, and its services were not provided below cost. The IRS found that the articles lacked proper exempt-purpose and dissolution clauses, so the organization failed the organizational test. It also failed the operational test because operating the market was a substantial commercial activity, its educational content was incidental to sales, and the market provided substantial private benefits to vendors. The organization did not protest the proposed denial, so the IRS issued a final adverse determination.

Ruling snapshot

• Question: Did a fee-supported farmers’ market qualify for exemption under section 501(c)(3)?
• Outcome: denied
• Key authorities: IRC §§ 170, 501(c)(3), 6104(c), 7428; Treas. Reg. § 1.501(c)(3)-1; Rev. Ruls. 61-170, 67-216, 68-167, 71-395, 73-127

Full text (IRS public release)

Department of the Treasury Internal Revenue Service
Tax Exempt and Government Entities
PO Box 2508
Cincinnati, OH 45201

Date: 11/15/2023
Employer ID number:

Person to contact:

Release Number: 202406014
Release Date: 2/9/2024

UIL Code: 501.33-00,
501.36-01

Dear

This letter is our final determination that you don't qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). 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 IRC Section 501(c)(3), donors generally can't
deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by
sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from the date of this
letter unless you request an extension of time to file. For further instructions, forms, and information, visit
www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the
enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 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 call the contact person shown above. If you have questions
about your federal income tax status and responsibilities, call our customer service number at 800-829-1040
(TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933.

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
PO Box 2508

Cincinnati, OH 45201

Date: 09/13/2023

Employer ID number:

Person to contact:
Name:

ID number:
Telephone:

Fax:

Legend: UIL:

B = Date 501.33-00
C = Name of State 501.36-01
x dollars = dollar amount

y percent = percent amount

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, Streamlined Application for Recognition of Exemption Under Section 501(c)(3)
of the Internal Revenue Code. You attest that you were incorporated on B, in the state of C. You attest that you
have the necessary organizing document, that your organizing document limits your purposes to one or more
exempt purposes within the meaning of IRC Section 501(c)(3), that your organizing document does not
expressly empower you to engage in activities, other than an insubstantial part, that are not in furtherance of one
or more exempt purposes, and that your organizing document contains the dissolution provision required under
IRC Section 501(c)(3). However, your organizing document, Articles of Incorporation, did not have appropriate
purpose and dissolution clauses,

You attest that you are organized and operated exclusively to further charitable purposes. You attest that you
have not conducted and will not conduct prohibited activities under IRC Section 501(c)(3). Specifically, you
attest you will:

• Refrain from supporting or opposing candidates in political campaigns in any way
• Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

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• Not further non-exempt purposes (such as purposes that benefit private interests) more than
insubstantially

• Not be organized or operated for the primary purpose of conducting a trade or business that is not related
to your exempt purpose(s)

• Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you
made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations
outlined in Section 501(h)

• Not provide commercial-type insurance as a substantial part of your activities

Your mission, as stated on your 1023-EZ, is to operate a farmer’s market. Detailed information was
subsequently requested. In operating your farmer’s market, you provide a space for the sale of fresh produce &
crafts from local artisans directly to the public. This will promote and showcase the variety and diversity of
locally and regionally grown produce, food items and crafts. You provide an educational forum for customers to
learn the uses and benefits of quality, locally grown food products. You intend to enhance the quality of life in
your locality by providing a community activity which fosters social gathering and interaction. These purposes
are clearly stated in your Bylaws and vendor application.

Your vendor application states, in part, that you will consider all applications and will determine eligibility
based primarily on the vision and the needs of your market. You encourage the sale of a variety of goods and
services.

Your vendors pay a weekly fee of y dollars, with an option for annual rate at a potential discount. Vendors are
required to provide goods which are homegrown, harvested, handmade and/or created from locally owned
operations. Any exceptions are handled on a case-by-case basis by the market manager. You also allow for
artisans, crafters, food vendors, non-profit clubs, and organizations to apply for a daily stall. You operate
weekly, through

Your funding in the years provided is primarily fee based; in only one of the years provided did the
donations pass y percent. Your expenses are insurance, advertising, sanitary, and various administrative costs.
Based on your response, services provided are not below 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(b)(1)(i) provides that an organization is organized exclusively for one or
more exempt purposes only if its articles of organization:

(a) Limit the purposes of such organization to one or more exempt purposes; and

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

3

(b) Do not expressly empower the organization to engage, otherwise than as an insubstantial part of its
activities, in activities that in themselves are not in furtherance of one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) holds 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 operation of law, be distributed for one or more exempt purposes.

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.

Section 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 private
interests.

Treas. Reg. Section 1.501(c)(3)-1(d)(3)(i) defines the term educational as the instruction or training of the
individual for the purpose of improving or developing his capabilities or the instruction of the public on subjects
useful to the individual and beneficial to the community.

Revenue Ruling 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 benefits from the organization’s activities, the primary benefit of these activities was to
the organization’s members.

Revenue Ruling 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 be exempt from tax under Section 501(c)(3) of the Code.

Revenue Ruling 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 a source of income.

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

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

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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.

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 American Institute for Economic Research v. United States, 302 F.2d 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 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

A ruling on exempt status is based solely on facts and representations in the administrative file. You have not
provided supporting documentation to establish you meet the requirements of IRC Section 501(c)(3). IRC
Section 501(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg.
1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in
IRC Section 501(c)(3).

Your Articles of Incorporation do not have purpose and dissolution clauses. As a result, you have not satisfied
the organizational test described in Treas. Reg. Sections 1.501(c)(3)-1(b)(1)(i) and 1.501(c)(3)-1(b)(4).

You are 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 you
fail to meet the operational test. You are made up of farmers, craftsman, and artisans, all working towards
connecting your community with local produce, food items, and crafts. Your primary activities revolve around
setting up the vendor spaces and facilitating the sale of goods for local farmers and other vendors.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

5

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 engage in a substantial non-
exempt activity like commercial enterprise by operating a market selling various goods to the public.

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. More than an insubstantial part of your
activities is in furtherance of the non-exempt purpose of being a profitable outlet for your vendors by
connecting your community with local farmers, craftsman, and artisans.

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. Any consumer education you provide is incidental to the sale of the vendors’ products.

You are not like the organization in Rev. Rul. 67-216 because you do not operate exclusively to instruct the
public. Instead, you utilize resources to help vendors gain visibility to potential buyers through the vehicle of
your market.

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.

You are like 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 the operation of an educational program through vendors are distinct purposes. Because the operation of
your market is not an exclusively charitable or educational purpose, you are not operated exclusively for exempt
purposes,

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 like 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 produce, crafts, and artworks is indicative of a business. Your sources of revenues
are mainly from vendor fees and your expenses are mainly for marketing, supplies, and insurance. Your market
is a significant non-exempt commercial activity.

Conclusion

You do not qualify for recognition of exemption under IRC Section 501(c)(3) because you fail the
organizational and operational tests. Your organizational document does not contain the proper purpose and
dissolution clauses. Your activities are indistinguishable from the similar activities of an ordinary commercial
enterprise, and these activities provide substantial private benefits to your vendors. Therefore, we conclude that

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

6
you do not meet the operational test for exemption under section 501(c)(3) of the Code.

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 Determination 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:

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

7

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

PO 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

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K