IRS Denies Farmers Market Tax-Exempt Status

The ongoing confusion in locating the line between charitable/tax-exempt vs. non-charitable/taxable business activity for nonprofits was highlighted by the IRS’s October 2015 denial of 501(c)(3) tax-exempt status to a farmers market. (PLR 201601014) The ruling illuminates how the IRS determines whether an entity that plans to conduct business activities alongside (or as part of) its charitable activities qualifies for 501(c)(3) tax-exempt status.


Here are the facts as the IRS summarized them:

The Organization’s Purposes:

1. Strengthening the natural products economy by developing model processes, practices, and procedures to contribute to the sustainability and development of markets that make fresh and healthy foods available to all people; 

2. Contributing to healthy and sustainable lifestyles for all by promoting products and programs from regional farmers, businesses, and artisans;

3. Pursuing programs and partnerships that have environmental, social, and economic integrity;

4. Supporting the efforts of other charitable organizations by making the market space available for their promotion and outreach.

The Organization’s Activities:

Your organization provides the surrounding community with a marketplace where farmers, businesses, and artisans sell their goods directly to the public one day per week. You also provide:

  • Special events where local craft vendors can sell their products;
  • Cooking demonstrations and other educational programs for adults and monthly educational events for children one day per month.
  • Space at the market for local non-profits to promote their activities.

The IRS noted that food vendors were charged relatively minimal fees to participate (no more than $25/week), and that the organization promoted the market through its weekly newsletters, a website, and through the local farmers market community.


You are managed through your board of directors and a contracted market manager. The board meets on a monthly basis to discuss the weekly markets and how to improve them, the various community and children’s projects, and marketing strategies.

The IRS further noted that at least two directors and officers were also vendors selling products at the farmers market.

Revenues and expenses:

Your organization is funded by community donations and vendor fees. Your expenses consist of insurance, marketing, supplies, professional fees, and expenses related to special events.


In denying the organization’s request for 501(c)(3) tax-exempt status, the IRS noted the following:

1.  The entity was operated “for the substantial purposes of providing private benefit to vendors of products at [its] market.”

The IRS found that, in comparison to the educational activity the entity conducted, “more than an insubstantial part of [its overall] activities are in furtherance of the non-exempt purposes of being a profitable outlet for [its] vendors.”

The IRS determined that the entity’s activities were effectively identical to those of an art gallery which exhibited and sold its members’ artwork. The art gallery was also denied tax-exempt status (Rev. Rul. 71-395). In that case, the IRS noted that although the exhibition and sale of paintings may be educational, the entity served the private purposes of its members more than incidentally.

2.  Because some of the entity’s board members are also vendors, their private benefit constitutes inurement.

The concept of inurement (more commonly known as private inurement) derives from Treasury Regulation section 1.501(c)(3)-1(c)(2), which states that, “no part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual.” This restriction bars insiders of tax-exempt organizations (such as directors and officers) from unduly benefiting from the organization’s assets. The Private Letter Ruling does not provide any analysis on this particular finding. This conclusory statement is problematic. Conflict of interest transactions are generally a red flag when the IRS reviews applications for tax-exempt status, but they should not be a barrier to exemption if appropriate steps have been taken to ensure that such transactions were reviewed and approved by the independent board members as being fair, reasonable, and in the organization’s best interests.

3.  The organization’s educational programs are distinct from (and secondary to) the commercial operation of a farmers market.

The IRS pointed to Revenue Ruling 73-127, in which it held that an entity operating a reduced price retail grocery store located in a low-income area that allocated a small percentage (4%) of its earnings to provide job training for the difficult-to-employ did not qualify for tax-exemption. The IRS viewed the operation of the store as an independent objective of the organization, and the operation of the store was not a recognized charitable purpose. It also noted that the store operations were conducted on a scale larger than reasonably necessary for the performance of the organization’s training program. The IRS contrasted the entity operating the grocery store from that of another nonprofit organization which was formed to market the cooking and needlework of needy women, which qualified for tax-exemption. (Rev. Rul. 68-167) Unlike the grocery store business, which could function as a business independent of the job training program, the organization selling the cooking and needlework of women in need existed solely to fulfill the charitable purpose of giving these women a market to sell their products and a source of income. The IRS also noted that the organization was not self-sufficient, and depended on charitable donations.

The IRS analysis seems very straight forward, right? But wait! Farmers markets have frequently been granted 501(c)(3) status, or other tax-exempt statuses, including as 501(c)(4) social welfare organizations, 501(c)(5) agricultural organizations, and 501(c)(6) business leagues. (See this chart prepared by the Farmers Market Coalition, explaining how different organizational activities and emphases can lead to different tax designations). While any tax-exempt status is beneficial, organizations prefer 501(c)(3) status because it is the only designation that allows organizations to receive tax-deductible contributions. Farmers markets do serve charitable, and more specifically, educational, purposes, some of which were noted in the denial ruling. The Farmers Market Coalition provides some tips on how an organization can explain the charitable and educational aspects of a farmers market in order to demonstrate to the IRS that the primary benefit of the organization’s activities is for the public, and not the farmers. Given the IRS’s checkered history in awarding or denying 501(c)(3) status to different farmers markets, organizations should think carefully about their purposes and activities, and if seeking 501(c)(3) status, ensure that the educational nature of the organization is fully articulated in the 1023 application to the IRS across all facets of the organization, including its purposes, activities, finances, and governance.

When considering whether to structure a social purpose venture as a for-profit enterprise or a tax-exempt nonprofit, it is important to assess whether more than an insubstantial part of the entity’s activities further non-exempt purposes (such as generating profit for a non-charitable class of individuals or entities). Similarly, if charitable or educational activities are contemplated, consider whether those charitable/educational activities are distinct from, or inextricably intertwined with, the business activity. While a number of factors will drive a business’s decision about its legal structure, understanding the key requirements (or barriers) to qualify for federal tax-exempt status will help entrepreneurs determine the right path more quickly.

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