Member-only facilities did not promote community social welfare

Plain-English summary

The IRS revoked an organization's section 501(c)(4) exemption for two tax years because its activities primarily served members rather than the public. The organization owned recreational facilities, charged member assessments, used security to exclude nonmembers from owned areas, and allowed only limited public use. Applying Revenue Ruling 74-99, the IRS concluded that the organization did not promote social welfare because its common facilities were not available for the general public's use and enjoyment. The examination report said the organization instead fit the description of a section 501(c)(7) social club. The organization was required to file Form 1120 for the affected years.

Ruling snapshot

• Question: Did the member-focused organization qualify for exemption as a civic or social welfare organization under section 501(c)(4)?
• Outcome: Revocation.
• Key authorities: IRC §§ 501 and 7428; Rev. Rul. 74-99; Rev. Rul. 69-281.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

Date: July 15, 2016

Taxpayer Identification Number:

Number: 201642037
Release Date: 10/14/2016 Person to Contact:

Employee Identification Number:

Employee Telephone Number:

UIL: 501.04-00

CERTIFIED MAIL — RETURN RECEIPT
Dear

This is a final adverse determination regarding your exempt status under section 501(c)(4) of the
Internal Revenue Code. You are no longer exempt under section 501(a) of the Code for the tax
years ending May 31, 20XX and May 31, 20XX.

The revocation of your exempt status was made for the following reason(s):

You do not provide any social welfare to the public outside of your members. You actively
exclude the general public from using your facilities under most circumstances. Revenue Ruling
74-99 states 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.

You are required to file income tax returns on Form 1120 for the tax years ending May 31, 20XX
and May 31, 20XX with the appropriate Service Center in accordance with the instructions of the
return.

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

If you decide to contest this determination under the declaratory judgment provisions of section
7428 of the Code, a petition to the United States Tax Court, the United States Claims Court, or the
district court of the United States for the District of Columbia must be filed before the 91st Day
after the date this determination was mailed to you. Please contact the clerk of the appropriate
court for rules regarding filing petitions for declaratory judgments by referring to the enclosed
Publication 892. You may write to the United States Tax Court at the following address:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

You also have the right to contact the Office of the Taxpayer Advocate. The Taxpayer Advocate
Service (TAS) is an independent organization within the IRS that can help protect your taxpayer
rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but
haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is
always free, TAS will do everything possible to help you. Visit taxpayeradvocate.irs.gov or call 1-
877-777-4778. If you prefer, you may contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

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

Sincerely,

Margaret Von Lienen
Director, EO Examinations

Enclosures:
Publication 892

Internal Revenue Service Department of the Treasury
Tax Exempt and Government Entities Division
Exempt Organizations: Examinations

Date: FEB 01 2016

Taxpayer Identification Number:
Form:

Tax Period(s) Ended:

Person to Contact/ID Number:

Contact Telephone Number:
Fax Number:
CERTIFIED MAIL - Return Receipt Requested

Dear

During our examination of the return(s) indicated above, we determined that your organization
was not described in Internal Revenue Code section 501(c)(4) for the tax period(s) listed
above. This letter is not a determination of your exempt status under section 501 for any period

other than the tax period(s) listed above.

The attached Report of Examination, Form 686-A, Explanation of Items, summarizes the facts,
the applicable law, and the Service's position regarding the examination of the tax period(s)
listed above.

You have not agreed with our determination, or signed Form 6018-A, Consent to Proposed
Action, accepting our determination of exempt status under section 501(c)(7) for the period(s)
stated above. You may appeal your case. 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 collection process.

If you are in agreement please sign the enclosed form 6018-A and return within 30 days of the
date of this letter.

If you request a conference with Appeals, you must submit a written protest within 30 days of
the date of this letter. An Appeals officer will review your case. The Appeals Office is
independent of the Director, EO Examinations. Most disputes considered by Appeals are
resolved informally and promptly.

In lieu of
Letter 4101 (3-2006)
Catalog Number 48372J

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

892. If we issue a technical advice memorandum in response to your request, no further administrative
     appeal is available to you within the IRS regarding the issue that was the subject of the technical advice.

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 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

Internal Revenue Service
Office of the Taxpayer Advocate

In the future, if you believe your organization qualifies for continued tax-exempt status, and
would like to establish its status, you may request a determination from the IRS by filing Form
1024, Application for Recognition of Exemption Under Section 501(a), and paying the required
user fee.

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,

Acting Paul A. Marmolejo
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018-A
Form 886-A
Envelope

2 In lieu of

Letter 4101 (3-2006)
Catalog Number 48372J

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS #1
Name of taxpayer Tax Identification Number | Year/Period ended
May 31, 20XX
May 31, 20XX
Issue:
1) Whether qualifies for exemption under Internal

Revenue Code §501(c)(4), social welfare, as self-declared with the filing of forms 990 for fiscal year
ending May 31, 20XX and 20XX.

2) Whether qualifies for exemption under Internal
Revenue Code §501(c)(7), social club, for fiscal year ending May 31, 20XX and 20XX.

Facts:

The is a corporation organized in the State of in 19XX.
stated purpose “

The is governed by a board of directors. Board members are selected by

and officers are elected every two years by members of the

The owns property and a which is made

available to members of the for ;

and . Members are assessed an annual fee of $XX plus a and

. Members must be located within the

A security guard patrols the to insure nonmembers do not in

owned areas and is only used by members and their guests.
has no ownership and/or maintenance in the ; or

which is the responsibility of local government.

offers a variety of activities to its members through the year including a
and . The is used to conduct

activities and is available for rentals by members and the general public. Receipts from the general public
do not exceed XX% of income.

Law:
Issue 1-

IRC Section 501(c)(4), civic organizations and local association of employees exempts from Federal
income tax an organization not organized for profit but operated exclusively for the promotion of social
welfare and no part of the net earnings of such entity inures to the benefit of any private shareholder or
individual.

Treasury Regulation Section 1.501 (c) (3)-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 people of the community. An

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

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS #1
Name of taxpayer Tax Identification Number | Year/Period ended

May 31, 20XX

May 31, 20XX

organization embraced within this section is one which is operated primarily for the purpose of bringing
about civic betterments and social improvements.

Revenue Ruling 74-99 states 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.

Issue 2-

IRC Section 501(c)(7) exempts clubs organized for pleasure, recreation and other nonprofitable
purposes, substantially all of the activities of which are for such purposes and no part of the net earnings
inures to the benefit of any private shareholder.

Revenue Ruling 69-281 states that a homeowner's organization where each property owner is entitled to
membership and that the club’s operating expenses are paid from annual membership dues and that the
club is operated exclusively for the pleasure and recreation of its established membership of individuals
by providing recreational facilities that afford opportunities for fellowship and social commingling is
exempt under section 501(c)(7).

TAXPAYER’S POSITION

The believes that it is entitled to exemption under section 501(c)(4) because it is the
classification it was advised they qualified for by legal and accounting advisors.

GOVERNMENT’S POSITION

Based on the facts of the examination, the organization does not qualify for exemption under IRC §(c)(4)
since the organization does not provide any social welfare to the public outside of its members. The
actively excludes the general public from using its facilities under most circumstances.

CONCLUSION

Based on the foregoing reasons, the organization does not qualify for exemption under section 501(c)(4).
The is described in the definition of an organization under IRC 501(c)(7) as it
operates substantially for pleasure, recreation and other nonprofitable purposes with members.

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