Gated homeowners association loses 501(c)(4) status for restricting the public

Plain-English summary

A homeowners association can qualify as a 501(c)(4) "social welfare" organization only if it serves a community in a way that benefits the general public, not just its own members. A long-running IRS rule (Revenue Ruling 74-99) says the association's common areas and facilities must be open to the general public, as distinguished from access controlled and restricted to members. Here the IRS revoked the exemption of an established homeowners association because it is a gated community: three gates with barrier arms, 24-hour manned gatehouses, security patrols, and an access policy that admits only owners, residents, their guests, and members of a co-located private golf club. Its biggest single expense was security, spent largely to keep the public out. The IRS found the association's services (security, road and common-area maintenance, architectural monitoring) benefit only those inside the gates, so it is not operated exclusively for social welfare. Comparing the association to cases like Flat Top Lake (denied) rather than Rancho Santa Fe (allowed, because that development had unrestricted public access), the IRS proposed and then finalized revocation. Once final, the association must file regular income tax returns.

Ruling snapshot

• Question: Does a gated homeowners association that restricts access to members and their guests qualify for exemption under IRC § 501(c)(4)?
• Outcome: revocation
• Key authorities: IRC § 501(c)(4); Treas. Reg. § 1.501(c)(4)-1(a); Rev. Ruls. 74-99, 80-63, 77-273; Flat Top Lake Ass'n v. United States; Rancho Santa Fe Association v. U.S.

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service
IRS Tax Exempt and Government Entities Taxpayer ID number (last 4 digits):

Form:
Tax periods ended:

Person to contact:

Release Number: 202452016 Name:
ID number:

Release Date: 12/27/24 Telephone:
UIL Code: 501.04-07 Fax:

Last day to file petition with United States
Tax Court: December 30, 2024

CERTIFIED MAIL - Return Receipt Requested

Dear

Why we are sending you this letter

This is a 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), for the tax periods
above. Your determination letter dated , is revoked.

Our adverse determination as to your exempt status was made for the following reasons: You have not
established that you are operated exclusively for the promotion of social welfare and other non-profitable
purposes and the net earnings of which are devoted exclusively to charitable, educational or recreational
purposes under IRC Section 501(a) as described in Section 501(c)(4).

Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns
and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov.

What you must do if you disagree with this determination
If you want to contest our final determination, you have 90 days from the date this determination letter was

mailed to you to file a petition or complaint in one of the three federal courts listed below.

How to file your action for declaratory judgment
If you decide to contest this determination, you can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

* The United States Tax Court,
* The United States Court of Federal Claims, or
* The United States District Court for the District of Columbia

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. You can download a fillable petition or complaint form and get information about
filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one
of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee
with the petition or complaint.

You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available
on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to
do so. You may also file your petition at the address below:

Letter 6337 (Rev. 3-2024)
Catalog Number 74808E

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

The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain
instructions about how to file your completed complaint electronically. You may also file your complaint at one of
the addresses below:

US Court of Federal Claims

717 Madison Place, NW

Washington, DC 20439

uscfc.uscourts.gov

US District Court for the District of Columbia
333 Constitution Avenue, NW

Washington, DC 20001

dcd.uscourts.gov

Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for
declaratory judgment under IRC Section 7428.

The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can't resolve your tax problem with the IRS or if you believe an IRS procedure just isn't
working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects
taxpayer rights. Visit TaxpayerAdvocate.IRS.gov/contact-us or call 877-777-4778 (TTY/TDD 800-829-4059)
to find the location and phone number of your local advocate. Learn more about TAS and your rights under the
Taxpayer Bill of Rights at TaxpayerAdvocate.IRS.gov. Do not send your Tax Court petition to TAS. Use the
Tax Court address provided earlier in the letter. Contacting TAS does not extend the time to file a petition.

Where you can find more information
Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for

more comprehensive information.

Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you
have questions, you can call the person shown at the top of this letter.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.

You may fax your documents to the fax number shown above, using either a fax machine or online fax service.
Protect yourself when sending digital data by understanding the fax service's privacy and security policies.

