Homeowners association was denied charitable exemption

Plain-English summary

A homeowners association applied for Section 501(c)(3) status on Form 1023-EZ while identifying itself as an unincorporated association. State records instead showed that it was a corporation whose articles organized it under Section 528 to maintain neighborhood property. Its activities included enforcing covenants, repaving the neighborhood road, collecting money for filing and government fees, holding a street party, and assessing homeowners when expenses arose. The IRS found that the articles lacked a valid exempt-purpose limitation and did not irrevocably dedicate assets to Section 501(c)(3) purposes on dissolution. It also found that maintaining privately used property primarily benefited members. The association therefore failed both the organizational and operational tests and was denied charitable exemption.

Ruling snapshot

• Question: Did the homeowners association satisfy the organizational and operational tests for Section 501(c)(3) exemption?
• Outcome: denied
• Key authorities: IRC §§ 501(c)(3), 528; Treas. Reg. § 1.501(c)(3)-1; Rev. Ruls. 69-175 and 75-286

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 01/10/2024
Tax Exempt and Government Entities Employer ID number:

IRS PO Box 2508
Cincinnati, OH 45201

Tax years:
All

Person to contact:

Release Number: 202414008
Release Date: 4/5/2024

UIL Code: 501.00-00,
501.03-04

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)(3). 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.

Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't
deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by
sending them a copy of this final letter along with the proposed determination letter.

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.

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
IRS PO Box 2508
Cincinnati, OH 45201
Date:
November 13, 2023

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = date 501.00-00
C= state 501.03-04
D = county
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)(3).
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)(3)? No, for the reasons stated below.

Facts
You submitted Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3)

of the Internal Revenue Code.

You indicated on Form 1023-EZ that you were an unincorporated association. You attest that you have the
necessary organizing document, your organizing document limits your purposes to one or more exempt
purposes within the meaning of IRC Section 501(c)(3), your organizing document does not expressly empower
you to engage in activities, other than an insubstantial part, that are not in furtherance of one or more exempt
purposes, and your organizing document contains the dissolution provision required under Section 501(c)(3).

You attest that you are organized and operated exclusively to further charitable purposes. You attest that you
have not conducted and will not conduct prohibited activities under IRC Section 501(c)(3). Specifically, you
attest you will:

* Refrain from supporting or opposing candidates in political campaigns in any way
* Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

2

* Not further non-exempt purposes (such as purposes that benefit private interests) more than
insubstantially

* Not be organized or operated for the primary purpose of conducting a trade or business that is not related
to your exempt purpose(s)

* Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you
made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations
outlined in Section 501(h)

* Not provide commercial-type insurance as a substantial part of your activities

During review of your Form 1023-EZ, detailed information was requested supplemental to the above
attestations.

You are a corporation, not an unincorporated association, and Articles of Incorporation were filed by you in C
on B. Your organizing document states you are organized exclusively as a homeowners’ association within the
meaning of Section 528 of the Internal Revenue Code of 1986. The specific purpose for which you are formed
is to provide for the maintenance, preservation, and improvement of certain property in D, C. Upon dissolution,
all of your remaining assets will be disposed to any successor entity to be used for the purposes of the
corporation or to such organization organized and operated exclusively for such purpose that shall qualify as an
exempt organization.

You stated on your 1023-EZ application your mission is to provide supervision of public spaces and
enforcement of covenants, conditions, and restrictions. You explained that in the years of your existence, the
membership has only met to deal with two issues of non-conformance to the protective covenants and
restrictions. Repaving of the main neighborhood road, and collection of money to pay for filing and other
government fees.

The people that participate in your activities are homeowners and their families. You conduct your activities at
various private residences in the neighborhood. You have no regular meetings except the annual board of
directors meeting required by the by-laws. You annually host a street party for socialization.

You meet on other occasions to address the business of the homeowner’s association. You have no regular fees
or dues. You make an assessment to the homeowners each time you approve an expense, and the approved
amount only covers the expense.

Law

IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable, or other purposes as specified in the statute. No part of the net
earnings may inure to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, to be exempt as an organization described in IRC
Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the
purposes specified in such section. If an organization fails to meet either the organizational test or the
operational test, it is not exempt.

