At the same time, nonprofits’ abilities to take part in these activities is limited by rules governing tax exemption. In particular, when a nonprofit seeks to earn income from these activities – by selling food, for example – it is important to determine whether such an activity will be acceptable within the limits of the organization’s tax exemption. In addition, nonprofits are generally prohibited from distributing their assets to private individuals, which means that it can be challenging to use a nonprofit entity for the purpose of growing food for volunteers’ personal consumption.
Disclaimer: The Sustainable Economies Law Center provides periodic updates to this site, however, information presented may be out of date. We encourage you consult with a professional before taking action based on the information here.
The most commonly known variety of nonprofit typically seeks tax exemption under section 501(c)(3) of the Internal Revenue Code. Below is extensive detail on the possibilities and limitations of organizations that are exempt from taxation under 501(c)(3). Beyond 501(c)(3), there are many types of tax exemption under section 501(c) of the Internal Revenue Code. Tax exemption under section 501(c)(3) has a unique benefit, in that the donations to the organization are tax deductible to the donors. However, tax exemption under sections 501(c)(4), 501(c)(5), 501(c)(7), or another section may afford an organization greater flexibility and allow a broader range of purposes. It is also possible for a nonprofit corporation to operate without obtaining tax exemption, in which case the corporation would be taxed like a normal business.
Models of Nonprofit Urban Agriculture
- Garden allotment organizations: Garden allotments are small plots of land (sometimes as small as 25 square feet, or many times larger) that individuals or groups may rent or use rent-free to cultivate vegetables for their own consumption. Garden allotments are very common in England and represent a tradition that is centuries old. Often, the government or a nonprofit organization provides the land. Currently, the Food and Agriculture Organization of the United Nations is working in the Democratic Republic of Congo to turn enormous portions of urban land into allotment gardens. The goal of the program is to involve 16,000 families, roughly 80,000 people, in allotment gardening. Garden allotment programs are also popular in Japan and in Seattle, where there are currently 2000 plots of land serving 6000 families.
- Backyard harvest organizations: Organizations that do backyard harvests take advantage of pre-existing resources that are not being fully exploited. Such organizations typically send volunteers to the homes of elderly or disabled individuals and offer to harvest fruit from the trees. The volunteers deliver some fruit to the homeowner, and donate or sell the rest. One example of such an organization is Village Harvest, in Santa Clara County, CA. According to its website, “Village Harvest is a nonprofit suburban harvesting cooperative in Santa Clara Valley, California, which brings together neighbors and community organizations to provide food for the hungry, preserve our heritage and skills, and promote sustainable use of urban resources. We organize and coordinate backyard fruit harvesting, and provide education on fruit tree care, harvesting, and food preservation.”
- Organizations that train people to cultivate their yards and/or install gardens on a one-time basis: Many organizations exist to encourage/train people to cultivate their own yards, and some organizations even provide the resources to start a garden. For example, Victory Gardens 2007+ is a new project in San Francisco that delivers “Starter Kits” to homes, and then trains residents on setting up a raised bed, drip irrigation systems, seed saving, and planting. A similar project is under way in Des Moines, where a coalition of public and private organizations are targeting one neighborhood at a time to build raised-bed backyard gardens. In Swaziland, Africa, the International Federation of the Red Cross installed 194 10×10 meter garden plots in the yards of homes where there are people living with HIV, as an initiative to improve quality of life and access to food.
- Community garden organizations: These organizations typically install large gardens in vacant lots, and then enlist volunteers to cultivate the land, sometimes in exchange for free food. These gardens frequently have a prominent community education component. Examples of such organizations are: People’s Grocery in Oakland, and Spiral Gardens in Berkeley.
- And more! We will update this page as we discover other models.