Letter 6337 (Rev. 3-2024)
Catalog Number 74808E

Keep the original letter for your records.
Sincerely,

Lynn A. Brinkley
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (Rev. 3-2024)
Catalog Number 74808E

Department of the Treasury Date:
Internal Revenue Service 05/30/2024
Tax Exempt and Government Entities Taxpayer ID number:

Form:
Tax periods ended:

Person to contact:
Name:

ID number:
Telephone:
Fax:

Address

Manager's contact information:

CERTIFIED MAIL — Return Receipt Requested Name:
ID number:
Telephone:
Response due date:

6/29/2024

Dear

Why you're receiving this letter
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke

your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(4).

If you agree
If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the

contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an
organization described in IRC Section 501(c)(4) for the periods above.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional
information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after
the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes
informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of
limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case.
For your protest to be valid, it must contain certain specific information, including a statement of the
facts, applicable law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't
apply now that we've issued this letter.

Letter 3618 (Rev. 3-2024)
Catalog Number 34809F

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities)
if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the
IRS,

If you're considering requesting technical advice, contact the person shown at the top of this letter. If you
disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as
explained above. A decision made in a technical advice memorandum, however, generally is final and
binding on Appeals.

If we don't hear from you
If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final

adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right
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 www.taxpayeradvocate.irs.gov or call 877-777-4778.

Additional information
You can get any of 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 shown at the top of this letter.
Sincerely,

Larry D. Pugh
for Lynn A. Brinkley
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018
Pub 892
Pub 3498

Letter 3618 (Rev. 3-2024)
Catalog Number 34809F

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended
ISSUE

Do you qualify for exemption under Internal Revenue Code (IRC) Section 501(c)(4)?

FACTS
was incorporated in the State of on .
is a homeowner's association currently exempt under IRC Section 501(c)(4). consists
of residential lots and is located in the greater area. mission or most
significant activities include architectural zoning/monitoring, safety/law enforcement patrol,
recreational/park maintenance, and common area maintenance (street lights, roads, and garbage
service).

Exam agent reviewed articles of incorporation. A provision in

The determination application (Form 1024) was worked by Internal Revenue Service (IRS) in
. Form 1024 was signed on and postmarked on
Final Determination letter notifying they were exempt under Section 501(c)(4) was issued on
. After reviewing the initial application for exemption, exam agent did not see any
indication was going to be a gated community. response to the question if the access
to any property or facilities it owns or maintains is restricted in any way was NO, and explanation
provided on the initial application for exemption was as follows:

a

Operational interview was conducted on between Exam Agent ,
Treasurer , and Onsite Manager
Per Treasurer, was created in the early by

The neighborhood was started because there was a private golf club on the premises which was a
big attraction for the homebuyers. At first, lots of large lots were sold but lots got smaller later on.
Controlled initially. It was eventually turned over to members around
(Treasurer was not certain exactly when that happened).

Catalog Number 20810W   Page 1   www.irs.gov   Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended
Around , private golf club was sold to members and that's the year when
officially exited the neighborhood. Golf Club is a paying member of the (the biggest paying
member of the ). Private golf club is exempt under IRC 501(c)(7). Some members are
also members of the golf club. and the golf club are separate entities but they have a close
relationship.
There are 3 entrances into neighborhood: Residents Only, Main entrance, and
Contractor Entrance. There are 3 gates with barrier arms restricting access. Main entrance and
contractor entrance have manned gatehouses with a 24-hour security who monitor access. Exam
Agent saw the gates and barrier arms during the tour of the grounds. Exam Agent saw the guards
and security vehicles. Per Treasurer, access to property and facilities owned and maintained by
is unrestricted to residents and guests of residents. resident has to notify the guards at
the gate that they have guests. Otherwise, guests will not be allowed in. However, if an individual
comes to the gate and says they are there to see the club, guards will ask for an identity document
(ID) and then will let the individual in. Guards ask for the ID so they can have a record of who
entered the premises. Once in the neighborhood, individuals are free to explore. Guards will not
follow you around to see if you are really going to the club. There are security patrols throughout
the neighborhood but those start at evenings. Patrols are to ensure teenagers do not loiter around
and get into trouble.

