Denies social welfare exemption to condominium association

Plain-English summary

A condominium owners' association sought exemption as a social welfare organization under section 501(c)(4). It collected assessments to maintain the complex's exterior structures, grounds, pool, tennis courts, utilities, insurance, and other common elements, and remaining assets would belong to unit owners at dissolution. The IRS concluded that these activities provided private benefits tied to the owners' property interests rather than promoting the common good and general welfare of the community. It denied exemption, and the determination became final when the association did not protest within 30 days.

Ruling snapshot

• Question: Did a condominium association maintaining member-owned property qualify as a section 501(c)(4) social welfare organization?
• Outcome: Denied.
• Key authorities: IRC § 501(c)(4); Rev. Rul. 65-201; Rev. Rul. 69-280; Commissioner v. Lake Forest, Inc.

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201832016
Release Date: 8/10/2018
UIL Code: 501.04-00
501.04-07

Date:
May 16, 2018

Employer ID number: [redacted]
Contact person/ID number: [redacted]
Contact telephone number: [redacted]
Form you must file: [redacted]
Tax years: [redacted]

Dear [redacted]:

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(4) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

You must file federal income tax returns for the tax years listed at the top of this letter using the required form
(also listed at the top of this letter) within 30 days of this letter unless you request an extension of time to file.

We’ll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) 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, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at
1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Notice 437

Redacted Letter 4034, Proposed Adverse Determination under IRC Section 501(a) Other Than 501(c)(3)
Redacted Letter 4040, Final Adverse Determination under IRC Section 501(a) Other Than 501(c)(3) - No
Protest

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date:
March 7, 2018

Employer ID number: [redacted]
Contact person/ID number: [redacted]
Contact telephone number: [redacted]
Contact fax number: [redacted]

Legend:
B = Date of formation
C = May
X = State
Y = Condominium name

UIL:
501.04-00
501.04-07

Dear [redacted]:

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify
for exemption under Section 501(c)(4) of the Code. This letter explains the basis for our conclusion. Please

keep it for your records.
Issues

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

Facts

You were formed as an X Nonprofit Corporation on B under the X Nonprofit Corporation Act and the X
Uniform Condominium Act.

Your articles indicate that you are organized for the purpose of administering, maintaining, operating and
managing Y, a condominium complex.

Your bylaws are applicable to the condominium complex and to the use and occupancy of the units. All present
and future owners, holders of security interest, eligible security interest holders, lessees and occupants of units
and their employees, guests, or invitees, and any other persons who may use the condominium are subject to
your bylaws and rules and regulations.

Qualification for membership in your association shall be ownership of one of the [redacted] condominium units in Y.
No membership may be separated from the unit to which said membership is appurtenant.

Assessments for common expenses shall be established as provided for in a declaration and the bylaws. Each
owner shall pay a share of the common expenses as indicated in the budget. Each assessment against a unit
shall be the personal obligation of the owner at the time the assessment is due.

You will establish and maintain a reserve fund for the periodic maintenance, repair and replacement of
improvements to the common elements or common areas. The fund shall be maintained out of assessments. If
needed, supplemental assessments will be made to each owner to cover common expenses.

The Form 1024 states, in part, that:

Y Condominium Owner’s Association is an organization formed to be the guiding body to perform the
necessary repairs and maintenance to the exterior of the condominium complex as well as to maintain
the grounds and common areas such as the pool and tennis courts. In order to fund those needed repairs
the association collects monthly assessment(s) from each of its owners. The funds collected not only pay
for the maintenance and grounds upkeep, but also maintains insurance on the studs outward of the
structures, pays for the termite bond, pays for pest control and pays the water and sewer bill.

We are responsible for maintaining common areas, maintaining structures from studs out, paying for the
insurance for studs out, paying the water and sewer bills and maintaining the utilities up to the owners
point of usage.

Upon dissolution of your organization, any remaining assets would belong to each of the [redacted] condominium
owners.

Law

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

Treasury Regulation Section 1.501(c)(3)-1(a)(2)(i) 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 organization embraced within this section is one which is operated
primarily for the purpose of bringing about civic betterments and social improvements.

Rev. Rul. 65-201, 1965-2 C.B. 170, holds that a cooperative organization operating and maintaining a housing
development and providing housing facilities does not qualify for exemption from Federal income tax under
section 501 (c) (12), or any other provision of the Code.

Rev. Rul. 69-280, 1969-1 C.B. 152, holds that a nonprofit organization formed to provide maintenance of
exterior walls and roofs of members' homes in a development is not exempt from Federal income tax under
section 501 (c) (4) of the Code.

In Commissioner v. Lake Forest, Inc., 305 F. 2d 814 (4th Cir. 1962), the court held that a cooperative housing
corporation was not exempt as a social welfare organization under section 501(c)(4) of the Code since its
activities were of the nature of an economic and private cooperative undertaking.

Application of law

By virtue of the essential nature and structure of a condominium system of ownership, the rights, duties,
privileges, and immunities of the members of an association of unit owners in a condominium property derive
from, and are established by, statutory and contractual provisions and are inextricably and compulsorily tied to
the owner's acquisition and enjoyment of his property in the condominium. In addition, condominium
ownership necessarily involves ownership in common by all condominium unit owners of a great many so-
called common areas, the maintenance and care of which necessarily constitutes the provision of private
benefits for the unit owners. Therefore, you are not primarily engaged in promoting in some way the common
good and general welfare of the people of the community and are not operated exclusively for the promotion of
social welfare.

Like the organization described in Rev. Rul. 65-201, you operate and maintain a housing facility in a
cooperative manner that promotes the private interests of your unit owners.

Like the organization described in Rev. Rul. 69-280, you provide for the maintenance of exterior walls and
roofs of members units.

You are a cooperative housing corporation similar to the organization described in Commissioner v. Lake
Forest, Inc. and are not operating primarily as a social welfare organization.

Conclusion

Since the organization's activities are for the private benefit of its members, it cannot be said to be operated
exclusively for the promotion of social welfare. Accordingly, it does not qualify for exemption from Federal
income tax under section 501 (c) (4) of the Code.

If you don’t agree

You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you
must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone
  number

• A copy of this letter highlighting the findings you disagree with

• An explanation of why you disagree, including any supporting documents

• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
  organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:

Under penalties of perjury, I declare that I examined this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We’ll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we’ll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

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

U.S. mail: Street address for delivery service:
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 can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you
within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your
income tax filing requirements.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If
you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892