- City Growers (MA)
Tax Exemption Under 501(c)(3)
The most common and familiar type of tax exemption falls under section 501(c)(3) of the Internal Revenue Code. A major benefit of applying for tax exemption under Section 501(c)(3) is that donations made to your organization by private individuals will be tax-deductible. Such organizations are also eligible to receive grants from foundations.Form 1023 is the application that must be submitted to the IRS in order to obtain tax exemption under 501(c)(3). Here is one example of 1023 form submitted by an urban agriculture organizations.
However, the range of activities a 501(c)(3) organization is entitled to engage in are more limited than other categories of tax exemption and the avenues for raising revenue are restricted. The IRS allows an organization to qualify for tax exemption as a 501(c)(3) if it is organized and operated for one or more of the following purposes:
- Testing for public safety
- Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment
- The prevention of cruelty to children or animals.
More specifically, if you organization is applying for recognition of exemption as a charitable organization, it must show that it is organized and operated for purposes that are beneficial to the public interest. Some examples of charitable purposes are:
- Relief of the poor, the distressed, or the underprivileged
- Advancement of religion
- Advancement of education or science
- Erection or maintenance of public buildings, monuments, or works
- Lessening the burdens of government
- Lessening of neighborhood tensions
- Elimination of prejudice and discrimination
- Defense of human and civil rights secured by law, and
- Combating community deterioration and juvenile delinquency.
Producing food, in and of itself, is not a tax exempt purpose under 501(c)(3). A 501(c)(3) nonprofit that is producing and/or selling food needs to show that the primary purpose of the activity is to further its tax exempt purposes. What you think is “educational” or “charitable,” may not be the same things the IRS considers to be “educational” or “charitable.” The only way to know with any certainty whether the IRS would accept your activity as tax exempt is to look at rulings where the IRS has examined similar activities. These rulings can be found in Private Letter Rulings, Revenue Rulings, and tax court decisions.
Also, it’s not so much what you do WITH the money, it’s what you do TO EARN the money. Many organizations believe that their food business should be tax exempt simply because they re-invest all profits into the nonprofit organization. However, this is a given with any nonprofit – the earnings should not be distributed to private individuals. What also matters to the IRS is the nature of the activity that earns the money, and whether the activity is operated with the primary purpose of achieving tax exempt purposes.
General Resources on Section 501(c)(3):
- See IRS Publication 557 for general information about tax exemption.
- See also: Exempt Organizations Determinations Manual
- For specific sections where organizations may seek to justify 501(c)(3) tax exemption, please click here.
Details on the Basis for Tax Exemption
Below are cases, publications, and revenue rulings that provide guidance on what the IRS does or does not consider to be tax exempt. Even after you read the information below, please note that it is extremely helpful to consult with a nonprofit lawyer to seek advice on whether your activities will qualify for tax exemption under 501(c)(3).
Section 1.501(c)(3)-1(d)(3) of the regulations defines the term ‘educational’ as 1)The instruction or training of the individual for the purpose of improving or developing his/her capabilities (e.g., vocational training); and 2)The instruction of the public on subjects useful to individuals and beneficial to the community. The IRS also provides examples of activities it considers educational, including: public discussion groups, forums, panels, lectures, or other similar programs. See pages 25-27 of IRS Publication 557 for other entire list of examples.
The following are examples of cases where the IRS examined the question of what activities could be tax exempt on the grounds that they are educational.
- American Law Institute v Commonwealth of Pennsylvania, PA 2005. 882 A.2d 1088
- The American Law Institute is an organization centered around legal reform, clarification and simplification of the law, adapting the law to social needs, and improving the administration of justice. Despite educational events aimed at lawyers, A.L.I. was found to be an organization devoted to the public good, and thus afforded tax-exempt status. The term “charitable” is construed in the broadest sense possible, extended to any organization which benefits an indefinite number of people.
- PLR 200225044 I.R.S. 2002
- The organization qualified for tax exemption where it’s stated purpose was habilitative training of disabled infants, youth, and adults. Its work activity program was conducted solely in furtherance of the stated charitable goals of the organization, and said program was conducted at an appropriate scale, thus the program was not subject to unrelated business income tax.
