IRS denies § 501(c)(3) exemption to a homeowners' association serving private member interests

Plain-English summary

A homeowners' association, organized as a mutual benefit common-interest development corporation, applied for charitable tax exemption under Code section 501(c)(3) using Form 1023-EZ. Its activities are the usual HOA functions: paying for water, electricity, trash, and landscaping of common areas, maintaining fire safety equipment, insuring the units, and collecting yearly maintenance fees from unit owners. The IRS denied the application and made it final after no protest was filed.

The IRS found the association fails both exemption tests. It fails the organizational test because its articles state a purpose (manage and preserve the development, promote members' health, safety, and welfare, and operate an HOA) that is not a charitable purpose and is broader than section 501(c)(3) allows. It fails the operational test because it operates for the private interests of its members, enhancing their property values, and its net earnings benefit those members. The IRS distinguished revenue rulings where community beautification open to the public was exempt (Rev. Rul. 68-14, 78-85) from rulings denying exemption to member-benefit property associations (Rev. Rul. 75-286), and cited Better Business Bureau v. United States for the rule that a single substantial non-exempt purpose defeats exemption. Because the association is not exempt, donors cannot deduct contributions under section 170.

Ruling snapshot

• Question: Does a homeowners' (common-interest development) association qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied (final adverse determination; no protest filed).
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)-(d); Rev. Rul. 68-14, 75-286, 78-85; Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945); IRC §§ 170, 7428(b)(2).

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

Date: 12/12/2025

Employer ID number:
Form you must file:
Tax years:

Person to contact:

Release Number: 202610017
Release Date: 3/6/26
UIL Code: 501.03-30, 501.33-00, 501.35-00

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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Letter 437
Redacted Letter 4034
Letter 4038

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

Department of the Treasury
Internal Revenue Service

Date: 10/15/2025

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

Legend:
B = Date
C = State
D = Date
E = Number

UIL:
501.03-30
501.33-00
501.35-00

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 B, in the state of C. 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.

• 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.

Your Form 1023-EZ states your mission is to pay for water, electricity, trash collection, and the landscaping cost for the common use of your E units. Additionally, you will maintain and update the fire extinguisher, coordinate an annual exam from your local fire department, and provide general insurance for your units.

Detailed information was subsequently requested. Your Articles of Incorporation (AOI) show you were formed on D as a mutual benefit - common interest development corporation. Your AOI states your purpose is to manage, maintain, and preserve the common interest of your development, to promote the health, safety, and welfare of your residents, and to operate a homeowner's association.

Your declaration of covenants state your purpose is to enhance, maintain, and protect the value and attractiveness of your property. Some of the rules and regulations contained in your declaration of covenants are as follows:

• Ownership of a unit is the sole qualification for membership.

• Each member has one vote.

• Each member will pay a yearly maintenance fee which will be used for the common grounds, signs, and any other improvement not covered by the city.

• The yearly maintenance fee shall be used exclusively for promoting the health, recreation, safety, and welfare of your members.

Your Bylaws state you are a non-profit, mutual benefit corporation. Each member of your Board of Directors shall be a unit owner or a qualified representative. Only unit owners may nominate themselves or another owner/qualified representative. Your sole revenue is the yearly maintenance fees charged to your members.

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, in order 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 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)(1)(iv) provides that in no case shall an organization be considered to be organized exclusively for one or more exempt purposes, if, by the terms of its articles, the purposes for which such organization is created are broader than the purposes specified in IRC Section 501(c)(3).

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(c)(2) provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(i) provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest.

Treas. Reg. Section 1.501(c)(3)-1(d)(2) provides the term "charitable" is used in IRC Section 501(c)(3) in its generally accepted legal sense and includes relieving the poor and distressed or the underprivileged, lessening of the burdens of Government, combating community deterioration, lessening neighborhood tensions, and eliminating prejudice and discrimination.

Revenue Ruling 68-14, 1968-1 C.B. 243, described an organization determined to be exempt under IRC Section 501(c)(3) because it was operated for charitable purposes by planting trees in public areas, assisting municipal authorities in keeping the city clean, and informing the public of the advantages of its programs.

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 benefiting the community as a whole as well as enhancing the members' property rights, will not qualify for exemption under IRC Section 501(c)(3) because the organization was organized and operated for the benefit of private interests by enhancing the value of members' property.

Rev. Rul. 78-85, 1978-1 C.B. 150, held that an organization with membership open to the general public that was formed by residents of a city to help preserve, beautify, and maintain a public park located in a heavily trafficked, easily accessible section of the city that was commonly used by citizens of the entire city qualified for exemption under IRC Section 501(c)(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 a claim for exemption regardless of the number or importance of truly exempt 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). Furthermore, Treas. Reg. Section 1.501(c)(3)-1(c)(1) states that to be operated exclusively for one or more exempt purposes, an organization must engage primarily in activities that accomplish one or more exempt purposes specified in Section 501(c)(3).

Your AOI states your purpose is to manage, maintain, and preserve the common interest of your development, to promote the health, safety, and welfare of your residents, and to operate a homeowner's association. This purpose is not an exempt purpose as defined in Treas. Reg. Section 1.501(c)(3)-1(d)(2), and the purpose is broader than the purposes specified in IRC Section 501(c)(3). See Treas. Reg. Section 1.501(c)(3)-1(b)(1)(ii) and Treas. Reg. Section 1.501(c)(3)-1(b)(1)(iv).

You are formed for the mutual benefit of your members. Your declaration of covenants state your purpose is to protect the value of real property owned by your membership. You are operating to substantially further the private interests of your members rather than the public interest. See Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). Moreover, each member of your Board of Directors shall be a unit owner or a qualified representative. Your net earnings inure in whole or in part to the benefit of private shareholders or individuals. See Treas. Reg. Section 1.501(c)(3)-1(c)(2).

Like the organization denied exemption in Rev. Rul. 75-286, your activities serve to benefit the private interests of your members rather than the public. Your purpose is to exclusively promote the health, recreation, safety, and welfare of your members.

You are not like the organizations granted exemption in Rev. Rul. 68-14 and 78-85 because you are not engaged in serving the public interest, rather, your activities serve the private interests of your members. Your AOI states your purpose is to manage, maintain, and preserve the common interest of your development, to promote the health, safety, and welfare of your residents, and to operate a homeowner's association.

You are like the organization described in Better Business Bureau of Washington, D.C., Inc. because your activities benefit your members more than incidentally and constitute a substantial non-exempt purpose.

Conclusion

You fail the organizational test because your AOI does not have a proper purpose clause. You fail the operational test because you have failed to establish that you are operated exclusively for exempt purposes. Your substantial purpose is operating a homeowner's association that exclusively promotes the health, recreation, safety, and welfare of your members which substantially furthers the private interests of your members. Moreover, your net earnings inure in whole or in part to the benefit of private shareholders or individuals. Therefore, you do not qualify for IRC Section 501(c)(3).

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:
Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
PO Box 2508
Cincinnati, OH 45201

Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202

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