I can’t promise I’ll write up every 501(c)(3) denial letter from the IRS. I would like to think that one day, the IRS will be replete with resources and separating out wheat from chaff so efficiently that no EO law blogger could keep pace. But we are not there yet. And I enjoy this and believe in these denial letters as useful reminders of the rules enough that, for now, we’ll keep this going.

To that end, we have 4 new rulings this week, at least 3 of which are at least interesting in the sense of “I could easily see someone setting up a 501(c)(3) wanting to do something like this, and not quite getting why it doesn’t work.” And another that I can’t pretend anyone would want to read.

1. PLR 202131012: A Farmer’s Market: Not Enough. I’m told that farmers’ markets are nice (unfortunately, I’m buying most of my groceries at the convenience store these days). But they are not charities, at least without some very special facts. The applicant in this ruling thought their facts were special enough. The IRS disagreed. The facts that the applicant thought were special:

   • Reduced market entrance fees to military veteran farmers

   • Education to consumers (could have been something if primary, but none had yet been done and I’m curious whether this education would have been much different from telling the public ‘apples are great, come buy them’).

   • The market was going to get SNAP/EBT certified, and give double purchasing power to food stamp dollars.

   • Food drives to donate unsold produce to local food banks.

   • Working with schools to provide education on organic farming.

   • Work with facilities to shuttle seniors to the markets.

   Most of these are the kind of plans that I’d describe as ‘charitable seasoning’. No one thinks that a veteran discount is a charitable activity in and of itself, but maybe if you smother your for-profit in enough ‘nice facts’ like that, maybe the IRS won’t realize what it is biting into…

   Demonstrating a discerning palate in this instance, the IRS was not fooled. Their response was that the primary activity was charging vendors fees to sell their goods at a market, that it was operating to support the business interests of the vendors, and that commercial purposes were at least a substantial (and really the primary) purpose. Primary non-exempt purpose = not a charity.
   

2. PLR 202131011: Golf Training: Also Not Enough. My aversion to golf is so strong that I cannot bring myself to give this ruling the time it probably deserves. Suffice to say, the applicant had a state-of-the-art golf center and offered golf training, classes, practice sessions, and fitness training to anyone at standard industry fees (though maybe some income-adjusted fees for families). The pitch to the IRS included economic development, citing the fact that the complex was in a “Federal Opportunity Zone,” so all the jobs they are bringing is a charitable activity. (Let’s not get into the vast chasm between the Opportunity Zone tax incentive for deferring taxable income and charitable activity).

   The IRS found this all nice enough that maybe it would be a 501(c)(4) because it was open to everyone, but that it was not good enough to be a 501(c)(3). The IRS focused on the fact that the activities were social and recreational and not limited to a charitable class. Cryptically, the IRS said, “Although private golf lessons could be considered an educational activity, you provide this service to all members of the community for a fee; you do not limit the lessons solely to children or those who are members of a charitable class. Social and recreational events are not considered charitable or educational purposes under IRC Section 501(c)(3) of the Code.” There is no explanation from the IRS of why these golf lessons were social/recreational, not educational, when arguably it could be either. Based on the facts they cited about VIP and loyalty programs, it seems that the IRS just decided they just ‘felt’ more recreational than educational holistically (and they might be right), but I could imagine the applicant feeling aggrieved if they were really operating in an educational matter. Again, substantial non-exempt (e.g. recreational) purposes = not a charity. (Also the corporation was organized in a manner that family members could have owned shares and did not have the required purpose language…. the applicant offered to fix some of those problems, but not enough to solve the organizational test problem of, you know, not being a true non-profit.)

3. PLR 202131013: Tourism Promotion: No. In an anonymous state but one that just feels like it is probably New Jersey, the applicant was going to “promote the area between Exit E and Exit F of G in such a manner that it becomes a vital travel destination.” The non-profit encouraged visitors to stop in the area through various means (literature, brochures, post cards, social media campaigns, recreational activities. The stated purpose of everything was to generate increased revenue for area small businesses and community economic vitality.

   All of the above sounds like a great chamber of commerce (i.e., 501(c)(6) activity), but it is clearly not enough to obtain charitable status without more. One way I could see this working is if the organization was lessening the burdens of government. Non-profits that less the burden of a government unit by carrying out a function the government considers its function, can claim charitable status even if the activity itself otherwise would not be charitable. So, if the state or city had been conducting similar tourist-promoting activities, and considered the non-profit to be taking over this function, they might have had an argument. But there was no sign that was the case and the IRS said as much.

   So, the IRS found a substantial purpose of benefitting local businesses, which is a non-exempt purpose, so no 501(c)(3) status.

4. PLR 202131010: Group Health Plan Purchasing…… Nothing to See Here. The organization received rebates from insurance carriers and used to “procure products and services on group purchasing agreements”. I do not know what that means and, whether the IRS did or not, they were satisfied it was not a charitable activity (and it’s hard to argue).