Other 1318022: IRS revokes a private homeowners association's exemption

Plain-English summary

The IRS revoked a homeowners association's exemption under section 501(c)(4). The association maintained private common areas, including a swimming pool, play areas, roads, and other facilities, and limited access primarily to members and their guests. The IRS concluded that the facilities were not open to the general public and that the association operated for the mutual benefit of its members rather than for social welfare. The organization was required to file Form 1120-H returns for the relevant years and later years.

Ruling snapshot

• Question: Whether the homeowners association qualified for exemption under section 501(c)(4).
• Outcome: Revocation.
• Key authorities: IRC §§ 501(c)(4), 528; Treas. Reg. § 1.501(c)(4)-1(a)(2)(i); Commissioner v. Lake Forest, Inc., 305 F.2d 814 (1962); Rev. Rul. 74-17; Rev. Rul. 74-99.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE:GE EO Examinations
1100 Commerce Street

TAX EXEMPT AND ,
GOVERNMENT ENTITIES Dallas, Texas 75242

DIVISION

November 18, 2009

Taxpayer Identification Number:
Number: 201318022

Release Date: 5/3/2013 Form:
Tax Year(s) Ended:
ORG
ADDRESS Person to Contact/ID Number:
UIL: 501.04-00 Contact Numbers:
Telephone:
Fax:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear

We have enclosed a copy of our report of examination explaining why we believe an
adjustment of your organization's exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed
Publication 3498, The Examination Process, explains how to appeal an Internal
Revenue Service (IRS) decision. Publication 3498 also includes information on your
rights as a taxpayer and the IRS collection process.

If you request a conference, we will forward your written statement of protest to the
Appeals Office and they will contact you. For your convenience, an envelope is
enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals
conference, or if you do not request an Appeals conference, you may file suit in United
States Tax Court, the United States Court of Federal Claims, or United States District
Court, after satisfying procedural and jurisdictional requirements as described in
Publication 3498.

Letter 3610 (04-2002)
Catalog Number 34801V

You may also request that we refer this matter for technical advice as explained in
Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues. Ifa
determination letter is issued to you based on technical advice, no further administrative
appeal is available to you within the IRS on the issue that was the subject of the
technical advice.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to
Proposed Adverse Action. We will then send you a final letter modifying or revoking
exempt status. If we do not hear from you within 30 days from the date of this letter, we
will process your case on the basis of the recommendations shown in the report of
examination and this letter will become final. In that event, you will be required to file
Federal income tax returns for the tax period(s) shown above. File these returns with
the Ogden Service Center within 60 days from the date of this letter, unless a request
for an extension of time is granted. File returns for later tax years with the appropriate
service center indicated in the instructions for those returns.

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 correct 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.

Letter 3610 (04-2002)
Catalog Number 34801V

Thank you for your cooperation.

Sincerely,

Sunita B. Lough
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018

Report of Examination
Envelope

Letter 3610 (04-2002)
Catalog Number 34801V

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit #1

Name of — Year/Period Ended
under Section 501(c)(4) of the Internal Revenue Code of 1986.

Facts: was incorporated in the
State of The Articles of Incorporation include the
development’s rules regarding what association can or cannot do. This includes the
primary purpose of the association in providing maintenance, preservation and control of
the residence lots or spaces and common area with in a certain tract of real property. The
community is comprised of homes. All owners are required to be members of the
association and pay monthly dues of $55.00 for a single lot and $82.50 for a double lot.
The organization also charges $20.00 for an emergency fund charge. The organization
charges a deposit of $125.00 for gas and water usage. The association also charges a small
fee to clean property when the owner fails to follow the rules as noted in the association
bylaws.

As stated in the Bylaws the Association has the power, duty and responsibility of
administering and enforcing the covenants, conditions, restrictions, easements, uses
limitations, obligations and all other provisions set forth in the Declaration, the Bylaws of
the Associations, and supplements and amendments. The association has the right to
establish, make and enforce compliance with such reasonable rules and regulations as may
be necessary for the operation, use and occupancy of the properties with the right to amend
same from time to time.

The association also has the right to construct, manage, maintain keep in good order,
condition and repair all of the common property and all items of common personal
property used by the Owners in the enjoyment of the Common Property.

