Operator of Farmer’s Market Not Tax Exempt

February 8, 2008 | Roger McEowen


The IRS has issued a ruling denying the claim of an operator of a farmer’s market for tax exempt status as an I.R.C. §501(c)(3) organization.  The IRS determined that the operator’s activities are conducted for the mutual benefit of its members and in a manner that is indistinguishable from commercial entities.  As a result, the operator served no public interest and is not tax-exempt.  That means that donors will not be able to deduct contributions to the operator, and the operator must filed federal income tax returns. 

The operator’s bylaws specified that it was formed to promote the direct marketing of farm products and handcrafted goods via the operation of a farmer’s market.  The operator provides booths at the market to members – with membership restricted to anyone that sells locally grown farm products and similar goods such as flowers and artisan crafts.  While the operator did not charge a membership fee, members were charged rent for space in the market.  The rental amounts accounted for over 90 percent of the operator’s revenue.  About 70 percent of the operator’s expenses were devoted to advertising, with the balance used to pay operating expenses.  IRS noted that tax exemption requires the taxpayer to show that it is not organized for any private interest.  But, the IRS determined that the operator’s primary activities involve providing a location for members to sell goods and promote their sales activity – and the operator received the vast majority of its funding coming from those same members.  That was the killer.  There was no evidence that the operator engaged in any educational, economic development, charitable or other exempt activities.  Priv. Ltr. Rul. 200818028 (Feb. 8, 2008).