Determination 1234028: IRS denies exemption to a private homeowners association

Plain-English summary

The IRS denied section 501(c)(4) exemption to a homeowners association that maintained parks, roads, and other facilities for subdivision property owners. Membership and park access were limited to property owners, although the roads were open to nonresidents. The IRS concluded that the association served the private interests of its members rather than the common good and general welfare of a community. It also found that the parks were not available to the general public, which failed a condition identified in Revenue Ruling 74-99 and applied in Flat Top Lake Association v. United States.

Ruling snapshot

• Question: Whether the homeowners association’s activities promoted social welfare under section 501(c)(4).
• Outcome: Denied.
• Key authorities: IRC §§ 501(a), 501(c)(4), 6110, and 7428(b)(2); Treas. Reg. § 1.501(c)(4)-1; Rev. Rul. 74-99; Flat Top Lake Ass'n v. United States, 868 F.2d 108 (4th Cir. 1989).

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 201234028 Contact Person:
Release Date: 8/24/2012

Identification Number:
Date: May 31, 2012

Contact Number:

Employer Identification Number:
Form Required To Be Filed:

Tax Years:
UIL: 501.04-00; 501.04-07

Dear

This is our final determination that you do not qualify for exemption from federal income
tax as an organization described in Internal Revenue Code section 501(c)(4). Recently,
we sent you a letter in response to your application that proposed an adverse
determination. The letter explained the facts, law and rationale, and gave you 30 days
to file a protest. Since we did not receive a protest within the requisite 30 days, the
proposed adverse determination is now final.

You must file federal income tax returns on the form and for the years listed above
within 30 days of this letter, unless you request an extension of time to file.

We will make this letter and our proposed adverse determination letter available for
public inspection under Code section 6110, after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the
two attached letters that show our proposed deletions. If you disagree with our
proposed deletions, you should follow the instructions in Notice 437. If you agree with
our deletions, you do not need to take any further action.

If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter. If you have any questions
about your federal income tax status and responsibilities, please contact IRS Customer
Service at

Letter 4040(CG) (11-2005)
Catalog Number 476352

2

1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933.
The IRS Customer Service number for people with hearing impairments is 1-800-829-

4059.
Sincerely,
Lois G. Lerner
Director, Exempt Organizations
Enclosure
Notice 437

Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

Letter 4040(CG) (11-2005)
Catalog Number 476352

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: April 12, 2012 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
LEGEND: UIL:
B = city 501.04-00
C = state 501-04-07
M = date
N = area
Z = number
Dear

We have considered your application for recognition of exemption from federal income
tax under Internal Revenue Code section 501(a). Based on the information provided, we
have concluded that you do not qualify for exemption under Code section 501(c)(4).
The basis for our conclusion is set forth below.

Issues
Do you qualify for exemption under section 501(c)(4) of the Code? No, for the reasons
stated below.

Facts

You incorporated in C, on M, to provide, on a non-profit basis, such community and
other facilities or benefits as may be necessary for the welfare and usefulness of your
members.

Your bylaws state membership is restricted to those who own property in the B
subdivision and are current on your annual assessment fee. Your purposes are outlined
as promoting and maintaining the facilities of B for property owners. Currently, you have

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Z property owners in your subdivision.

Your activities include promoting and maintaining such community facilities as may be
necessary for the general welfare and usefulness of the property owners in B. You will
promote and protect the interest of the property owners in B, enforce property
restrictions, collect assessments, maintain roads, right-of-ways, drains, maintain parks
and easements.

You hold title to five pieces of property within B, all parks, two of which are currently
developed and in use, three of which you have indicated you will be creating or
maintaining in the future. You had been maintaining the roads within B, but recently had
those dedicated to the care of the county. Roads within B are open to non-residents.

While the parks are not restricted in terms of access, parks are “posted with signs
prohibiting use to anyone not an owner’ of property in B. “Parks are for the use of
property owners in the subdivision and are posted as such”. Parks are located at the
edges of a lake (N) within B and offer residents shelters, access ramps and docks, as
well as recreation equipment. You refer to yourself in your newsletter as an active lake
community.

You also state that you work cooperatively for the benefit and health and general
welfare of the property owners of B and in no way for the profit of an individual owner.
You carry on any business to promote your interests or enhance the value of the
property in B, to have and exercise all powers conferred by C for welfare organizations.
In addition to the regular maintenance provided, you offer occasional work parties and
picnics, and provide property owners with a guide to businesses and services located
along N.

Your income comes primarily from property owners’ assessment fees. Your budgets
include expenses for maintenance and improvements to the parks, mowing expenses,
attorney fees and other miscellaneous expenses. At least 60% of your budget is used
directly for the maintenance of parks.

Law

Section 501(c)(4) of the Code provides that civic leagues or organizations not organized
for profit but operated exclusively for the promotion of social welfare, or local
associations of employees, the membership of which is limited to the employees of a
designated person or persons in a particular municipality, and the net earnings of which
are devoted exclusively to charitable, educational, or recreational purposes and no part
of the net earnings of such entity inures to the benefit of any private shareholder or
individual may be exempt from federal income tax.

Treasury Regulation 1.501(c)(4)-1 provides that an organization is operated exclusively
for the promotion of social welfare if it is primarily engaged in promoting in some way

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the common good and general welfare of the people of the community. An organization
embraced within this section is one which is operated primarily for the purpose of
bringing about civic betterments and social improvements and is not an action
organization as set forth in paragraph (c)(3) of Regulation 1.501(c)(3)-1.

