Tuesday April 16, 2024
Private Letter Ruling
Farmers Market Denied Exemption
GiftLaw Note:
Organization applied for exempt status under Sec. 501(c)(3). Organization's bylaws state that its purpose is to provide an open environment for business and skilled tradespeople to share their expertise and experiences in mentorship capacities and to support the needs of the community at large. Organization seeks to educate, inspire and encourage members of its community pertinent to the businesses within its region. Organization's members are comprised of individuals within its area and surrounding areas that promote Organization's purposes. Organizations members provide the necessary support to allow the farmers markets to continue operation where local farmers and crafters attend to sell their own goods. Organization requests donations from each vendor to help with equipment rental costs. Additionally, Organization allocates a portion of its time on networking events that involves conducting professional networking meetings, where attendees discuss upcoming community events.
To be exempt under Sec. 501(c)(3), an organization must be both organized and operated exclusively for charitable, religious or educational purposes and no part of the earnings may inure to the benefit of any private shareholder or individual. Regulation 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized or operated exclusively for one or more 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 such as designated individuals. Under Reg. 1.501(c)(3)-1(c)(1), an organization is operated exclusively for an exempt purpose only if it engages primarily in activities which accomplish an exempt purpose. Here, the Service determined that Organization fails the operational test under Reg. 1.501(c)(3)-(1)(a)(1) because Organization organizes a farmers market for vendors to sell products and conducts networking events for its members, which serves the private interest of the vendors and members rather than a public interest as required under Reg. 1.501(c)(3)-1(d)(1)(ii). Therefore, Organization's tax-exempt status was denied.
Organization applied for exempt status under Sec. 501(c)(3). Organization's bylaws state that its purpose is to provide an open environment for business and skilled tradespeople to share their expertise and experiences in mentorship capacities and to support the needs of the community at large. Organization seeks to educate, inspire and encourage members of its community pertinent to the businesses within its region. Organization's members are comprised of individuals within its area and surrounding areas that promote Organization's purposes. Organizations members provide the necessary support to allow the farmers markets to continue operation where local farmers and crafters attend to sell their own goods. Organization requests donations from each vendor to help with equipment rental costs. Additionally, Organization allocates a portion of its time on networking events that involves conducting professional networking meetings, where attendees discuss upcoming community events.
To be exempt under Sec. 501(c)(3), an organization must be both organized and operated exclusively for charitable, religious or educational purposes and no part of the earnings may inure to the benefit of any private shareholder or individual. Regulation 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized or operated exclusively for one or more 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 such as designated individuals. Under Reg. 1.501(c)(3)-1(c)(1), an organization is operated exclusively for an exempt purpose only if it engages primarily in activities which accomplish an exempt purpose. Here, the Service determined that Organization fails the operational test under Reg. 1.501(c)(3)-(1)(a)(1) because Organization organizes a farmers market for vendors to sell products and conducts networking events for its members, which serves the private interest of the vendors and members rather than a public interest as required under Reg. 1.501(c)(3)-1(d)(1)(ii). Therefore, Organization's tax-exempt status was denied.
PLR 202316009 Farmers Market Denied Exemption
4/21/2023 (01/23/2023)
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.
Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.
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:
Your bylaws state you are operating for the purpose of providing an open environment for business and skilled tradespeople to share expertise and experiences with one another in informal networking settings and mentorship capacities and to support the needs of the community at large. Your bylaws also state that you seek, with the help of one another, to educate, inspire, and encourage your members and members of your community on matters pertinent to the businesses within the D area. Your members are comprised of individuals within the D area and surrounding areas who want to promote your purposes.
You spend * * *% of your time operating a farmer's market. You explained that * * * and the event * * * if someone * * * to help organize it. You then decided that your members could provide the needed support to allow the farmer's market to continue. The market operates primarily during * * * typically on Fridays at a and the dates are published on social media. Local farmers and crafters attend to sell their own goods. You request but do not require a donation of x dollars from each vendor to defray the cost of renting a portable toilet/sink, and folding tables/chairs. A * * * and * * * organization supports the event with you and provides demonstrations.