- PLR 9550003, 1995.
- Where the primary purpose behind the sale of items is the furtherance of an educational purpose, it is related to the purpose and income earned is exempt. Only where the primary purpose is to generate income is the sale taxable. In this case, a museum’s sales of items unrelated to their educational purpose were not found to be exempt, including revenues from engraving and gift-wrapping services.
- PLR 9809062, 1993.
- “W” was granted tax exempt status as a consumer-education organization. Their status was not revoked even though they engaged in some activities that were not directly related to consumer education and presented views on political issues. The IRS deemed their non-related activities insubstantial and their political activities limited to discussing controversial activities without further action, so their exemption was valid.
- Greater Navajo Development Enterprises v IRS, United States Tax Court, 1980. 74 T.C. 69
- Developer received income from leasing oil-well drilling equipment, distributed two-thirds to educational and charitable purposes. They failed the organizational test because they were not organized or operated for exempt purposes, their primary purpose was to lease drilling equipment. The destination of the business income cannot transform the nature of the activity into an exempt purpose from a non-exempt purpose.
- Rev.Rul. 73-104, 1973-1 C.B. 263
- A museum exempt for education purposes may sell greeting cards with reproductions of works of art from the museum because they further the educational purpose of the museum by stimulating public interest in the artwork. That they are sold in competition with commercial greeting cards is immaterial because they further the museum’s exempt purposes.
- Rev.Rul. 73-105, 1973-1 C.B. 264
- While a museum may sell items directly related to their purpose, a folk art museum may not obtain tax-exemption for the sale of scientific books and souvenirs of the city where it is located. These items do not enhance the public’s understanding and appreciation of art, the exempt purpose of the museum, so the sale of these items is unrelated trade or business and will be taxed accordingly.
- Rev. Rul. 66-179, 1966-1 C.B. 139
- Garden clubs qualified for tax exemption if they were organized for instructing the public on horticultural topics and stimulating public interest in the beautification of a geographic area. These goals were furthered by:
- keeping a horticultural library;
- providing instruction via radio, television, and lectures on correct gardening techniques and conservation methods;
- holding noncommercial flower shows displaying new plants and flowers;
- giving awards to children for gardening;
- encouraging roadside beautification and civic planting; and
- giving civic awards for planting and conservation.
- To qualify for 501(c)3 tax exempt status as an educational organization, the organization must either:
- instruct or train individuals for the purpose of improving or developing their capabilities; OR
- instruct the public on subjects useful to individuals and beneficial to the community
- Membership is open to the public and not made up primarily of those with commercial or professional horticultural connections. The organization’s funds are derived from donations and membership dues, and the funds cannot inure to the benefit of any member.
- Garden clubs qualified for tax exemption if they were organized for instructing the public on horticultural topics and stimulating public interest in the beautification of a geographic area. These goals were furthered by:
Examples of cases examining poverty alleviation purpose:
- PLR 200021056, 2000.
- An organization that sold handicraft items produced by needy and deserving women was found exempt under 501(c)3. Even though retail sales are normally business activity, the ultimate test is purpose, and teh IRS deemed providing a means for needy women to support themselves sufficiently charitable.
- New Faith Inc v IRS, United States Tax Court,1992.
- Lunch truck organization giving food to needy travelers was denied exempt status because the failed to satisfy their burden of proving that they were operated exclusively for an exempt status. Taking cash for food, contributing to a political campaign, and failing to keep adequate records were all factors in the decision.
Providing Vocational Training
Vocational training is one way tax exempt organizations fulfill their educational purpose. If you offer job training through your business, the business’s primary purpose should be the job training program.
