Other 1318012: IRS revokes a homeowners association’s section 501(c)(3) exemption

Plain-English summary

The IRS revoked a homeowners association’s exemption under section 501(c)(3), effective January 1, 20XX. The organization had originally been treated as a municipal corporation, but after the municipality ceased to exist it operated as a homeowners association for local residents. The IRS found that it performed no exempt activities, collected dues and fees from members, and agreed with the government’s position that its section 501(c)(3) status should be revoked. The IRS also stated that contributions were not deductible and that the organization had to file Form 1120 returns.

Ruling snapshot

• Question: Whether the organization’s section 501(c)(3) exemption should be revoked.
• Outcome: Revocation.
• Key authorities: IRC §§ 170, 501(c)(3), 6104(c), 7428; Treas. Reg. §§ 1.501(c)(3)-1(a), 1.501(c)(3)-1(d).

Full text (IRS public release)

Internal Revenue Service
TE/GE EO Examinations 501.03-00

1100 Commerce Street
Dallas, TX 75424

DEPARTMENT OF THE TREASURY
|
|
|

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION |
May 20, 2012

Number: 201318012

Release Date: 5/3/2013

LEGEND

ORG = Organization name XX = Date City = city Address =

address XYZ = State

ORG Person to Contact:

ADDRESS Contact Telephone Number:
In Reply Refer to: TE/GE Review Staff
EIN:

CERTIFIED MAIL - RETURN RECEIPT

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT: August 18, 20XX

Dear

This is a Final Adverse Determination Letter as to your exempt status under setc.ion
501(c)(3) of the Internal Revenue Code. Your exemption from Federal income tax under
setc.ion 501(c)(3) of the code is hereby revoked effetc.ive January 1, 20XX. You agreed to this
adverse determination per signed Form 6018, on March 24, 20XX.

Our adverse determination was made for the following reasons:

Your primary activity and purpose since your inception has consisted of
providing services to various individuals of CITY, XYZ, for pecuniary
gain. I.R.C. setc.ion 501(c)(3) requires organizations to operate exclusively
for an exempt purpose. See Treas. Reg. Setc.ion 1.501(c)(3)-1(a). You
failed to meet the requirements of IRC setc.ion 501(c)(3) and Treas. Reg.
setc.ion 1.501(c)(3) -1(d) in that you failed to establish that you were
operated exclusively for an exempt purpose. Rather, you were operated for a
substantial non-exempt purpose by providing services for interests of
individuals of CITY.

Contributions to your organization are no longer deductible under setc.ion 170 of the
Internal Revenue Code. You are required to file Federal income tax returns on Form 1120.

You are to provide those returns for periods ended December 31, 20XX and for all years
thereafter.

Processing of income tax returns and assessment of any taxes due will not be delayed should
a petition for declaratory judgment be filed under setc.ion 7428 of the Internal Revenue
Code.

If you decide to contest this determination in court, you must initiate a suit for declaratory
judgment in the United States Tax Court, the United States Claim Court or the District
Court of the United States for the District of Columbia before the 91st day after the date this
determination was mailed to you. Contact the clerk of the appropriate court for the rules for
initiating suits for declaratory judgment.

You also have the right to contact the office of the Taxpayer Advocate. However, you
should first contact the person whose name and telephone number are shown above since
this person can access your tax information and can help you get answers.

You can call 1-877-777-4778 and ask for Taxpayer Advocate assistance. Or you can contact
the Taxpayer Advocate from the site where the tax deficiency was determined by mailing:

Taxpayer Advocate assistance cannot be used as a substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or
technically corretc. tax determinations, nor extend the time fixed by law that you have to file
a petition in the United States Tax Court. The Taxpayer Advocate can, however, see that a
tax matter that may not have been resolved through normal channels gets prompt and
proper handling.

We will notify the appropriate State Officials of this action, as required by setc.ion 6104(c) of
the Internal Revenue Code.

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

Sincerely yours,

Marsha A. Ramirez
Diretc.or, EO Examinations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street
Dallas, TX 75424

GOVERNMENT ENTITIES
DIVISION

May 20, 2008

Taxpayer Identification Number:

ORG
ADDRESS Form:

Tax Year(s) Ended:
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Certified Mail - Return Receipt Requested

Dear

We have enclosed a copy of our report of examination explaining why we believe
revocation of your exempt status under setc.ion 501(c)(3) of the Internal Revenue Code
(Code) is necessary.

