The small pool of precedent that exists provides sufficient guidance to determine if an organization qualifies for exemption as an agricultural organization described in IRC Section 501(c)(5). IRC section and Treasury Regulations Internal Revenue Code IRC Section 501(c)(5), Labor, agricultural, or horticultural organizations IRC Section 501(g), Definition of agricultural Treasury Regulations Treas. Reg. 1.501(c)(5)-1, Labor, agricultural, and horticultural organizations Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources) Senate Report No. 94-938 – Part I, 94th Cong., 2nd Sess. 1976, 1976 U.S.C.C.A.N. 3438, explains the reasoning for defining the term “agricultural” by adding Section 501(g) to the Code. Forest City Live Stock and Fair Company v. Commissioner, B.T.A.M. (P-H) 32,215 (1932), involved an organization that was created with the purpose of giving and holding fairs, stock shows and race meetings and to acquire property in connection therewith. Although the organization did hold fairs at one time, for the years at issue the sole activity of the organization was the conduct of pari-mutuel horse races at its track. The Court stated, in holding that the organization was not an exempt agricultural organization, that, “The single fact that horse racing tends to promote the breeding and raising of better race horses, which are raised on a farm, is not enough. The connection to agriculture should be more immediate than this.” Compare California Thoroughbred Breeder’s Ass’n. v. Comm., T.C. Memo 1989-342 (discussing whether breeding furthers a Section 501(c)(5) agricultural purpose, in determining if the organization owes unrelated business income tax). Rev. Rul. 56-245, 1956-1 C.B. 204 PDF, provides that an association of fur-bearing animal breeders and ranchers, formed to promote better and more economical methods of raising the animals, to provide an orderly system for marketing the pelts of its members, and to create a public demand for their products, is exempt as a Section 501(c)(5) agricultural organization. Rev. Rul. 67-252, 1967-2 C.B. 195 PDF, provides that a nonprofit organization whose members are packers, processors, and distributors of processed agricultural products may be exempt under Section 501(c)(6) rather than Section 501(c)(5). Rev. Rul. 74-118, 1974-1 C.B. 134 PDF, provides that a nonprofit organization of farmers’ wives formed to enhance and improve the agricultural way of life in a particular State qualifies for exemption under Section 501(c)(5). The organization’s activities consist of recommending legislation favorable to persons engaged in agriculture, conducting programs to inform the public about problems facing farmers, and participating in and supporting activities designed to obtain higher prices for farm products. Analysis In order for an organization to qualify for exemption as an agricultural organization described in Section 501(c)(5): Its net earnings must not inure to the benefit of any member; and It must have as its objects the betterment of the conditions of those engaged in agricultural pursuits, the improvement of the grade of agriculture products, and the development of a higher degree of efficiency in agriculture. See Treas. Reg. 1.501(c)(5)-1(a). In evaluating whether the second condition has been met, it is important to understand the scope of the term “agricultural” and to look to whether the organization’s activities are primarily directed towards the listed agricultural objectives. Scope of the term “agricultural” The current definition of “agricultural” for purposes of Section 501(c)(5) is set forth in Section 501(g), which provides the term “agricultural” includes the art or science of cultivating land, harvesting crops or aquatic resources, or raising livestock. It was added to the Code as part of the Tax Reform Act of 1976, P.L. 94-455, enacted on October 4, 1976. This definition expands upon the definition of agriculture used by the Service prior to 1976, as expressed in Rev. Rul. 75-287, 1975-2 C.B. 211. See Senate Report 94-938(I), 419-20, and footnote 577. Rev. Rul. 75-287 did not treat organizations devoted to improving fishing or such related occupations as taking lobster or shrimp as agricultural organizations. In contrast, the Senate Report accompanying the public law that added Section 501(g) to the Code states: “There seems to be no valid reason for differentiating under Section 501(c)(5) between occupations devoted to producing foodstuffs from the earth and occupations devoted to producing foodstuffs from water.” Cited above. In describing the definition of “agricultural” provided in Section 501(g), it further states, “The term ‘harvesting aquatic resources’ includes fishing and related pursuits (such as the taking of lobsters and shrimp). Both fresh water and salt water occupations are to qualify as ‘agricultural’ under the new definition. In addition, the cultivation of underwater vegetation, such as edible sea plants, qualifies as agricultural in nature, as does