IRS denies 501(c)(4) status to a homeowners' group that maintains one private road for its own members

Plain-English summary

The IRS denied recognition as a tax-exempt social welfare organization under section 501(c)(4) to a group of homeowners formed as a mutual benefit corporation. Their sole purpose was to maintain and repair a single private road shared by the members, funded by member dues (and a hoped-for reimbursement from a utility company whose vehicles had damaged the road). To qualify under 501(c)(4), a group must operate primarily for the common good and general welfare of the community, not for the private benefit of its members. The road here was private, posted against public access, and used only by the member lot owners, so the IRS concluded the group served its members' private interests rather than the community. The agency pointed to Rev. Rul. 74-99 and the Flat Top Lake case, which require a qualifying homeowners association to benefit a real community (an area tied to a governmental subdivision) and to maintain common areas open to the general public. Because the group failed those tests, it does not qualify, and it must file federal income tax returns. The organization did not protest the earlier proposed denial, so it became final.

Ruling snapshot

• Question: Does a homeowners' group that maintains a single private road for its own members qualify for exemption as a 501(c)(4) social welfare organization?
• Outcome: denied (proposed adverse determination made final after no protest was filed)
• Key authorities: IRC § 501(c)(4); Treas. Reg. § 1.501(c)(4)-1; Rev. Rul. 69-280; Rev. Rul. 74-99 (modifying Rev. Rul. 72-102); Flat Top Lake Ass'n v. United States, 868 F.2d 108 (4th Cir. 1989); IRC § 7428(b)(2); IRC § 6110

Full text (IRS public release)

Transcriber's note: this is a scanned adverse-determination package, comprising a Letter 4038 final adverse determination and the enclosed Letter 4034 proposed adverse determination (which sets out the facts, law, and analysis), plus a reference to an enclosed Letter 437 disclosure notice. The repeating Letter footers, catalog numbers, and bare page-number lines have been removed; the header field labels were reconstructed from the scan. Wording is reproduced as scanned, with obvious OCR misreads corrected. Redacted identifying details (name, dates, place names, member count) appear as the letter's own LEGEND placeholders or as blanks.

Department of the Treasury Date: 05/02/2022
Internal Revenue Service
IRS
Tax Exempt and Government Entities

PO Box 2508
Cincinnati, OH 45201

Employer ID number:
Form you must file:
[illegible]
[illegible]
Name:
ID number:
Telephone:

Number: 202230013
Release Date: 7/29/2022

UIL: 501.04-00, 501.04-06, 501.04-07

Dear

This letter is our final determination that you don't qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(4). 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 the federal income tax forms for the tax years shown above within 30 days from the date of this
letter unless you request an extension of time to file. For further instructions, forms, and information, visit
www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the
enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 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 call the contact person shown above. If you have questions
about your federal income tax status and responsibilities, call our customer service number at 800-829-1040
(TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

Department of the Treasury
¥20) Internal Revenue Service
IRS PO Box 2508

Cincinnati, OH 45201

Date:
February 15, 2022
Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = state 501.04-00
C = date 501.04-06
D = city/state 501.04-07
E = street name
f= number
Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(4).
This letter explains the reasons for our conclusion. Please keep it for your records.

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

Facts
You were formed in B on C as a Mutual Benefit Corporation. Your Articles of Incorporation indicate that your
purpose is to “maintain/repair [a] private road between homeowners.”.

Your application indicates that you are a group of f homeowners in the town of D; a rural area with many
agricultural properties responsible for the general maintenance and repairs of the E private road. Specifically,
you plan to collect membership fees from homeowners to pay for re-surfacing of E needed due to extensive
damage resulting from oversized vehicles and equipment using E to access a construction site owned by a local
utility company. Although you plan on seeking reimbursement of the costs of repairing E from the utility
company, in the event the utility company will not reimburse you, the costs will be shared by your members.

Lot owners are responsible for keeping the area of E adjacent to their property as well as the area of their
property within one foot clearance from the road clean of weeds and debris, but you are responsible for
maintaining and general repairs of E as well as clearing storm drains.

You further indicated that E is a private road with a sign posted restricting public access with the threat of
prosecution for those who trespass. Your application indicates that you will not distribute profits to members,

but your bylaws indicate that upon dissolution, all funds held by you will be returned to your member lot
owners, pro rata.