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) provides that an organization is organized exclusively for one or
more exempt purposes only if its articles of organization: (a) Limit the purposes of such organization to one or

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

3

more exempt purposes; and (b) Do not expressly empower the organization to engage, otherwise than as an
insubstantial part of its activities, in activities that in themselves are not in furtherance of one or more exempt
purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) states that an organization is not organized exclusively for one or more
exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization's articles or operation of law, be distributed for one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operated exclusively
for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of
such exempt purposes specified in IRC Section 501(c)(3). An organization will not be so regarded if more than
an insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized and operated exclusively
for charitable purposes unless it serves a public rather than a private interest. To meet this requirement that it
serve a public purpose, an organization must establish that it is not organized or operated for the benefit of
private interests.

Revenue Ruling 69-175, 1969-1 C.B. 149 describes an organization which was formed by parents of pupils
attending a private school. The organization provided bus transportation to and from the school for those
children whose parents belong to the organization. The organization did not qualify for exemption under IRC
Section 501(c)(3) because it served a private rather than a public interest.

Revenue Ruling 75-286, 1975-2 C.B. 210 held that a nonprofit organization with membership limited to the
residents and business operators within a city block and formed to preserve and beautify the public areas in the
block, thereby benefitting the community as well as enhancing members' property rights, will not qualify for
exemption under IRC Section 501(c)(3).

In Benedict Ginsberg and Adele W. Ginsberg v. Commissioner, 46 T.C. 47 (1966), exemption was retroactively
revoked from a corporation organized to conduct the dredging of certain waterways. It was held that the
corporation was organized and operated primarily for the benefit of those persons owning property adjacent to
the waterways dredged rather than for public or charitable purposes.

Application of law

IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests to qualify for exempt
status. An organization must be both organized and operated exclusively for purposes described in Section
501(c)(3). You have failed to meet the organizational and operational requirements, as explained below.

Although you have attested that you are unincorporated, state records show you did file Articles of
Incorporation. You fail the organizational test because your organizing document, your Articles of
Incorporation, empowers you to engage in activities that are not in furtherance of one or more exempt purposes,
does not include language that limits your purposes to one or more exempt purposes, and does not contain a
valid dissolution clause. You are not organized exclusively for exempt purposes per Treas. Reg. Section
1.501(c)(3)-1(b)(1)(i). You are formed to operate as an IRC Section 528 homeowners’ association. Further,

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

4

although your organizing document has a dissolution clause, it does not dedicate your assets on dissolution to
those described in Section 501(c)(3) and is therefore not valid. Treas. Reg. Section 1.501(c)(3)-1(b)(4).

You do not meet the operational test under IRC Section 501(c)(3) because you are not operating exclusively for
charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). You provide private benefits to
your members because you operate as a homeowners’ association. You make assessments to the homeowners
each time you approve an expense that serves your members and provide for the preservation and maintenance
of their property.

You are much like the organization in Revenue Ruling 69-175 in that you were formed to provide benefits to
your members in your homeowners’ association. Your activity is to provide maintenance for common areas
used in private by your members. Maintaining property that would otherwise have to be maintained by your
individual members serves private interests. Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) states that an
organization is not operated exclusively for one or more exempt purposes unless it serves a public rather than a
private interest.

You are like the organizations described in Rev. Rul. 75-286 and in Benedict Ginsberg and Adele W. Ginsberg
in that your activities, more specifically providing maintenance of privately used land for your members, serve
private rather than public interests. Your activity is not beneficial to the general public because you are a
homeowners’ association and serve only the private interests of your members. Any benefits as a result of your
activities would be incidental to the general public.

Conclusion

Based on the information submitted, you do not qualify for exemption under IRC Section 501(c)(3). You do not
meet the organizational test because your articles do not contain a valid purpose and dissolution clause. You do
not meet the operational test because you are operated as a homeowners’ association serving primarily the
private interests of your members, which is a substantial non-exempt purpose. Therefore, you do not qualify for
exemption under Section 501(c)(3) of the Code.

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

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

5

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

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K