Farmers market denied § 501(c)(3) exemption because it primarily benefited vendors

Plain-English summary

An organization sought § 501(c)(3) status for operating a farmers market where local producers and artisans paid weekly or seasonal fees to sell goods. It also held monthly educational events and hosted musicians, but more than half of its board members were market vendors. The IRS concluded that the market's central activity promoted vendor sales and conferred a substantial private benefit. Vendor fees financed most of the operation, which reinforced the conclusion that serving vendors was a critical part of its work. Because a substantial nonexempt commercial purpose defeats exemption even when some activities are charitable or educational, the IRS denied the application. The organization did not protest the proposed denial, so it became final.

Ruling snapshot

• Question: Did operating the farmers market qualify the organization for exemption under § 501(c)(3)?
• Outcome: Denied.
• Key authorities: IRC §§ 501(c)(3), 170, 7428(b)(2); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(1)(ii); Rev. Rul. 77-111; Rev. Rul. 2006-27.

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

Date:
12/18/2025
Employer ID number:
Form you must file:

Tax years:

Person to contact:

Release Number: 202611014 Name:
Release Date: 3/13/26 ID number:
UIL Code: 501.03-00, 501.33-00 Telephone:

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

Date:
10/31/2025

Employer ID number:
33-3302103
Person to contact:
Name: Mr. Krebs
ID number: 5289315
Telephone: 513-514-2209
Fax: 855-361-7615

Legend: UIL:

B = Date 501.03-00
C = State 501.33-00
D = Day

e dollars = Dollar
f dollars = Dollar

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).

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

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

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• Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals

• 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

You host a farmers market that prioritizes local production among your local producers, artisans, businesses,
organizations, and residents. Approved items for sale include meat, dairy, produce, canned goods, baked goods,
hot food, and handcrafted items. You rent out a city park D evenings, and organize space and structure for local
crafters, makers, and producers to meet local customers and facilitate business opportunities. A volunteer board
organizes the farmers market. Local makers, crafters, and producers bring their product to the market, where
they set up a booth to sell to local customers. Over half of your board members are vendors that participate in
the farmers market.

You have events once a month with different themes that allow you to teach the community about a variety of
topics related to local production. You also host live musicians at a number of your markets.

You charge a weekly fee of e dollars or provide the option to pay for the whole season for f dollars. You state
that you do not make any provide, as all fees charged are used to cover the cost of marketing and promoting the
farmers market.

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 and specifically that it is
not organized or operated for the benefit of private interests, such as designated individuals, the creator or his
family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.

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

3

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.

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 Rev. Rul. 2006-27, 2006-1 C.B. 915 (2006), Situation 2 describes an organization that provided down
payment assistance to low-income home buyers in return of a payment from the home seller. To finance its
down payment assistance activities, the organization relied on sellers and other related businesses that stood to
benefit from the transactions it facilitated. In addition, in deciding whether to provide assistance to a low-
income buyer, the organization’s staff knew the identities of the seller and other interested parties and was able
to take into account whether the seller or another interested party was willing to make a payment to it for its
services. It was determined that down payment assistance was directly related to the payment received from the
home seller and resulted in a direct benefit to the home seller as a critical part of the organization’s operations.
This organization was ultimately found to not meet the requirements of IRC Section 501(c)(3).

In Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945), the Supreme Court
determined that the presence of a single non-exempt purpose, if substantial in nature, will destroy exemption
under IRC Section 501(c)(3) regardless of the number or importance of any other exempt purposes.

In American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), the court held that organization
formed to operate a school to train individuals was funded by the persons affiliated with a particular political
party. Most of the organization’s graduates worked in campaigns for the party’s candidates. It was concluded
that even though candidates and entities benefitted were not considered insiders to the organization, conferral of
benefits on disinterested persons who are not members of a charitable class may cause an organization to
indirectly serve a private interest within the meaning of Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).

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). 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

IRC Section 501(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg.
Section 1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes
described in Section 501(c)(3). You do not meet the operational test under Section 501(c)(3) because you are
not operating exclusively for charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). You
operate to facilitate a farmers’ market that provides a direct benefit to your vendors.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) requires an organization show that it is not organized or operated for

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

4

private interests. Although you may conduct some charitable and educational activities at the 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 to increase their sales. Your activities provide a substantial private benefit to vendors.
Therefore, you do not qualify for exemption under IRC Section 501(c)(3).

Like the organization described in Rev. Rul. 2006-27, Situation 2, you primarily finance your activities by
charging your vendors a fee to sell their goods. Your vendors benefit from the transactions you facilitate. Your
reliance on these fees for most of your funding indicates that the benefit to your vendors is a critical aspect of
your operations.

Like the organization described in American Campaign Academy, you do not exclusively serve purposes
described in IRC Section 501(c)(3) because you serve private interests more than incidentally. Although your
vendors are not “insiders,” you have not shown your activities benefit members of a charitable class in a non-
select manner.

Similar to the organization described in Rev. Rul. 77-111, Situation 1, your overall thrust is to accommodate the
sales of your vendors through advertising and marketing as well as managing the market facility. Your sole
objective is to provide a venue for the vendors to sell their items.

Like the organization described in Better Business Bureau, you operate for a substantial nonexempt purpose.
You devote a substantial amount of your time, resources, and activities organizing a market to generate sales for
your vendors. This substantial nonexempt purpose precludes exemption under IRC Section 501(c)(3).

Similar to the organization in Living Faith, you further a non-exempt commercial purpose. You have
established a marketplace for vendors to come together and sell products to the general public at vendor
established prices. Your activities are aimed at pairing potential buyers with sellers and facilitating sales
transactions. This disqualifies you from recognition of exemption under IRC Section 501(c)(3).

Conclusion

You are not operated exclusively for exempt purposes within the meaning of IRC Section 501(c)(3). You
operate for the substantial non-exempt purpose of hosting a weekly farmers market. Vendors participate in the
farmers market to sell goods to customers benefiting the vendors own private interest. Therefore, you fail to
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
• A statement indicating whether you are requesting an Appeals Office conference

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

5

• 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:

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.

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

6

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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