Exam Agent asked if has any voice in operations or policies of the private golf club.
Per Treasurer, formally, has no say. Practically, yes has a say. Club and the are
intertwined and have a close relationship to each other. There is a need to coordinate between
each other regarding certain activities. Per Treasurer, guards do not ask for proof that you are a
club member to let you in. However, Treasurer explains it's also important about how you
approach the gate and how you phrase and/or explain why you are there. For example, If you
were to say I am here to see a specific resident, the guards will look at the list and if that resident
has not notified the guards that he/she is expecting you, guards will not let you in. If you say you
are just curious to see what is behind the gate and to see the neighborhood, guards should not let
you in. If you say you are curious about the club, guards may ask you if you are there for a lunch,
or tea party, or to play golf. They may still let you in, but may call and/or accompany you to the
club to see if it is ok for you to be there. It is all about the phrasing and confidence in how you say
why you are there.

Per Treasurer, important mitigating circumstance to consider are the golf tournaments.
For example, The tournaments are held at the golf
club. During tournament held on ' people came in and walked
around the neighborhood and used the amenities. Per Treasurer, while tournament is an
annual event, there are maybe 5-10 other events that bring a large gathering within the
neighborhood. Some examples of these other events include

Catalog Number 20810W   Page 2   www.irs.gov   Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended

Exam Agent drove through the neighborhood and toured the grounds on
Park, basketball courts, and the splash pad area are the amenities available to the
residents. The golf club house offers additional amenities such as golf, tennis, fitness center, spa,
and dining. residents need to be members of the golf club to access the club amenities but
club members have access to all of the amenities.

Per Form 990 — , expenses were reported as follows:

Type of expense $ Amount % of total expense

Per Form 990 — Schedule O, list of other expenses from part IX line 24e is as follows:
Description of Expense Amount

Total expenses reported on the Form 990 were $ . Biggest expense "Security"
comprises % of total expenses. "Landscaping" was the second biggest expense coming
in with % of total expenses. Third biggest expense is the miscellaneous "All other
expenses" comprising % of total expenses. One of the other expenses listed on Schedule
O of Form 990 is "Access Gates."

Exam Agent reviewed board meeting minutes for tax year. Gated access and "Community
Access Policy" was discussed at board meetings. Minutes provide that "Starting
residents will be required to provide their security code to the guards when calling to
authorize guests who are not on their account." Per the meeting minutes,
is the app that is used by residents to enter in authorized guests and contractors.

Catalog Number 20810W   Page 3   www.irs.gov   Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended
Exam Agent reviewed Governing Documents. The following documents were reviewed:

The instrument entitled "
" provides for overall
development, administration, maintenance, and preservation and provides procedures for its
future expansion. It grants the Board authority to adopt rules and regulations regulating the use
and enjoyment of the Common Areas.

The Board implemented a community access policy for and adopted rules and regulations
policy regarding the use and enjoyment of the Common Areas.

The purpose of Design Standards is to assist the owner and design personnel in achieving the
desired level of site development and to enhance the aesthetics and provide for an orderly
development of

Exam Agent reviewed the 3 aforementioned documents because the government needed to
understand if was always meant to be a gated community. The government also
needed to understand what is the current written policy regarding the use and enjoyment of the
common areas.

was executed .
document was executed on . came in for exemption in
so both of those documents are before requested exemption under IRC Section 501(c)(4).
document was signed and executed during the exam year.

Rules for Community Access are as follows:

1. Access to the Community is through the Entry Gates which are operable with an entry tag.

2. Each Resident and Club Member must complete an Application for Access to obtain access
to the Community utilizing an entry tag and Club Members can complete an Application for
Access.

3. Each Tenant or Lessee must complete an Application for Access to obtain access to the
Community utilizing an entry tag. The Tenant or Lessee must pay $ per tag that will be
registered for access to the Community. All restrictions applicable to the Residents also
apply to all Tenants or Lessees. The Owner is responsible for the actions of the Resident in
relation to the Entry Gates.

Catalog Number 20810W   Page 4   www.irs.gov   Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended

4. Club Employees without toll tags will be provided a from the
will purchase their own through the

5. After a completed Application for Access is submitted to and approved by the managing
agent for the Association, access will be granted per entry tag.

6. Residents and Club Members without tags must purchase from the
Association's managing agent utilizing the process provided herein.
are currently $ and are $ . This
Association may adjust the price of the as needed.

7. Residents can enter through Gate 1, Gate 2, or Gate 3.

8. Lessees and Tenants can enter through Gate 1, Gate 2, or Gate 3.

9. Club Employees can only enter through Gate 2B (middle lane of Main Gate)
10. Club Members can only enter through Gate 2.

11. Contractors can only enter through Gate 3.

12. Guests of residents, lessees, and tenants must enter through Gate 2A (left lane at Main
Gate) in order to check in with the Security Guards.