Revenue Ruling 74-99, 1974-1 C.B. 131, held that a homeowners association, to qualify
for exemption under section 501(c)(4) of the Code, (1) must serve a "community" which
bears a reasonable recognizable relationship to an area ordinarily identified as
governmental, (2) it must not conduct activities directed to the exterior maintenance of
private residences, and (3) the common areas or facilities it owns and maintains must
be for the use and enjoyment of the general public; association of such areas as
roadways and parklands, sidewalks and streetlights, access to, or the enjoyment of
which is extended to members of the general public, as distinguished from controlled
use or access restricted to the members of the homeowners association.

Flat Top Lake Ass'n v. United States, (1989 4th Circuit) 868 F.2d 108 The Court held
that a homeowners association did not qualify for exemption under section 501(c)(4) of
the Code when it did not benefit a “community” bearing a recognizable relationship to a
governmental unit and when its common areas or facilities were not for the use and
enjoyment of the general public.

Application of Law

Section 501(c)(4) of the Code provides that civic leagues or organizations not organized
for profit but operated exclusively for the promotion of social welfare may be exempt
from federal income tax. Treasury Regulation 1.501(c)(4)-1 defines social welfare as
primarily being engaged in promoting in some way the common good and general
welfare of the people of the community. You do not promote the common good and
general welfare of the people in the community, but rather, promote the interests of the
property owners in B. Your activities are aimed at the maintenance of private areas not
open to the public and serve an exclusive, rather than broad, class of people. An
organization that is operated essentially for the private benefit of its members is not
primarily engaged in activities for the common good and general welfare of the people
of the community. Thus, you are operating for the private interests of your members and
do not qualify for exemption under 501(c)(4).

Rev. Rul. 74-99, above, describes the criteria that must be met in order for a
homeowners association to qualify for exemption under section 501(c)(4) of the Code.
The Court in Flat Top Lake Ass'n v. United States held that the criteria set forth in Rev.
Rul. 74-99 must be met in order for a homeowners association to qualify for exemption
under section 501(c)(4) of the Code. One of these criteria is that facilities you own or
maintain must be for the use of the public rather than being restricted in use. You
currently have two parks that are restricted in use. The maintenance and upkeep of

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these parks require the majority of your funding. Also, as stated in your Articles and
Bylaws, you are serving the private interests of the property owners in B through the
maintenance of parks not open to the public. An organization that operates for the
exclusive benefit of its members does not serve a "community" as that term relates to
the broader concept of social welfare. Because you fail the requirements set forth in
Rev. Rul. 74-99 you do not qualify for exemption as a homeowners association under
section 501(c)(4) of the Code.

Conclusion

Based on the facts and information submitted, you are not operated for exempt
purposes under section 501(c)(4). You have not established that your activities promote
social welfare and you are serving the private interests of your members. Therefore, you
are not described in section 501(c)(4) of the Code.

You have the right to file a protest if you believe this determination is incorrect. To
protest, you must submit a statement of your views and fully explain your reasoning.
You must submit the statement, signed by one of your officers, within 30 days from the
date of this letter.

We will consider your statement and decide if that information affects our determination.
If your statement does not provide a basis to reconsider our determination, we will
forward your case to our Appeals Office. You can find more information about the role
of the Appeals Office in Publication 892, Exempt Organization Appeal Procedures for
Unagreed Issues.

Types of information that should be included in your appeal can be found on page 2 of
Publication 892, under the heading “Regional Office Appeal”. The statement of facts
(item 4) must be declared true under penalties of perjury. This may be done by adding
to the appeal the following signed declaration:

“Under penalties of perjury, I declare that | have examined the statement of facts
presented in this appeal and in any accompanying schedules and statements and, to
the best of my knowledge and belief, they are true, correct, and complete.”

Your appeal will be considered incomplete without this statement.

If an organization’s representative submits the appeal, a substitute declaration must be
included stating that the representative prepared the appeal and accompanying
documents; and whether the representative knows personally that the statements of
facts contained in the appeal and accompanying documents are true and correct.

An attorney, certified public accountant, or an individual enrolled to practice before the
Internal Revenue Service may represent you during the appeal process. To be

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represented during the appeal process, you must file a proper power of attorney, Form
2848, Power of Attorney and Declaration of Representative, if you have not already
done so. For more information about representation, see Publication 947, Practice
Before the IRS and Power of Attorney. All forms and publications mentioned in this
letter can be found at www.irs.gov, Forms and Publications.

If you do not intend to protest this determination, you do not need to take any further
action. If we do not hear from you within 30 days, we will issue a final adverse
determination letter to you. That letter will provide information about filing tax returns
and other matters.

Please send your protest statement, Form 2848 and any supporting documents to the
applicable address:

Mail to: Deliver to:
Internal Revenue Service Internal Revenue Service
EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008
P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You may also fax your statement using the fax number shown in the heading of this
letter. If you fax your statement, please call the person identified in the heading of this
letter to confirm that he or she received your fax.

If you have any questions, please contact the person whose name and telephone
number are shown in the heading of this letter.

Sincerely,

Lois G. Lerner
Director, Exempt Organizations

Enclosure, Publication 892

Letter 4034(CG)(11-2005)
Catalog Number 47628K