You spend * * *% of your time on networking events which involves conducting professional networking meetings on a quarterly basis. Your networking meeting dates are published on social media and distributed to an email list of approximately * * * people. At these networking meetings, the attendees discuss upcoming community events where you might volunteer, local nonprofit board vacancies and needs, and employment vacancies. You also have discussed doing resume reviews and mock interviews and informally peer mentoring to one another.
You spend * * *% of your time on assisting other service clubs and community events. This may involve clean up, holiday decorating and trick or treat. In the future, you hope to network with local high school clubs and conduct mock interviews and resume reviews.
Finally, you provided a printout from C's website showing that you are a corporation. However, you did not provide a complete copy of your Articles of Incorporation showing they were filed with C even though they were requested.
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 and operated exclusively for one or more exempt purposes of organization:
(a) Limit the purpose of such organization to one or more exempt purposes; and
(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 purpose.
Treas. Reg. Section 1.501(c)(3)-1(b)(4) which requires the dedication of remaining assets exclusively for purposes in IRC Section 501(c)(3).
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 one or more exempt purposes unless it serves a public rather than a private interest.
Treas. Reg. Section 1.501(c)(3)-1(d)(2) defines the term charitable as including the relief of the poor and distressed or of the underprivileged, and the promotion of social welfare by organizations designed to lessen neighborhood tensions, to eliminate prejudice and discrimination, or to combat community deterioration. The term "charitable" also includes lessening of the burdens of government.
Revenue Ruling 71-505, 1971-2 C.B. 232 describes a city bar association, exempt under IRC Section 501(c)(6), that could not be reclassified as an educational or charitable organization exempt under Section 501(c)(3). Although the organization had a number of charitable and educational activities, a substantial portion of the organization's activities were directed at the promotion and protection of the practice of law and therefore furthered the common business purpose of its members.
In Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court stated that the presence of a single nonexempt purpose, if substantial in nature, will preclude exemption under IRC Section 501(c)(3) regardless of the number or importance of statutorily exempt purposes.
IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests for an organization to be recognized as exempt. An organization must be both organized and operated exclusively for purposes described in Section 501(c)(3). Based on the information you provided in your application and supporting documentation, we conclude that you fail both tests.
Although they were requested, you did not submit a complete copy of your Articles of Incorporation showing that they have the required provisions to meet the organizational test for IRC Section 501(c)(3). As a result, you have not established that you satisfy 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 do not meet the operational test under IRC 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 are organizing a farmer's markets for vendors to sell products. You are also conducting networking events for your members. These activities serve the private interest of the vendors and your members rather than a public interest as required by Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).
You are similar to the organization in Rev. Rul. 71-505 because even though you are conducting charitable activities, a substantial portion of the organization's activities are directed to a substantial nonexempt purpose.
As held in Better Business Bureau of Washington. D.C., Inc. v. United States, a single non-exempt purpose, if substantial, will preclude tax exemption under IRC Section 501(c)(3). You are hosting farmers markets and networking events, which is a substantial non-exempt purpose. Therefore, you are not operating exclusively for an exempt purpose as described in Section 501(c)(3).
You do not meet the requirements for tax exemption under IRC Section 501(c)(3). You have not established that you meet the organizational test for Section 501(c)(3). You fail the operational test because you are operated for substantial nonexempt purposes, and you are serving private interests. Accordingly, you do not qualify for exemption under Section 501(c)(3).
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.
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:
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)).
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:
U.S. mail:
Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
PO Box 2508
Cincinnati, OH 45201
Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202
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.
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
4/21/2023 (01/23/2023)
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
- 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
Your bylaws state you are operating for the purpose of providing an open environment for business and skilled tradespeople to share expertise and experiences with one another in informal networking settings and mentorship capacities and to support the needs of the community at large. Your bylaws also state that you seek, with the help of one another, to educate, inspire, and encourage your members and members of your community on matters pertinent to the businesses within the D area. Your members are comprised of individuals within the D area and surrounding areas who want to promote your purposes.