13. Non-Immediate Family Members, non-Residents, guests, vendors, contactors, service
workers, household employees, or any other individual not residing in a Unit are not
authorized and will not be authorized to register an entry tag for access to the Community.
These individuals must check in with the security officer to gain access to the Community.

14. Pedestrian gate access is limited to residents only.

15. Should a resident, tenant, or lessee damage any of the gates, gate equipment or related
property, they will be responsible for the cost of the repair and any fines.

16. Should a guest or contractor damage any of the gates, gate equipment or related property,
they will be responsible for the cost of the repair and fines. Should they not pay the repair
cost with 30 days, the responsibility will fall to the resident or club member who allowed
them access into the community.

Catalog Number 20810W   Page 5   www.irs.gov   Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended
The following excerpt (see below) is from "
"document. Excerpt
mentions perimeter fencing, entry gates and gatehouses. As a reminder, this document was
created and executed before applied for the exempt status.

The following excerpt (see below) is also from "Amendment and Restatement of the Declaration of
Covenants, Conditions, Restrictions and Easements for " document. Excerpt
mentions gates, identification for admission, and deny entry to unauthorized persons.

Exam agent noted has right and authority to:
a) control access to the Community or any portion thereof,
b) to construct, install, operate, and staff entrance gates;
c) to require identification for admission to the Community;
d) to videotape or otherwise record and document all Persons and vehicles entering or exiting
the Community;
e) to screen and/or require registration of vehicles, guests, and others entering the Community
f) to deny entry to the Community to unauthorized Persons.

Catalog Number 20810W   Page 6   www.irs.gov   Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended
The following two excerpts (see below) are from "
" document.

Exam agent noted is responsible for operating and maintaining the gate facilities and private
streets leading to the Golf and Country Club. In consideration of their access and use of the gate
facilities and roads maintained by , the owner(s) of the Golf and Country Club and its
members agree to pay an annual maintenance fee to

Catalog Number 20810W   Page 7   www.irs.gov   Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended
The following excerpt (see below) is from document.
It provides that is a gated community. As a reminder, this document was created
and executed before applied for exempt status.
The following excerpt (see below) is from the same document. It provides that is a
gated community. Construction access will be limited to designated and identified construction
personnel.
The following excerpt (see next page) is from the same document. It provides that
Contractors must meet with Association staff and prepare a Contractor's vehicle pass list
and the supporting information containing the description and identification of construction

Catalog Number 20810W   Page 8   www.irs.gov   Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended
employee's vehicles. No person or vehicle will be allowed onto property until
the requisite documents are on file and the appropriate passes have been issued.

All Contractor personnel are required to enter and leave through the designated
construction gate. has a program of vehicle search that provides for the
inspection and/or search of all vehicles entering and leaving the property.

LAW

IRC Section 501(c)(4) 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
or legal associations of employees, the membership of which is limited to the employees of the
designated person or persons in a particular municipality, and the net earnings of which are
devoted exclusively to charitable, educational, or recreational purposes.

Treas. Reg. Section 1.501(c)(4)-1(a)(1) states an organization may be exempt if: (i) it is not
operated for profit and (ii) it is operated exclusively for the promoting of social welfare.

Treas. Reg. Section 1.501(c)(4)-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. 72-102, 1972-1 CB 149, describes non-profit organization formed to preserve
appearance of a housing development and to maintain streets, sidewalks, and common areas for
use of the residents that is found to be exempt under Section 501(c)(4). The ruling describes what

Catalog Number 20810W   Page 9   www.irs.gov   Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended

may constitute a community, which may be exemplified in a neighborhood, precinct, subdivision,
or housing development. It states by administering and enforcing covenants, and owning and
maintaining certain non-residential, non-commercial properties of the type normally owned and
maintained by municipal governments, this organization is serving the common good and the
general welfare of the people of the entire development,

Rev. Rul. 74-99, 1974-1 C.B. 132, modified Rev. Rul. 72-102. It clarified that to qualify for
exemption under IRC Section 501(c)(4), a homeowners' association must:

1. serve a "community" which bears a reasonable recognizable relationship to an area ordinarily
identified as governmental,

2. not conduct activities directed to the exterior maintenance of private residences, and

3. open its common areas or facilities it owns and maintains must for the use and enjoyment of the
general public.