Examples of cases examining vocational training purposes:
- Rev. Rul. 73-127, 1973-1 C.B. 221
- The government denied the tax exempt status of a grocery store that sold groceries at a discount in an economically depressed area. They also operated a job training program. First, the government found that merely selling merchandise at a reduced price does not constitute a charitable purpose. Secondly, the job training program was small in comparison to the scale and operation of the store. Only 4% of the store revenue was devoted to the job training program. Therefore, the government concluded that the primary purpose of the grocery store was not to operate a job training program.
- Rev. Rul. 73-128, 1973-1 C.B. 222
- An organization that would otherwise qualify for exempt status would not fail to do so because its educational and vocational purposes are carried out through the manufacture and sale of toys. Where it is clear that any business activities exist to serve the exempt purpose of the organization in a scale that does exceed the furtherance of that purpose, the organization will qualify for tax exemption. Contrasted with 73-127 above, here the organization sold toys only to the degree necessary to further it’s charitable purpose.
- PLR 9152039, 1991.
- An organization devoted to training mentally handicapped people job skills through a mail sorting service qualified for tax-exemption because all revenues were inured to the benefit of the organization and the mentally handicapped and it only employed enough non-handicapped to ensure the training of the handicapped would be successful.
Efforts to preserve and protect the natural environment for the benefit of the public will generally qualify for tax exemption.
Examples of organizations found to be exempt for such activities include
• An organization formed to preserve a lake as a public recreational facility and to improve the condition of the water in the lake to enhance its recreational features;
• An organization formed to promote and assist in city beautification projects and to educate the public in the advantages of street planting;
• An organization formed by residents of a city to cooperate with municipal authorities in preserving, beautifying, and maintaining an urban public park; and
• An organization formed to develop a sanctuary for wild birds and animals for the education of the public.
One ruling recognized that efforts to preserve and protect the natural environment for the benefit of the public serve as a charitable purpose in itself, even if there is no educational component.
However, in another ruling, an organization acquired real estate for the dual purpose of holding land for preservation of open space and farming.
However, the land contained no ecologically significant attributes. The ruling found that although there was some ecological preservation involved, the organization was not preserving land of any distinctive ecological significance and therefore was not eligible for exemption.
Since the date of that ruling, Congress has passed legislation governing “qualified conservation contributions that significantly undermines the ruling’s validity. Agricultural land preservation organizations have successfully argued that, where agricultural preservation activities advance a well-defined governmental policy in favor of farmland conservation at the federal, state or local level, such activities meet the definition of charitable under Section 501(c)(3).
If a property is designated as a “wilderness area” or a “wild and scenic river” or the like by federal, state, or local conservation agencies, this is one indication that the land is ecologically significant. The IRS may also consider whether the organization’s governing body and membership are composed of scientists, educators, conservationists, and representatives of the community-at-large and whether the organization has close working relationships with appropriate private and governmental conservation organizations.
- IRS Publication on Environmental Preservation Issues
- Rev. Rul. 70-186; 1970-1 C.B. 128
- An organization that improved the quality of a lake primarily used for recreational purposes qualified for tax-exempt status. By improving the water quality, the organization furthered public interest, and any private benefits that resulted did not lessen public benefits.
Preserving and Developing the Beauty of a City
Examples of cases examining city beautification purposes:
- Columbia Park and Recreation Ass’n., Inc. v. IRS, 1987
- Court held that Columbia Park and Rec Association was developed for the non-exempt purpose of providing recreational benefits to property owners of the association. The purpose was deemed non-exempt because the class of beneficiaries was only the residents of the Columbia development, not the general public at-large.
- Rev. Rul. 67-391, 1967-2 C.B. 190
- An organization that was created to develop a land-use plan for a particular urban area serves a charitable purpose and quaifies for tax-exemption under preserving the beauty of the city.
- Rev. Rul. 68-14, 1968-1 C.B. 243
- An organization which planted trees and helped clean up the city lessened the burdens of government. By distributing information to architects and builders they furthered educational purposes. The overall effect was to combat community deterioration, and thus they qualified for tax exemption. They beautified the whole city, not just their own neighborhood.