If you accept our findings, take no further action. We will issue a final revocation letter.

If you do not agree with our proposed revocation, you must submit to us a written
request for Appeals Office consideration within 30 days from the date of this letter to
protest our decision. Your protest should include a statement of the facts, the
applicable law, and arguments in support of your position.

An Appeals officer will review your case. The Appeals office is independent of the
Diretc.or, EO Examinations. The Appeals Office resolves most disputes informally and
promptly. The enclosed Publication 3498, The Examination Process, and Publication
892, Exempt Organizations Appeal Procedures for Unagreed Issues, explain how to
appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes
information on your rights as a taxpayer and the IRS colletc.ion process.

You may also request that we refer this matter for technical advice as explained in

Publication 892. If we issue a determination letter to you based on technical advice, no
further administrative appeal is available to you within the IRS regarding the issue that
was the subjetc. of the technical advice.

Letter 3618 (04-2002)
Catalog Number 34809F

If we do not hear from you within 30 days from the date of this letter, we will process
your case based on the recommendations shown in the report of examination. If you do
not protest this proposed determination within 30 days from the date of this letter, the
IRS will consider it to be a failure to exhaust your available administrative remedies.
Setc.ion 7428(b)(2) of the Code provides, in part: "A declaratory judgment or decree
under this setc.ion shall not be issued in any proceeding unless the Tax Court, the
Claims Court, or the District Court of the United States for the District of Columbia
determines that the organization involved has exhausted its administrative remedies
within the Internal Revenue Service." We will then issue a final revocation letter. We
will also notify the appropriate state officials of the revocation in accordance with setc.ion
6104(c) of the Code.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate
assistance is not a substitute for established IRS procedures, such as the formal
appeals process. The Taxpayer Advocate cannot reverse a legally corretc. tax
determination, or extend the time fixed by law that you have to file a petition in a United
States court. The Taxpayer Advocate can, however, see that a tax matter that may not
have been resolved through normal channels gets prompt and proper handling. You
may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you
prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number
shown in the heading of this letter. If you write, please provide a telephone number and
the most convenient time to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

Marsha Ramirez
Diretc.or EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX12
LEGEND

ORG = Organizationname XX=Date City=city XYZ = State

• Issues---Revocation of the Exempt Status

Facts----The organization was incorporated in the state of XYZ in 18XX. In 19XX the organization filed an application with the
Internal Revenue Service requesting status as a Municipal Corporation. The Service granted the request in a letter dated October 17
19XX. The organization was filing forms 990 identifying themselves as a 501(c)(1) organization since that time. In a letter dated 2-17-XX the org received a letter from the Service notifying them that our records indicated that they were exempt under IRC 501(c)(3)
of The Internal Revenue Code. During the 1930s and 19XXs the organization was acting as a municipal corporation providing
various services such as Fire, police, trash etc. for the residents of CITY. In 1980 due to litigation CITY was annexed by CITY and
ceased to exist as a separate municipality. The county was now responsible for all municipal services but did allow this organization
to continue providing service to the residents of CITY for which they were reimbursed. The Camp meeting org then became a
homeowners association for only the residents of CITY. The org colletc.s dues from the homeowners and helps provide a quiet and
healthy environment for the members, rents out some property and adopts rules and regulations to protetc. the interests of the
residents of CITY.

Law--IRC 501(c)(3)--In order to obtain and maintain tax exempt status under this setc.ion the organization must be organized and
operated exclusively for religious, charitable, scientific, literary or educational purposes.

Government's Position--The service has determined that the organization performs no exempt activities, but rather acts as a
homeowners association for the residents of CITY.

Taxpayer's Position--The taxpayer agrees with the government's position.

Conclusion--Due to the fact that the organization performs no exempt activities and never requested nor held themselves out as a 501
(c)(3) and never solicited or colletc.ed income from IRC 170 donations. The organizations tax exempt status under 501(c)(3) should
be revoked. In addition since all of the income colletc.ed was from members, dues and assessments or services provided as
homeowners association, all assets should remain with the organization and the State need not be notified of the revocation. (The State
of XYZ has already ruled that they do not recognize this organization as a valid 501(c)(3) for real estate taxes exemptions).

Form 886-A (1-1994) Catalog Number 20810W _—— Page publish.no.irs.gov Department of the Treasury-Internal Revenue Service