This ruling provides clarification for the term "community". Rev. Rul. 72-102 caused a
misconception that "any housing development may qualify as a community for exemption
Purposes regardless of any other attendant facts and circumstances in the case." This ruling
continues to explain, "A community within the meaning of IRC Section 501(c)(4) and the
regulations is not simply an aggregation of homeowners bound together in a structured unit
formed as an integral part of a plan for the development of a real estate subdivision and the sale
and purchase of homes therein. Although an exact delineation of the boundaries of a "community"
contemplated by Section 501(c)(4) is not possible, the term as used in that section has
traditionally been construed as having reference to a geographical unit bearing a reasonably
recognizable relationship to an area ordinarily identified as a governmental subdivision or a unit or
district thereof."

This ruling also provides clarification for the phrase "non-residential, non-commercial properties of
the type normally owned and maintained by municipal government." It is further explained that the
only areas and facilities encompassed were those traditionally recognized and accepted as being
of direct governmental concern in the exercise of the powers and duties entrusted to governments
to regulate community health, safety, and welfare. Thus, it was "intended only to approve
ownership and maintenance by a homeowners' association of such areas 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, as distinguished from controlled use or access restricted to the
members of the homeowners' association..."

Rev. Rul. 75-386, 1975-2 C.B. 211, describes an organization that contracts with a private firm to
provide the community with security patrols assisted by guard dogs, works to improve public
services, housing, and residential parking, and that publishes a newspaper distributed free of
charge to all community residents and sponsors a community basketball league, holiday

Catalog Number 20810W   Page 10   www.irs.gov   Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended

programs, and meetings of community residents is operated exclusively for the promotion of social
welfare and qualifies for exemption under IRC Section 501(c)(4).

Rev. Rul. 77-273, 1977-2 C.B. 195, describes a non-profit organization that provides security
services for residents and property owners of a particular community, who agree to voluntarily
donate money at a specified hourly rate to defray the cost of the services, is carrying on a
business with the general public in a manner similar to organizations operated for profit and
does not qualify for exemption under IRC Section 501(c)(4).

Rev. Rul. 80-63, 1980-1 C.B. 116, provides further clarification of Rev. Rul. 74-99 through specific
questions. The answer to Question 1 reiterates that a qualifying association's common areas and
facilities must be open for the use and enjoyment of the general public, as distinguished from
areas and facilities whose use and enjoyment is controlled and restricted to members of
the association, to satisfy the requirement of serving a community. The answer to Question 2
points out that an association will not qualify if it restricts the use of its recreational facilities (within
the definition of "common areas"), such as swimming pools, tennis courts, and picnic areas, to
members of the association.

Commissioner v. Lake Forest, Inc., 305 F.2d 814 (4th Cir., 1962), denied exemption to a social
welfare organization because the organization did not benefit the public at large, nor was its
contribution of a public character. The case involved a non-profit membership housing cooperative
that provided low-cost housing to its members. In denying exemption as a social welfare
organization, the court found that although the organization's activities were available to all
citizens eligible for membership, opining, "[I]ts contribution is neither to the public at large nor of a
public character." The court looked to the benefits provided and not to the number of persons who
received benefits through membership. In this case, benefits were largely directed to certain
individuals rather than the general public, so the organization did not qualify as a social welfare
organization.

Rancho Santa Fe Association v. U.S., 589 F. Supp. 54 (S.D. Cal. 1984), held that a housing
development functioning as a public municipality, constituted an independent community under
Section 1.501(c)(4)-1 of the Treasury Regulations, and that the homeowners' association
representing the property owners within the housing development bestowed benefits on the entire
community. Therefore, the association was exempt under Section 501(c)(4) even though the
public was restricted from certain recreational facilities.

Of note, the Rancho Santa Fe development was significant in size, separated geographically from
the central area of a large city, and had its own post office and zip code. In addition, the
organization performed the functions of a governmental entity, and it brought about civic
betterments and social improvements on an unrestricted basis that would be sorely missed by the
community without the activities of the organization. The homeowners' association owned 600
acres and the remainder was owned by individual members. Of the 600 acres owned by the

Catalog Number 20810W   Page 11   www.irs.gov   Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended

Association, 300 acres were dedicated to parkland and open space, 165 acres were improved as
playgrounds, athletic fields, a public parking lot, a community clubhouse, and hiking and bridle
trails. The remaining 135 acres comprised a golf course and tennis courts. In sum, out of the 600
acres owned directly by the Association, 465 of these acres were available for use by the general
public on an unrestricted basis. The remaining 135 acres were available to all the members of the
Rancho Santa Fe community and to the general public, but only when the public used the inn
located in Rancho Santa Fe. The court summarized, "The critical factor is that the Association
benefits the community it serves and represents on an unrestricted basis."

