Coffeehouse Could Not Qualify as a §501(c)(3) Organization

In 2016 we noted an unsuccessful attempt by a religious order to get a coffeehouse the organization planned to operate treated as a §501(c)(3) exempt organization.[1]  Now, in PLR 201934008,[2] we have another attempt, this time for a coffeehouse that “will act as both a fundraising organization for nonprofits that serve your community and act as a community launch point and gathering venue featuring local art and music.”[3]

The ruling describes the proposed operation of the coffeehouse as follows:

You are still in the process of finalizing your regular menu and prices. You, however, provided a list of proposed prices showing how your coffees prices and other items compare to the prices of other coffeehouses in your locale. Your prices were the same as those of the other coffeehouses. The only exception is a basic drip coffee that will be offered at a discounted price for those who want to be part of your community, but do not want to pay for the higher priced coffee.

You plan the coffeehouse to be open during typical business hours for a coffeehouse in your metro area, which you anticipate will be from 6:00 AM to 9:00 PM seven (7) days per week. Furthermore, concerning staffing, your goal is to employ about F community members and pay them a living wage. You also plan to use in the range of G volunteer hours per week to augment the paid staff.[4]

Aside from having volunteer workers, this seems up to now to come close to describing most any commercial coffeehouse.  But the organization goes on to describe the types of charitable work the coffeehouse plans to engage in:

Besides operating the coffeehouse, you will conduct community-building programming that may include:

  • Forums with leaders from multiple religious groups to include educational/informational content, as well as dialogue and bridge-building conversations;

  • Celebrations of holidays recognized by the many cultures living in C;

  • Conversations about shared community values, and working together to set common goals and achieving them;

  • A neighborhood talent show where all proceeds go to the winner's charity of choice.

You have also entered in a partnership with D, an entity exempt under Section 501(c)(3) of the Code, who serves as your fiscal agent until your 501(c)(3) exempt status is granted. Furthermore, you have received pro bono assistance with establishing your legal status, as well as with building design work associated with the renovations necessary at the site where you are considering locating. To date, you have also raised x dollars from E in C.[5]

The IRS does note that there is a prior ruling that allows for a charitable coffeehouse, but note that, unlike this proposed operation, the charitable coffeehouse charged only a nominal amount upon admission and no charge for food/beverages consumed:

Rev. Rul. 68-72, 1968-1 C.B. 250, states that a nonprofit organization that operates a supervised facility to bring together young people of college age with church leaders, educators, and leading businessmen of the community may be exempt from federal income tax under Section 501(c)(3) of the Code. The organization was formed by local churches for the purpose of furthering the religious, intellectual, and moral development of persons of college age through the operation of the "coffeehouse", a supervised facility where church leaders, educators, and leading businessmen of the community meet and mingle with young people in an informal atmosphere. They hold discussions on such subjects as religion, current events, and social problems. Personal counseling and vocational guidance are provided. A nominal charge is paid upon admission, but there are no additional charges for the refreshments and entertainment. The organization meets it expenses from contributions and the admission charges.[6]

The letter ruling notes that, per Reg. §1.501(c)(3)-1(a)(1), an organization must be organized and operated exclusively for one or more tax exempt purposes to be a §501(c)(3) exempt organization.[7]

The ruling noted how the organization differed from the organization described in Revenue Ruling 68-72:

You are not like the organization described in Revenue Ruling 68-072. You were not formed by local churches to further the religious, intellectual, and moral development of persons of college age through the operation of a supervised facility under the guise of a “coffeehouse." Additionally, unlike the organization in Rev. Rul. 68-72 that charged a nominal admission fee but did not charge for refreshments or entertainment, you charge for the food and beverages and have a paid staff. Most your expenses which are devoted to the operation of the coffeehouse are met by the funds from these sales. Unlike the organization in the revenue ruling, the social and commercial aspects of your operations are not incidental. Therefore, you fail to qualify under Section 501(c)(3) of the Code.[8]

The ruling concludes:

While you plan to make charitable contributions and some of your activities may be charitable within the meaning of Section 501(c)(3) of the Code, your primary activity is the operation of a coffeehouse open to the public. As the court found in Better Business Bureau of Washington, D.C. v. U.S., the presence of a single, substantial non-exempt purpose of operating a coffeehouse will preclude exemption regardless of the number of other exempt activities.[9]

[1] Ed Zollars, “Religious Organization Formed to Operate Coffee Shop Denied Tax-Exempt Status,” Current Federal Tax Developments website, November 6, 2016,, retrieved August 27, 2019

[2], August 24, 2019, retrieved August 27, 2019

[3] Ibid, p. 3

[4] Ibid, pp. 3-4

[5] Ibid, p. 4

[6] Ibid, p. 5

[7] Ibid, p. 5

[8] Ibid, p. 7

[9] Ibid, p. 7