The association provides maintenance and improvements to the common areas in the
development including the office building, swimming pool, play areas, dumpster, meters
and roads. The association is responsible for maintaining the common areas to ensure
compliance with the City a Residents are responsible for the upkeep of the
exterior of their homes. The association normally does not maintain the exterior of the
member’s property, but if a member fails to keep the property clean as noted in the

Declaration after several warning notices the member will be charged a fee and be billed at
a feasible rate for the services.

The swimming pool and common areas are not open to the general public for the following
reasons: The general public can only utilize the pool it they are a guest to a member. The
member must accompany the nonmember or if a pool pass is provided only two
nonmembers allowed per pool pass. The association conducts meetings to discuss the
safety and repairs of the common areas. The association publishes a newsletter to inform

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue
Service

Page: -1-

Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit #1

Name of — Year/Period Ended

members of upcoming or proposed maintenance projects and to address any concerns
voiced by residents. The newsletters are distributed to the members.

Form 886A

The pool and play area’s is a benefit to members only. The access to the park is
considered private. There are no security officers or gates just a gate around the swimming
pool. I did not notice a sign that said private property around the pool. The association
does pay for a security system to monitor the office building, dumpster and the swimming
pool.

The access to the community is private one way in and one way out.

The association’s receipts/expenses are distributed as follows: At least 60% of the gross
income of the Association for any taxable year shall consist solely of amounts received as
membership dues, fees, or assessments from Unit Owner; At least 90% of the expenditures
of the Associations for any taxable year shall be for the acquisition, construction,
management, maintenance, and care of Association property.

Law: Section 501(c)(4) of the Internal Revenue Code of 1986 provides for exemption from
Federal income tax of civic leagues or organizations not organized for profit, but operated
exclusively for the promotion of social welfare.

Section 1.501(c)(4)-1(a)(2)(i) of the Income Tax Regulations provides that an organization
is operated exclusively for the promotion of social welfare if it is primarily engaged in
promoting in some way the common good and general welfare of the community, Le., for
the purposes of bringing about civic betterment and social improvements.

In Revenue Ruling 74-17, 1974-1 CB 130, (Jan. 01, 1974), the Service held that a
organization formed by the unit owners of a condominium housing project to provide for
the management, maintenance, and care of the common areas of the project, as defined by
State statute, with membership assessments paid by the unit owners does not qualify for
exemption under section 501(c)(4) of the Code.

In Revenue Ruling 74-99, 1974-1 CB 131, (Jan. 01, 1974), the Service 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.

In Commissioner v. Lake Forest, Inc., 305 F. 2d 814 (1962), it was held that a corporation
that provided housing on a cooperative basis lacked the necessary requirements of an

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue
Service

Page: -2-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit #1

Name of — Year /Period Ended

organization described in section 501(c)(4) of the Code. The court held the operation to be
a private self-help enterprise with only an incidental benefit to the community as a whole.

The court also held that the organization is operated primarily for the private benefit of
members and any benefits to the community are not sufficient to meet the requirement of
the regulation that the organization be operated primarily for the common good and
general welfare of the people of the community.

Government’s Position: Based on the applicable law and facts the

is not operating primarily for social welfare within the meaning
of § IRC 501(c)(4), if it restricts access by the general public to its “common” areas such
as recreational facilities, streets, sidewalks and green areas. The homeowner’s association
is operating primarily for the mutual benefit of its members.

agrees to the

Taxpayer’s Position:
revocation of its exempt status from as organization described in Section 501(c)(4). The
proposed effective date of the revocation |

exemption as an organization described in the Internal Revenue Code Section 501(c)(4), it

is obvious that the facilities and common areas maintained by the association are not open
to the general public, but rather restricted to or primarily for the benefit of its members.
This organization does not qualify for exemption under Section 501(c)(4) of the Internal
Revenue Code of 1986 because it is not promoting social welfare within the meaning of
the IRC & Regulations. Since you will no longer be an exempt organization, you will be
required to file Federal income tax returns on Form 1120-H, U. S Income Tax Return for
Homeowners Associations. Forms 1120-H should be filed for years —
and subsequent years.

Form 886-A cev.4-68) Department of the Treasury - Internal Revenue
Service

Page: -3-