A recent Nonprofit Quarterly article focused on solving the issue of food deserts—places without access to grocery stores offering fresh fruits and vegetables at reasonable prices. Several different examples are described, some of which involve 501(c)(3) exempt status, and which reflect the many approaches organizations and individuals can take to address this issue.
As a starting point, food deserts are problematic because lack of fresh and healthful food choices contributes to obesity and other health issues for affected populations. And the federal government has taken notice of the health effect and the related impact on community economics and connection; six federal agencies have created an initiative called Local Foods, Local Places to support programs to create community-owned grocery stores and farmers’ markets.
The article highlights the following structures:
- “Investment” social enterprise: In Waco, Texas, the Jubilee Food Market has been formed as a community resource—with supporters able to purchase “shares” for $25 and up. Shareholders receive quarterly status reports and can vote at the annual meeting, though they don’t technically own part of the market. The market was formed by a 501(c)(3) nonprofit called Mission Waco, which has a mission to provide faith-based holistic programs that empower the area’s low-income residents. Some other programs they operate include a community theater, coffee shop and neighborhood “pocket park.”
- Membership organization: In Bowdon, North Dakota, residents have formed a grocery store as a membership store similar to a Costco. The small town had already lost its school, and didn’t want to lose its grocery store—the nearest one would be 18 miles away.
- More traditional 501(c)(3)-operated social enterprise: In Willow Lake, South Dakota, a 501(c)(3) nonprofit called Willow Lake Area Advancement has been operating a community grocery store for about five years now. Money generated from the store helps the nonprofit make community-oriented business loans to further improve the small town’s economy.
As background, the operation of a grocery store within a 501(c)(3) structure can be challenging. To start, a 501(c)(3) needs to be organized and operated for exempt 501(c)(3) purposes. This includes charitable purposes, such as serving a needy population (including job training programs) and addressing community deterioration, and can include the promotion of health as well.
However, a 501(c)(3) is subject to additional regulation, including the somewhat amorphous commerciality doctrine. Under this doctrine, the IRS will deny 501(c)(3) status to organizations that operate too similarly to a for-profit, commercial business. This inquiry will focus on factors including whether the organization sells goods to the general public; is in direct competition with for-profit businesses; sets prices comparable to retail; utilizes promotional materials and commercial catch-phrases; does not utilize volunteers; and does not receive charitable contributions.
An organization operating a grocery store that was not deemed to serve a 501(c)(3) exempt purpose could be liable for unrelated business income tax, or even could put its exempt status in jeopardy. Organizations that are aiming to serve populations that otherwise lack access to healthful foods, which generally are in areas that are suffering some degree of blight, have a good argument that they are not necessarily operating in competition with standard grocery stores. However, this will be a facts-and-circumstances determination on the part of the IRS. Some stores focus all or in part on providing job training as part of their core function, which helps alleviate the commerciality concern somewhat.
That said, there are several ways to utilize a 501c3 in the grocery context strategically. An organization can operate the grocery directly (either as an operating division or through a single-member LLC that is disregarded for tax purposes) if it is confident that is serving an exempt purpose.
For organizations running a store that may border more on commercial, they can operate the store within a for-profit corporate subsidiary, which will shield the nonprofit from unrelated business income tax and also protect its exempt status (though, of course, income will be taxed at the subsidiary level before it is passed along to the nonprofit parent through dividends or other distributions.
Finally, a 501(c)(3) can make a program-related investment in a community-oriented grocery enterprise. This can be done through a low- or non-interest loan, or an equity investment in some circumstances.