the cultivation or growth of any edible organism. Also, the operation of ‘fish farms’ is to be considered agriculture under the new definition. However, aquatic resources are only to include animal or vegetable life, not mineral resources.” Activities directed toward the betterment of the conditions of those engaged in agriculture, the improvement of the grade of agriculture products, and the development of a higher degree of efficiency in agriculture To be considered an agricultural organization, the organization must work towards bettering the conditions of those engaged in agriculture, improving of the grade of agriculture products, and developing a higher degree of efficiency in agriculture. So even though the activities or the persons conducting the activities do not appear to fall under the scope of ‘agricultural,’ the end result of the activities may better agricultural conditions, improve agricultural products, or develop higher agricultural efficiency. A couple of revenue rulings illustrate this point. Rev. Rul. 56-245, 1956-1 C.B. 204, considers an organization raising fur-bearing animals, which obtains for its members certain services for the economical and orderly marketing of their products and advertises to increase the public demand for their products. The ruling finds that these activities are aimed at improving the conditions of its members and the grade of their products and in developing a higher degree of efficiency in their occupations and, therefore, exempt as a Section 501(c)(5) agricultural organization. Rev. Rul. 74-118, 1974-1 C.B. 134, provides that a nonprofit organization of farmers’ wives formed to enhance and improve the agricultural way of life in a particular State qualifies for exemption under Section 501(c)(5). The ruling notes the organization’s members have a mutual interest in promoting the occupation of their husbands who are engaged in agriculture. Remoteness of purpose Activities that only remotely promote the interest of those engaged in agricultural pursuits will not qualify an organization for exemption. In Forest City Livestock and Fair Co. v. Commissioner, B.T.A.M. (P-H) P 32,215 (1931), the United States Board of Tax Appeals revoked exemption of an agricultural organization that was organized to hold agricultural fairs, stocks shows, and horse race meets, but had discontinued the holding of agricultural fairs and stock shows. It reasoned, “It would be a far stretch of the imagination that would allow [the word ‘agriculture’] to be used as a cloak to give exemption from taxation to the racing business. The single fact that horse racing tends to promote the breeding and raising of better race horses, which are raised on a farm, is not enough. The connection to agriculture should be more immediate than this.” Rev. Rul. 67-252, 1967-2 C.B. 195, describes an organization formed to promote the sale and use of a processed agricultural product. To this end, it conducts research in processing and marketing, and conducts advertising campaigns to encourage consumers to buy and use the product. The organization’s members are processers, packagers, and distributors of the processed agricultural product. The ruling finds the organization does not qualify as a Section 501(c)(5) agricultural organization because the members are not engaged in agriculture. It notes improvement of the conditions of persons engaged in agriculture arises only indirectly from the activities of the organization whose purpose is to improve business conditions among its members. Primary activities It is possible that an organization could qualify for Section 501(c)(5) tax-exempt status, but conduct some activities that are not considered Section 501(c)(5) activities. For example, Section 501(c)(5) organizations are subject to the unrelated business income tax, indicating that they may conduct some unrelated business activity. Issue indicators or audit tips In determining if an organization qualifies for exemption as an agricultural organization described in Section 501(c)(5): Identify the organization’s purpose(s). Determine the organization’s exempt “agricultural” activities, that is, those activities directed toward the betterment of the conditions of those engaged in agriculture, the improvement of the grade of agriculture products, and the development of a higher degree of efficiency in agriculture. Look to Section 501(g) for the definition of “agricultural.” Consider scheduling out the organization’s activities and identify which are agricultural and which are not, the amount of time spent on each activity, and the amounts of income and expenses from each. Based upon your analysis of the activities of the organization, determine if the agricultural activities constitute the organization’s primary activities. Verify that the organization’s net earnings do not inure to the benefit of any member. Remember, with the passage of the PATH Act, there can be no modifications of exempt status. For further information see IRM 4.75.32.