- Rev. Rul. 78-85, 1978-1 C.B. 150
- An organization formed by city residents to preserve and beautify a public park in the center of the city qualifies for tax exemption.
- Rev. Rul. 66-358; 1966-2 C.B. 218
- Acceptance of a gift of land from a corporation will not negatively affect an organization’s exempt status provided the benefits of that gift inure to the general public and not to private individuals.
- Section 22.214.171.124 (02-23-1999) of the Internal Revenue Manual provides: Public Works and Recreation as a Charitable Purpose:
- In the general law of charity, the promotion of the happiness and enjoyment of the members of the community is a charitable purpose. Restatement (Second) of Trusts §374 (1959); IV A. Scott, The Law of Trusts § 374.10 (3d ed. 1967).
- Maintaining public parks, public monuments, and other kinds of public works, and the providing community recreational facilities for the entire community furthers charitable purposes. See, Isabel Peters, 21 T.C. 55 (1953), acq. 1950–2 C.B. 6.
- However, providing public parks and recreational facilities is not a per se charitable activity. They are charitable only if they provide a community-wide benefit.
Combating Community Deterioration and Lessening Neighborhood Tensions
For a more detailed description of Combating Community Deterioration, click here. Note that remedying urban decay is only charitable to the extent that there is actual decay. For more information from the IRS on tax exemption for these purposes, see this section of the Internal Revenue Manual.
The following are examples of cases filed under the combating community deterioration and neighborhood tensions purposes section:
- A non-profit that promotes racial integration in housing, lessens neighborhood tensions and prevents neighborhood deterioration qualifies for tax-exemption. Present deterioration not necessary, only potential deterioration.
Section 126.96.36.199.3 (02-23-1999) of the Internal Revenue Manual provides more information about Combating Deterioration and Urban Decay: “Reg. 1.501(c)(3)–1(d)(2) (iv) includes combating community deterioration in the definition of charitable purposes. Combating community deterioration involves remedial action to eliminate the physical, economic and social causes of such deterioration, including providing:
- planning and enforcement
- housing assistance
- economic development
- prevention of deterioration
- historic preservation
Organizations engaged in combating community deterioration generally achieve their purposes through assistance to others or through other activities that are not inherently “charitable”. Thus, determining whether an activity is charitable requires a multi-step analysis:
- identify the conditions the organization seeks to improve and determine if they are “community deterioration” in the charitable sense;
- identify the persons who will benefit from the organization’s activities, and determine if they are members of a charitable class;
- identify the organization’s activities and determine if some or all are inherently charitable activities, for example, education of the public;
- if the activities are not inherently charitable, determine how they achieve the organization’s stated charitable purposes;
- identify who benefits form the organization’s activities, and determine if private benefits are consistent with exemption under IRC 501(c)(3), either because the recipients are members of a charitable class, or if not, because private benefits are incidental to achieving the charitable purpose.”
Promotion of Health
Internal Revenue Manual Section 188.8.131.52 (02-23-1999) provides: Promotion of health has long been recognized as charitable, provided that it is not carried on in a proprietary manner and the class of beneficiaries is sufficiently large and indeterminate to benefit the community as a whole. Restatement (Second) of Trusts, §§ 368, 372 (1959); 4A Austin W. Scott and William F. Fratcher, The Law of Trusts §§ 368, 372 (4th ed. 1989).
See page 19 of this IRS publication on The Concept of Charity for more information on what the IRS considers to be “promotion of health.”
Examples of cases examining scientific purposes:
- PLR 200722028- 2007.
- The sale of each item is examined individually to determine if it is substantially related to the organization’s exempt purpose. The sale of breast cancer awareness merchandise furthered the organizations purpose of breast cancer education and fundraising for research.
- Dumaine Farms v IRS, United States Tax Court, 1980.