Flat Top Lake Ass'n v. United States, 868 F.2d 108 (4th Cir., 1989), held that a homeowners'
association that encompassed a very large area but restricted use of its facilities to its members
did not qualify for exemption under Section 501(c)(4). Of note, in Flat Top Lake there were no
schools, churches nor commercial establishments within the bounds of the property, nor was
commercial development permitted by the Association. They undertook certain tasks of a quasi-
governmental nature; they constructed a bridge within the development maintained certain
common areas including the road, a park, and the lake itself; and provided waste disposal for
residents. Finally, they arranged for law enforcement by obtaining the appointment of a
conservator of the peace pursuant to local state code. The conservator is paid by the local sheriff's
department which is in turn reimbursed by the Association. The factual circumstances presented
in Rancho Santa Fe are distinguishable from the instant case. The housing development served
by the organization in Rancho Santa Fe was much larger than Flat Top and, functioned as a public
municipality. Access to the development by nonresidents was unrestricted and the use of a
substantial portion of the development's recreational facilities by the general public was unlimited.
Unlike the inhabitants of Flat Top Lake, there was no indication that the inhabitants of Rancho
Santa Fe sought to shut themselves off from society and to hold the outside world at arms' length.
While the court in Rancho Santa Fe did believe that a development that attained "community"
status could exclude the public at large and still obtain Section 501(c)(4) exemption, that
conclusion must be regarded largely as dicta in light of the actual nature of Rancho Santa Fe. Flat
Top Lake Association created a wholly private environment for its members.

APPLICATION OF LAW

Although the government considered circumstances such as golf tournaments, and fundraisers for
other charities, our findings show you place significant barriers with the goal of restricting the
general public from accessing your grounds. (IRC Section 501(c)(4), Revenue Ruling 74-99,
Revenue Ruling 80-63). You are a gated community; no one can get past your gates unless they
are one of the Authorized Persons. Authorized Persons include Owners, residents, and their
guests and invitees; members and guests of the Golf and Country Club; police, fire, and
emergency medical personnel in the performance of their official duties; and contractors and other
service providers authorized by Owners or residents of Units. The government contends that you
do not operate as IRC Section 501(c)(4) and Treas. Reg. Section 1.501(c)(4)-1(a)(1) because
your activities do not primarily promote social welfare.

Catalog Number 20810W   Page 12   www.irs.gov   Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended

Specifically, the government contends that you do not operate as a 501(c)(4) organization for the
following reasons:

"and provide
evidence you were a gated community since the beginning. That means the gates were
present before and during initial Form 1024 application process. You did not reveal that
your "common areas" are via gated access when you applied for exemption. Therefore,
exemption was granted to you without all of the facts and circumstances.

2. A provision in of your Articles Of Incorporation states that one of your
purposes is "

This is a
problematic provision in your Articles of Incorporation since IRC Section 501(c)(4) should
be operated exclusively for the promotion of social welfare.

3. Your total expenses in were $ . Biggest expense "Security" amounts to
$ which comprises % of total expenses in . Per Schedule O, one of the
other expenses listed is " " amount of $ . Your organization spends
time and resources on security, which supports the Examining Agent's position that you are
trying and, very successfully, keeping people out. This is contradictory to what a 501(c)(4)
organization should do: provide social welfare to the general public.

4. Exam Agent's observations and findings during the tour of the grounds and initial interview
provide sufficient evidence you are a gated community. There are 3 entrances into
neighborhood: Residents Only, Main entrance, and Contractor Entrance. There are
3 gates with barrier arms restricting access. Main entrance and contractor entrance have
manned gatehouses with a 24-hour security who monitor access.

Your board minutes provide sufficient evidence you are a gated community.

Per your , access is restricted to the general public and only a
residents, guests of residents, club members, or guests of club members have unlimited
access.