Law

Section 501(c)(4) of the Internal Revenue 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 Section 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 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 Treas. Reg. Section 1.501(c)(3)-1.

Rev. Rul. 69-280, 1969-1 CB 152, describes an organization formed to provide maintenance of exterior walls
and roofs of homes of members who owned houses in a development. It was held that the organization was
operated primarily for the private benefit of members and not operated primarily for the common good and
general welfare of the people of the community. The services provided to members included maintenance of the
exterior walls and roofs of the individual units. If a person purchases a unit in the housing development, he is
required to become a member of the organization. The organization is supported entirely by annual dues
charged members. The dues are based on the estimated expenses of the organization plus an amount for reserves
to cover large expenditures, such as replacement of roofs.

Rev. Rul. 74-99, 1974-1 C.B. 131, modified Rev. Rul. 72-102 and held that a homeowners association, in order
to qualify for exemption under Section 501(c)(4) of the Code, must, in addition to otherwise qualifying for
exemption under Section 501(c)(4), satisfy the following requirements: (1) It must engage in activities that
confer benefit on a community comprising a geographical unit which bears a reasonably recognizable
relationship to an area ordinarily identified as a governmental subdivision or a unit or district thereof; (2) It
must not conduct activities directed to the exterior maintenance of private residences; and (3) It owns and
maintains only common areas or facilities such as roadways and parklands, sidewalks and street lights, access
to, or the use and enjoyment of which is extended to members of the general public and is not restricted to
members of the homeowners’ association.

In 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 because it did not benefit a
"community" bearing a recognizable relationship to a governmental unit and its common areas or facilities were
not for the use and enjoyment of the general public.

Application of law

You were formed and are operated to maintain a private roadway. Rather than promoting in some way the
common good and general welfare of the people of the community, you serve a small group of homeowners,
your members. Because you are operated exclusively for the private benefit of your members rather than for the
benefit of the community as a whole, you are not operated exclusively for the promotion of social welfare

within the meaning of Treas. Reg. Section 1.501(c)(4)-1. Therefore, you are not organized and operated
exclusively for the promotion of social welfare as required by IRC Section 501(c)(4).

Rev. Rul. 69-280 describes an organization formed to provide maintenance of exterior walls and roofs of homes
of members. It was held that the organization was operated primarily for the private benefit of members. Similar
to the organization in that ruling, your members are comprised of owners of property adjacent to E and pay
annual dues used to maintain E. This is for the private use of your members rather than for the community as a
whole. As a result, you are not operated primarily for the common good and general welfare of the people of the
community. .

Similar to Flat Top Lake Ass’n, you do not meet the criteria described in Rev. Rul. 74-99 that must be met for a
homeowners association to qualify for exemption under IRC Section 501(c)(4). Like Flat Top Lake Ass’n, you
do not serve a “community” which bears a reasonable recognizable relationship to an area ordinarily identified
as governmental and you maintain a private road that is for the exclusive use of your member property owners,
rather than the general public.

Conclusion

Based on the information submitted, you are not organized and operated exclusively for exempt purposes within
the meaning of IRC Section 501(c)(4). Rather, you are organized and operated primarily for the private interests
of your members by maintaining a private road, and do not promote the social welfare of the community as a
whole. Accordingly, you do not qualify for exemption under Section 501(c)(4).

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.

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

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

* A statement of the facts, law, and arguments supporting your position

- A statement indicating whether you are requesting an Appeals Office conference

* The signature of an officer, director, trustee, or other official who is authorized to sign for the

organization or your authorized representative

* The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization: Under
penalties of perjury, I declare that I have examined this request, or this modification to the request, including
accompanying documents, and to the best of my knowledge and belief, the request or the modification
contains all relevant facts relating to the request, 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 they haven’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 gave us a basis to reconsider our determination. If so,
we'll continue to process your case considering the information you provided. If you haven't given us a basis
for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

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

Where to send your protest
Send your protest, Form 2848, if applicable, 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
Mail Stop 6403 550 Main Street, Mail Stop 6403

PO Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your protest 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 they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

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 if 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 www.taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements