A resident-owned mobile home park corporation was denied exemption

Plain-English summary

A member-owned corporation sought section 501(c)(3) status so it could buy the land under a mobile home park and keep lot rents stable for resident homeowners. The residents would continue to own their homes, while the corporation would own the land and serve only homeowner-members, not renters or the general public. The IRS concluded that buying and operating the park and maintaining its common areas were substantial nonexempt activities that primarily benefited the members. It also found that the low-income housing safe harbor did not apply because the corporation would provide land rather than complete housing units and lacked a policy protecting residents who could no longer pay lot rent. The exemption was denied, and the denial became final when no protest was filed within 30 days.

Ruling snapshot

• Question: Did the resident-owned mobile home park corporation qualify as a charitable organization under section 501(c)(3)?
• Outcome: Denied, and the proposed adverse determination became final after no timely protest.
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Proc. 96-32; Rev. Rul. 73-306

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
Cincinnati, OH 45201

Date: August 10, 2017

Employer ID number:

Release Number: 201744020

Release Date: 11/3/2017 Contact person/ID number:
UIL Code: 501.00-00
501.03-30 Contact telephone number:
501.33-00

Form you must file:

Tax years:

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(3) of the
Internal Revenue Code (the Code). 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 Section 501(c)(3) of the Code, donors can’t
deduct contributions to you under Section 170 of the Code. You must file federal income tax returns for the tax
years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of
this letter unless you request an extension of time to file.

We’ll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

We’ll also notify the appropriate state officials of our determination by sending them a copy of this final letter
and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state
officials if you have questions about how this determination will affect your state responsibilities and
requirements.

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at

1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Notice 437

Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501(c)(3)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) - No Protest

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service

Cincinnati, OH 45201

Date: May 31, 2017

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date 501.00-00
C = State 501.03-30
D = Mobile home park 501.33-00

E = Organization

F = Organization

g dollars = Amount
h = Number

Dear

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify
for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please
keep it for your records.

Issues
Do you qualify for exemption under Section 501(c)(3) of the Code? No, for the reasons stated below.

Facts

You were incorporated on B in the state of C. Your Articles of Incorporation state that you were formed on a
nonprofit basis for the purpose of acquiring, producing, building, operating, furnishing, exchanging, or
distributing manufactured housing in a manufactured housing park, as well as services primarily associated
therewith for the benefit, recognized as both public and private, of the current and future homeowners of the
community, who are the ultimate consumers of the housing opportunity you provide. You amended your
Articles, which reiterated the purposes stated in the original Articles of Incorporation. The amendment also
included proper Section 501(c)(3) purpose and dissolution clauses.

You are formed as a member-owned corporation for the purpose of acquiring a mobile home park called D,
which is currently owned by a for-profit corporation. You assert that your acquisition of the property would lead
to more stable lot rents and would ensure that households are no longer susceptible to displacement due to
redevelopment or park closure. All of your board members are also current residents of the mobile home park
you plan to purchase.

2

Your membership fee is g dollars, which you say makes membership affordable to everyone. Your bylaws
contain covenants which guarantee that the cost of membership will remain the same for future homeowners
and will not be subject to market appreciation. You will reduce discrimination and prejudice by providing
decent, affordable, secure housing and financial and organizational training, giving a 'voice' to a traditionally
underserved and stigmatized community. You will give residents an opportunity to form new relationships, thus
reducing tension and increasing a sense of belonging.

You define a “member" as each household occupying, or wishing to occupy, one of the lots in the community
and approved for membership by the Board of Directors, provided that all adult members of the household (18-
years-or-older), without regard to their social, political, racial, religious, age, sex, sexual orientation, disability,
or marital status:

• Meet membership criteria as established by the Board,

• Own and reside in a manufactured housing unit in the park,

• Is current on lot rent, and

• Is/are willing to accept membership responsibilities, including voluntary participation in the governance
and in the operation of the community.

Member rights include:

• A perpetual right to occupy a lot within the community as long as he or she continues payment of the lot
rent and complies with the other terms of the Member Occupancy agreement, the Bylaws and the
Community Rules established by the members, and

• The right to vote on all matters put before the members.

You have one class of members. The number of the membership shall not exceed the total number of
manufactured housing lots in the manufactured housing community you will own. There are h mobile home
sites in the community. The maximum percentage of capital that may be owned or controlled by any member
shall be the percentage of the membership fees owned by them in relation to the total membership fees. Each
member shall be limited to a single membership interest. Membership is open to all homeowners currently
residing in the community. Renters are not eligible for membership.

Residents in investor-owned parks, such as D, face a number of risks, including:
• No control over rising lot rents
• Displacement or loss of housing due to park closure
• Onerous park rules or inconsistent rules enforcement, and
• Inadequate maintenance and performance of basic infrastructure such as water, sewer and roads.

You want to be a resident-owned community. A resident-owned community is formed by the homeowners in
order to:

• Preserve owner-occupied affordable housing

• Stabilize lot rents

• Build assets for low and moderate income families and individuals, and

• Support leadership development within the community.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

3

If the resident purchase is successful, you will own and operate the manufactured home community and engage
in other activities on a not-for-profit basis. After you purchase the park, new residents who move in must
become members and meet member eligibility requirements. Everyone pays the same amount of lot rent.

After the purchase, you will own the land currently occupied by manufactured homes. The residents will each
own their own mobile home and you will not have any ownership interest in them. Additionally, you will own
an office building and garage/storm shelter located on the property. Approximately % of the homes are owned
by third party investors and the rest are owner occupied.

You have entered into an agreement with E, a non-profit organization. This agreement states that you wish to
purchase the D mobile home park and that E will provide you with technical assistance. The agreement states
that E is willing to help you achieve this goal and other post-purchase goals related to the governance and
operations of the park. E currently has an executed and assignable purchase agreement on record with the
current owner of D. E wishes to assign you all of their rights and responsibilities under the contract as soon as
practicable. The contract is in effect for years.

The agreement states that E provides assistance to you through another organization, F, which is described as a
social enterprise organized exclusively for charitable and tax exempt purposes. F’s purpose, per the agreement,
is to aid people living in manufactured home communities so that as a group they can purchase their
communities and operate them as a resident-owned and/or controlled corporation. The agreement states that you
will reimburse E for their earnest money deposit for the purchase as well as legal fees. At the closing of the
purchase, you will pay a fee, which is set as a percentage of the purchase price, to E. Additionally, if you use a
specific company related to F to finance the purchase, you will not need to pay for any post-purchase training
fees. If you do not use this specific company to finance the purchase, you must sign an agreement to purchase
support from them at a certain rate.

You said you comply with the affordability restrictions and certify, pursuant to Rev. Proc. 96-32, that your
residents meet requirements of Section 3, Safe Harbor for Relieving the Poor and Distressed. At least %
(actual is %) of the homeowners surveyed have a household income less than % of the area median income
as established by HUD, and at least % of the homeowners responding (actual is     %) are residents that also
meet the very low income limit for the area. You also said the mobile home park is currently occupied by poor
and distressed residents and your housing is affordable to residents. Your Bylaws state that low-income
individuals or families must have first choice to purchase any home that is offered for sale by one of your
members.

You assert that you meet Section 4 of the Facts and Circumstances Tests for Relieving the Poor and Distressed
of Rev. Proc. 96-32 as:
• You are developing a budget that will ensure the housing continues to be affordable for low-income and
very-low-income residents
• You will be governed by a Board of Directors elected by members
• You will be supported for the life of your mortgage by D, and
• As a resident-owned community, you have been organized to provide an affordable and sustainable
home ownership opportunity. Not only will housing be preserved, but residents will have land tenure
and control over infrastructure improvements, all of which would otherwise be unaffordable.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

4

If a resident becomes unable to pay their lot rent you will address it through a collections policy, which is
currently under development. The policy will be consistent with the state law that governs the legal process for
eviction from a manufactured home park.

Your projected budgets include all revenues from admissions, merchandise sold or services performed, or
furnishing of facilities related to your exempt purposes.

Law

Section 501(c)(3) of the Code provides for the exemption from federal income tax to organizations organized
and operated exclusively for charitable or educational purposes, provided no part of the net earnings inures to
the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that in order to be exempt as an organization
described in Section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for
one or more 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(c)(1) provides that an organization will be regarded as operating exclusively
for exempt purposes if it engages primarily in activities that accomplish exempt purposes specified in Section
501(c)(3) of the Code. 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) provides that an organization is not organized or operated
exclusively for one or more exempt purposes unless it serves a public rather than a private interest. Thus, the
organization must establish that it is not organized or operated for the benefit of private interests such
individuals.