- The Tax Court held that Dumaine Farms, a trust operating a demonstration farm promoting ecologically sound farming techniques, was operated exclusively for scientific and educational purposes and not private benefit; Dumaine farms therefore qualified for tax-exemption.
- PLR 9147005, 1991.
- An organization that sells non-hybrid seeds in an effort to further plant diversity contends that the sale of commercially purchased seeds, rather than those it grows itself, is substantially related to exempt purpose. The IRS concluded that there was not a substantial relationship between selling the seeds and the organizations exempt activities because consumers could buy seeds without meaningful educational interaction.
Common Issues Related to Urban Agriculture 501(c)(3) Nonprofit Organizations
- The law allows nonprofits to operate income-generating businesses of two sorts:
- Related (the income from which IS NOT taxed), and
- Unrelated (the income from which IS taxed).
- Related Business: A “related” business is one in which the activities are substantially related to the tax-exempt purpose of the organization. The primary purpose of the activity must be to further the exempt purpose, and it must have a substantial causal relationship to achieving those purposes. The primary motivation behind the activity and its primary impact should be the furtherance of the tax exempt purpose; the primary motivation should not be to earn money. The money that you earn must be incidental to, and not the primary goal of the project. When the nonprofit makes decisions about the business activity, it should be with the question: “what will most help us achieve our educational or charitable goals?” and not “how can we earn the most money?” The IRS is especially concerned that nonprofit business activities do not unfairly compete with for-profit businesses. A nonprofit’s business activity should not be operated on a scale that is larger than necessary to achieving the tax exempt purposes.
- The Food Store Example: For example, it is incredibly rare, but not impossible, for the IRS to grant tax exemption to food store. Some nonprofits have formed small stores or food stands as a forum to educate people about food and health, or as a space to provide job training to unemployed or at-risk individuals. For example, a farm stand that operates to provide temporary job opportunities to recently released prisoners, and which serves as an educational forum to teach about nutrition, could, in theory, obtain tax exemption. The store or stand should not be operated on a scale larger than is necessary for the achievement of the exempt-purpose of providing job training and educating the community. If the store starts to look and make decisions like a regular grocery store, then the IRS may ultimately conclude that it is not operating for tax-exempt purposes. For an example of success in this area, see the Berkeley Student Food Collective, which achieved 501(c)(3) exemption through its focus on education and skills training.
- Unrelated Business: In contrast to a “related” business, an “unrelated” business can be operated with the primary goal of earning money for the nonprofit, so long as it’s a small portion of the nonprofit’s total activities. Income from such a business is subject to Unrelated Business Income Tax (UBIT), and must be reported in the organization’s annual 990 filing. The purpose of UBIT is to ensure that nonprofits do not gain an unfair advantage if they are competing in a regular market. The most important thing to remember about unrelated business is that it should not become substantial in relation to the nonprofit’s total activities. There is no bright-line rule for determining when the unrelated business has become “substantial,” but the safest thing to do keep it at less than 10% or 15% of the organization’s activities or income. If the activity grows and is successful in generating income, the organization may want to create a for-profit subsidiary. Example?.
What is a private benefit?
Earnings of a nonprofit organization may not inure to the benefit of any private shareholder or individual. Volunteers and staff members of community garden organizations are often “paid” with vegetables and fruits. While this seems like a relatively minor benefit, an important issue to address is: at what point could this be considered private inurement? If people are starting 501(c)3 organizations for the purpose of producing their own food, this would seem to be in conflict with the private inurement prohibition.
Tax Exemption Under 501(c)(4)
Many organizations characteristic of a sharing economy could likely obtain tax exemption under 501(c)(4), even though they likely could not have under 501(c)(3). Examples of activities that are somewhat better suited to 501(c)(4) exemption include farmers markets, time banks, local currencies, and car sharing organizations that offer membership to the public. For details on section 501(c)(4), see the IRS Publication on 501(c)(4) Organizations.
