A property owners' association that maintains its own community's grounds for member fees does not qualify for 501(c)(3) exemption

Plain-English summary

To be exempt under Section 501(c)(3), an organization must operate exclusively for
public purposes, not to serve the private interests of a limited group. Here, a
property owners' association applied for charitable status using the streamlined Form
1023-EZ. It was formed to promote the safety, welfare, and property values of the
owners in a particular community, and its actual activities were maintaining the
community entrance landscaping, the storm-water drains, and vacant lots, funded by a
monthly fee charged to its members. The IRS denied exemption. Keeping up property that
the members would otherwise have to maintain themselves serves the private interests of
those members, not the general public, so the association fails the operational test.
Any benefit to the wider public is incidental. Citing prior rulings that denied
exemption to neighborhood beautification and waterway-dredging groups funded by the
adjacent owners, the IRS concluded that serving members' private interests was a
substantial non-exempt purpose that defeats exemption. This kind of homeowner or
property-owner association generally does not qualify under 501(c)(3) (though some such
groups may fit other categories, such as 501(c)(4) or 501(c)(7), which this letter did
not address).

Ruling snapshot

• Question: Does a property owners' association that maintains its own community's common areas for member fees qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied (fails the operational test; serves members' private interests)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), (d)(1)(ii); Rev. Rul. 69-175; Rev. Rul. 75-286; Ginsberg v. Commissioner, 46 T.C. 47 (1966); Better Business Bureau v. United States, 326 U.S. 279 (1945); § 7428(b)(2)

Full text (IRS public release)

                       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



                                                                               Date:
                                                                               06/09/2025
                                                                               Employer ID number:


                                                                               Person to contact:
                                                                                Name:
                                                                                ID number:
                                                                                Telephone:
                                                                                Fax:




Legend:                                                                       UIL:
X = Date                                                                      501.03-05
Y = State                                                                     501.03-30
Z = Community

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 attest that you were incorporated on X, in the state of Y. You attest that you have the necessary organizing
document, that your organizing document limits your purposes to one or more exempt purposes within the
meaning of the IRC Section 501(c)(3), that 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 that 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
   •   Not further non-exempt purposes (such as purposes that benefit private interests) more than
       insubstantially
                                                                                        Letter 4034 (Rev. 01-2021)
                                                                                        Catalog Number 47628K
                                                          2

   •   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

You state that you are formed to promote and enhance the safety, welfare, and interests of the property owners
of Z. You are also formed to preserve and enhance property values and quality of life through the prudent use of
resources for the benefit of the Z community.

To accomplish these goals you maintain the landscaping of the entrance to Z, maintaining the storm water
drains on the property, and maintaining the vacant lots to keep them up to required standards.

You charge a monthly fee to cover your Presidents management of accounting, billing, and banking, payments
to a landscaping company, and payments to a bushhogging company.

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) provides 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 l.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) of the regulations provides that an organization is not organized or
operated exclusively for exempt purposes unless it serves a public rather than private interest.

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.

Rev. Rul. 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).




                                                                                        Letter 4034 (Rev. 01-2021)
                                                                                        Catalog Number 47628K
                                                        3

In Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption
regardless of the number or importance of truly exempt purposes.

In Benedict Ginsberg and Adele W. Ginsberg v. Commissioner, 46 T.C. 47 (1966), exemption was retroactively
revoked for a corporation previously exempt under IRC Section 501(c)(3) that was organized to conduct the
dredging of certain waterways. The property owners adjacent to the waterway were the only financial
contributors to the organization. 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) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg.
Section 1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes
described in Section 501(c)(3). You do not meet the operational test under Section 501(c)(3). Hence, you cannot
be recognized as exempt under this section.

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 charge fees to your members
to provide for the preservation and maintenance of their property. By providing these services, you serve the
private interests of your members rather than the interests of the public as described in Treas. Reg. Section
l.501(c)(3)-1(d)(1)(ii).

You are like the organization in Rev. Rul. 69-175 in that you were formed to provide benefits to your members.
Your members are charged fees to be members and receive benefits. You use these fees to provide maintenance
for the areas used in private by your members. Maintaining property that would otherwise have to be
maintained by your individual members serves the private interests of those members rather than the interests of
the public.

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 primarily serves the private interests of your members and any
benefit to the general public is incidental to the benefit to your members. As described in Better Business
Bureau the presence of this substantial non-exempt purpose will preclude exemption under Section 501(c)(3).

Conclusion
Based on the information submitted, you do not qualify for exemption under IRC Section 501(c)(3). You do not
meet the operational test because you are operated primarily to serve 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.




                                                                                      Letter 4034 (Rev. 01-2021)
                                                                                      Catalog Number 47628K
                                                          4

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.




                                                                                        Letter 4034 (Rev. 01-2021)
                                                                                        Catalog Number 47628K
                                                        5

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