This illustrates you do not primarily operate to promote social welfare within the meaning of
IRC Section 501(c)(4). Moreover, you do not meet the provisions of Treas. Reg. Section
1.501(c)(4)-1(a)(2)(i) because your activities are focused on providing services and
amenities to homeowners and do not primarily promote civic betterment or social
welfare.

Catalog Number 20810W   Page 13   www.irs.gov   Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended

5. Further, your activities do not convey benefits to the community beyond your restricted
gated community as shown by the fact that your activities are directed toward benefitting
the limited persons who may enter inside your gated community. Furthermore, while you
provide such services such as architectural zoning/monitoring, safety/law enforcement
patrol, and common area maintenance (street lights, roads, and garbage service), these
services are not available to the general public but are available only to your residents,
guests of residents, and members and guests of the co-located private golf club.

Thus, you are not operating in the manner contemplated by Rev. Rul. 74-99 which provided
exemption to homeowners' associations under IRC Section 501(c)(4).

You are not similar to the organization described in Rev. Rul. 75-386, which provided a
community at large with security patrols. Security services were not limited to those who
are dues-paying or fee-paying persons. You are not similar to the instant organization
because you are not providing services to a "community" as clarified and explained in Rev.
Rul. 74-99. You are providing security services solely to your members and members of a
co-located private golf club, which is not the community at large.

The manner in which you provide security services is similar to the denied organization
described in Rev. Rul. 77-273, which provides security services only to residents who pay
fees for such services. Likewise, your security services only directly benefit those who fall
within the limited membership criteria for your homeowners' association and members of a
certain private golf club, when they are on your premises.

The general public does not significantly benefit from your organization. (Commissioner v.
Lake Forest, supra, Flat Top Lake Association, Rancho Santa Fe Association v. U.S.A.
supra). You operate to restrict the general public from access to your facilities, thereby
failing to confer a benefit onto the community. Where there is failure to serve the
community, there is a failure to promote social welfare, which is a requirement for a
501(c)(4) organization. A 501(c)(4) organization must operate "exclusively for the promotion
of social welfare" which is further explained by the Regulations thus: being primarily
engaged in promoting in some way the common good and general welfare of the people of
the community. Revenue Ruling 74-99 confirms that the benefit must be conferred to "the
community". Revenue Ruling 80-63 clarifies Revenue Ruling 74-99 stating that while a
"community" cannot be strictly defined, that if the association owns and maintains common
areas and facilities for the use and enjoyment of the general public as distinguished from
areas and facilities whose use and enjoyment is controlled and restricted to members of the
association then it may satisfy the requirement of serving a community.

You are not similar to the qualifying organization described in Rancho Santa Fe. Of note,
Rancho Santa Fe did not have physically restricted access, as you do. Any person could
access their property at will and utilize all common areas, with the exception of the golf and
tennis facilities, which comprised less than a quarter of the organization's property per

Catalog Number 20810W   Page 14   www.irs.gov   Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service   Schedule number or exhibit
(May 2017) Explanation of Items
Name of taxpayer   Tax Identification Number (last 4 digits)   Year/Period ended

square foot. You, however, do have physically restricted access to your property in the form
of a 24-hour guarded gates which only admit your homeowners-members and members of
the co-located private golf club. No parallel is able to be drawn between the golf and tennis
club at Rancho Santa Fe and the golf club within your gates. In your cases the golf club is a
separate entity, in which you have no formal voice in operations nor policies. Thus, any
leniency with respect to golf and tennis facilities limited to certain persons in Rancho Santa
Fe has no bearing on you.

You are similar to the denied organization described in Flat Top Lake; you are a residential
homeowners' association who has undertaken certain road, common area, and landscape
maintenance, as well as provision of security, which benefits only your members and
members of the co-located private golf club when they are on your premises, due to the
restricted physical access to your property.

TAXPAYER'S POSITION
The taxpayer's position is solicited.

CONCLUSION

You are not described under IRC Section 501(c)(4) because you are not operated exclusively for
the promotion of social welfare. You are not primarily engaged in promoting the common good and
general welfare of the people of the community within the meaning of the regulations.

Your activities serve to benefit only the select few who are permitted to enter your guarded gate.
Accordingly, we are proposing revocation of your tax-exempt status. If the proposed revocation
becomes final, appropriate state officials will be notified of such action in accordance with
§6104(c) of the Internal Revenue Code.

Catalog Number 20810W   Page 15   www.irs.gov   Form 886-A (Rev. 5-2017)