An organization exempt under 501(c)(4) is known as a civic league or social welfare organization. It operates primarily to further the common good and general welfare of the people of the community. Examples include community associations that work to improve public services, housing, and parking, that publish a free community newspaper, that sponsor community sports leagues, of that contract with a private security service to patrol the community.
Some practitioners call this exemption 501(c)(3) “light.” In other words, an organization that looks a lot like a 501(c)(3) but does not quite meet the stringent requirements for exemption under that section may qualify for this exemption. The IRS has sought to explain the purpose of 501(c)(4)s as follows:
“There is no official Congressional or Service pronouncement construing the terms “civic league” or “social welfare” as embodied in section 501(c)(4). However, [the Sixth Circuit Court of Appeals] described [501(c)(4)s] as embodying “the ideas of citizens of a community cooperating to promote the common good and general welfare of the community.” [The Fourth Circuit] described a civic organization as being “a movement of citizenry or the community,” whereas the [the Third Circuit] while acknowledging the difficult task in arriving at a specific definition of “civic organization,” stated that “the organization must be a community movement designed to accomplish community ends.”
(See IRS EO Topic 81, “Social Welfare: What Does It Mean? How Much Private Benefit is Permissible? What is a Community?”)
For example, IRS Revenue Ruling 75-286 concluded that an organization formed by the residents of a city block to preserve and beautify that block may qualify for exemption under IRC 501(c)(4), even though the element of private benefit is sufficient to disqualify it from exempt status under IRC 501(c)(3).
An organization claiming exemption under 501(c)(4) must operate for the benefit of the community as a whole rather than for the benefit of a limited group:
Compare Rev. Rul. 78-69, 1978-1 C.B. 156, which holds that an organization providing rush hour commuter bus service to all residents of a community qualifies for exemption under IRC 501(c)(4), with Rev. Rul. 55-311, 1955-1 C.B. 72, which holds that a local association of employees operating a bus primarily for the convenience of its members does not so qualify. Also compare Rev. Rul. 62-167, 1962-2 C.B. 142, which holds that an organization retransmitting television signals for the benefit of an entire community qualifies for exemption under IRC 501(c)(4), with Rev. Rul. 54-394, 1954-2 C.B. 131, which holds that an organization providing television on a cooperative basis does not qualify. See also GCM 39357 (May 3, 1985) which concluded that an employee health club in which membership is available only to salaried employees can qualify under section 501(c)(4), but as a local association of employees.
(See IRS EO Topic 00, “Health Clubs,” by Virginia Richardson, Roderick Darling and Marvin Friedlander, pp. 18-19.)
Similarly, cooperative organizations formed to benefit their members, such as an organization to purchase food in bulk for its members, have been denied exemption under Section 501(c)(4). (See IRS EO Topic 81, “Social Welfare: What Does It Mean? How Much Private Benefit is Permissible? What is a Community?”)
Tax Exemption under 501(c)(5)
Agricultural and horticultural organizations can qualify for tax-exemption under section 501(c)(5) . However, if the primary purpose of the organization is to provide food for the community, then 501(c)(5) will likely not apply. According to the IRS publication on 501(c)(5)s,
Agricultural organizations exempt under IRC 501(c)(5) are those that have as their principal purposes:
- The betterment of the conditions of those engaged in agriculture,
- The improvement of their products, and
- Their occupational efficiency.
An organization’s members do not have to be engaged in agricultural pursuits. However, the organization must have as its primary purpose the betterment of the conditions of those engaged in agricultural pursuits. A qualifying IRC 501(c)(5) agricultural organization may engage in various educational programs in furtherance of agriculture. [Rev. Rul. 67-216, 1967-2 C.B. 180.]
It appears, therefore, that 501(c)(5)s are meant more for the purpose of improving the agricultural profession, rather than engaging in agriculture itself.