You spend * * *% of your time operating a farmer's market. You explained that * * * and the event * * * if someone * * * to help organize it. You then decided that your members could provide the needed support to allow the farmer's market to continue. The market operates primarily during * * * typically on Fridays at a and the dates are published on social media. Local farmers and crafters attend to sell their own goods. You request but do not require a donation of x dollars from each vendor to defray the cost of renting a portable toilet/sink, and folding tables/chairs. A * * * and * * * organization supports the event with you and provides demonstrations.
You spend * * *% of your time on networking events which involves conducting professional networking meetings on a quarterly basis. Your networking meeting dates are published on social media and distributed to an email list of approximately * * * people. At these networking meetings, the attendees discuss upcoming community events where you might volunteer, local nonprofit board vacancies and needs, and employment vacancies. You also have discussed doing resume reviews and mock interviews and informally peer mentoring to one another.
You spend * * *% of your time on assisting other service clubs and community events. This may involve clean up, holiday decorating and trick or treat. In the future, you hope to network with local high school clubs and conduct mock interviews and resume reviews.
Finally, you provided a printout from C's website showing that you are a corporation. However, you did not provide a complete copy of your Articles of Incorporation showing they were filed with C even though they were requested.
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 and operated exclusively for one or more exempt purposes of organization:
(a) Limit the purpose of such organization to one or more exempt purposes; and
(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 purpose.
Treas. Reg. Section 1.501(c)(3)-1(b)(4) which requires the dedication of remaining assets exclusively for purposes in IRC Section 501(c)(3).
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 one or more exempt purposes unless it serves a public rather than a private interest.
Treas. Reg. Section 1.501(c)(3)-1(d)(2) defines the term charitable as including the relief of the poor and distressed or of the underprivileged, and the promotion of social welfare by organizations designed to lessen neighborhood tensions, to eliminate prejudice and discrimination, or to combat community deterioration. The term "charitable" also includes lessening of the burdens of government.
Revenue Ruling 71-505, 1971-2 C.B. 232 describes a city bar association, exempt under IRC Section 501(c)(6), that could not be reclassified as an educational or charitable organization exempt under Section 501(c)(3). Although the organization had a number of charitable and educational activities, a substantial portion of the organization's activities were directed at the promotion and protection of the practice of law and therefore furthered the common business purpose of its members.
In Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court stated that the presence of a single nonexempt purpose, if substantial in nature, will preclude exemption under IRC Section 501(c)(3) regardless of the number or importance of statutorily exempt purposes.
Application of law
IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests for an organization to be recognized as exempt. An organization must be both organized and operated exclusively for purposes described in Section 501(c)(3). Based on the information you provided in your application and supporting documentation, we conclude that you fail both tests.
Although they were requested, you did not submit a complete copy of your Articles of Incorporation showing that they have the required provisions to meet the organizational test for IRC Section 501(c)(3). As a result, you have not established that you satisfy 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 do not meet the operational test under IRC 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 are organizing a farmer's markets for vendors to sell products. You are also conducting networking events for your members. These activities serve the private interest of the vendors and your members rather than a public interest as required by Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).
You are similar to the organization in Rev. Rul. 71-505 because even though you are conducting charitable activities, a substantial portion of the organization's activities are directed to a substantial nonexempt purpose.
As held in Better Business Bureau of Washington. D.C., Inc. v. United States, a single non-exempt purpose, if substantial, will preclude tax exemption under IRC Section 501(c)(3). You are hosting farmers markets and networking events, which is a substantial non-exempt purpose. Therefore, you are not operating exclusively for an exempt purpose as described in Section 501(c)(3).
Conclusion
You do not meet the requirements for tax exemption under IRC Section 501(c)(3). You have not established that you meet the organizational test for Section 501(c)(3). You fail the operational test because you are operated for substantial nonexempt purposes, and you are serving private interests. Accordingly, 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
- 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.
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:
Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
PO Box 2508
Cincinnati, OH 45201
Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202
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
Published May 5, 2023
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