Organizations that work to better the conditions of agriculture or horticulture may be eligible for tax-exempt status under section 501(c)(5). See IRS Exempt Organizations Continuing Professional Education Text 2003, “IRC 501(c)(5) Organizations,” by John Francis Reilly, Carter C. Hull, and Barbara A. Braig Allen.
The activities of these organizations may include raising livestock, forestry, cultivating land, raising and harvesting crops or aquatic resources, cultivating useful or ornamental plants, and similar pursuits.
The primary purpose of exempt agricultural and horticultural organizations under Internal Revenue Code section 501(c)(5) must be to better the conditions of those engaged in agriculture or horticulture, develop more efficiency in agriculture or horticulture, or improve the products, for example:
- Promoting various cooperative agricultural, horticultural, and civic activities among rural residents by a state and county farm and home bureau.
- Exhibiting livestock, farm products, and other aspects of agriculture and horticulture.
- Testing soil for members and nonmembers of the farm bureau on a cost basis, the results of the tests and other recommendations being furnished to the community members to educate them in soil treatment.
- Guarding the purity of a specific breed of livestock.
- Encouraging improvements in the production of fish on privately-owned fish farms.
- Negotiating with processors for the price to be paid to members for, but not acting as an agent to help members sell, their crops.
- Nonprofit association that operates an educational rodeo show promoting agriculture.
For information about 501(c)(5)s, see the IRS Publication on 501(c)(5) Organizations.
Tax Exemption under 501(c)(7)
Recreational and social organizations might work well for a garden allotment organization or certain community gardens.
501(c)(7) is a category of exemption designed for social, recreational, and “other nonprofitable purposes.” Section 501(c)(7) is designed to provide tax exemption to organizations that groups form for their own benefit, rather than for a public benefit. In that respect, many activities of the sharing economy may fall within 501(c)(7). A community association whose primary function is to own and maintain recreational areas and facilities for its members can likely obtain exemption under 501(c)(7). A group of people that engage in urban farming together might be able to obtain tax exemption under this section. For more information, see the Exempt Organizations-Technical Instruction Program 1996, “Social Clubs – IRC 501(c)(7),” by Jim Langley and Conrad Rosenberg.
The rationale for granting tax exemption to a social club is that since individuals can participate in social and recreational activities without tax consequences, individuals that form a group to do such activities should be in the same position tax-wise as they would be if they did the activity on their own. Because of this reasoning, 501(c)(7) organizations must derive most of their income from their members and any income received from nonmember sources are taxed as unrelated business income. This means that an urban farm that is exempt from taxation under 501(c)(7) will be unable to sell substantial amounts of vegetables to non-members.
Note that while the phrase “other nonprofitable purposes” may sound like a catch-all to include many types of activities, the IRS will generally deny exemption for activities that are not sufficiently connected to or in furtherance of social, recreational, or other pleasure activities. (See Rev. Rul. 75-494, 1975-2 C.B. 214.) It’s easy to see how this can become a grey area in the sharing economy. Many things we do for the purpose of providing for ourselves will also, preferably, be enjoyable, like meal sharing, community gardening, neighborhood home repair groups, shared workshop spaces, tool lending libraries, and so on. It’s odd that the IRS has so clearly carved out a form of tax exemption to allow us to spend money and have fun together, but there is not a perfect category to allow us to spend money and share practical things.
Under 501(c)(7), a group could have a recreational garden; however, if a group applies for tax exemption to operate an urban “farm” (which might sound to the IRS less like a recreational activity), the IRS might deny exemption, unless the group could prove that the purpose is truly social or recreational. The question is: How much fun do these activities have to be or how much socializing must happen in connection with such activities in order to obtain exemption under 501(c)(7)? Could the IRS be persuaded that we do all of this for social purposes? Could the IRS be persuaded that all of this is for the purpose of making life more enjoyable? It will be fun, at the very least, to have this conversation with the IRS.
- – Foundation Center has put together a comprehensive state-by-state resource guide for starting a nonprofit organization with links to nonprofit associations, legal support resources, and government agencies.