Rev. Proc. 96-32, 1996-1 C.B. 717, sets forth a safe harbor under which organizations that provide low-income
housing are considered charitable as relieving the poor and distressed, and a facts and circumstances test that
applies in determining whether organizations that fall outside the safe harbor relieve the poor and distressed.
The safe harbor requires that certain percentages of the units be occupied by residents that meet certain low-
income standards, and that the housing be affordable to the charitable beneficiaries. In the case of rental
housing, this requirement will ordinarily be satisfied by the adoption of a rental policy that complies with
government-imposed rental restrictions or otherwise provides for the limitation of the tenant's portion of the rent
charged to ensure that the housing is affordable to low-income and very low-income residents.

Rev. Rul. 73-306, 1973-2 C.B. 179, held not exempt under Section 501(c)(4) of the Code a nonprofit
organization formed to promote the common interest of tenants who resided in an apartment complex. Any
person regularly living in the complex was eligible for membership. The organization represented its member-
tenants in negotiations with the management of the complex in order to secure better maintenance and services,
and to secure reasonable rentals. The organization also provided legal representation for members as a group in
litigation and before local and federal regulatory agencies involving matters of mutual concern to the members
as tenants. The Service reasoned that the organization operated essentially for the private benefit of its members
rather than for the common good and general welfare of the people of the community.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

5

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the Court held that the existence of a single
non-exempt purpose, if substantial in nature, will destroy a charitable exemption.

In Commissioner v. Lake Forest, Inc., 305 F.2d 814 (4th Cir. 1962), a corporation was organized by World War
II veterans for the purpose of purchasing a government housing project and converting it to cooperative,
nonprofit housing for its members. Individuals became members in the corporation by purchasing an apartment
unit and, as such, the number of members was limited to the number of units available. The court held that the
organization was not described in Section 501(c)(4) of the Code because it was “a public-spirited but privately-
devoted endeavor” that provided only incidental benefit to the community. Id. at 818. The organization did not
promote social welfare because it furnished housing only to a certain group of individuals, rather than on a
community basis, and did not offer a service or program for the direct betterment or improvement of the
community as a whole.

In Old Dominion Box Co. v. United States, 477 F2d. 344 (4th Cir. 1973) cert. denied, 413 U.S. 910 (1973), the
court held that operating for the benefit of private parties constitutes a substantial non-exempt purpose.

In Syrang Aero Club Inc. v. Commissioner, 73 T.C. 717 (1980), the United States Tax Court held that an
organization organized and operated for the benefit and recreation of its members did not qualify for exemption
under Section 501(c)(3) of the Code.

Application of law

You are not described under Section 501(c)(3) of the Code or Treas. Reg. Section 1.501(c)(3)-1(a)(1) because
you do not meet the operational test. If an organization fails either the organizational or operational test, it
cannot qualify as an exempt organization under Section 501(c)(3).

Your planned activity of purchasing a mobile home park and maintaining the common areas and providing
related services are not exempt activities and are substantial in nature. A single, substantial non-exempt purpose
will preclude an organization from exemption as described in Better Business Bureau v. United States. Because
more than an insubstantial portion of your activities accomplish non-exempt purposes, you are not exempt per
Treas. Reg. Section 1.501(c)(3)-1(c)(1).

You are formed by current residents of the mobile home park that you plan to purchase. The residents that own
their own mobile homes (not renters) are your members. You are purchasing the mobile home park so that you
can keep lot rents low. You do not offer other subsidies. Your activities serve the private benefit of your

members, and not the general public, which precludes you from exemption as described in Treas. Reg. Section

1.501(c)(3)-1(d)(1) (ii).

The acquisition and operation of a mobile home park could be a charitable activity, depending on the structure
of the organization and its manner of operation. However, you do not own any actual housing. You will, after
acquisition, only own the land. Individuals will have to purchase their own mobile home to place on the lot.
Ensuring a portion of the residents’ housing cost remains low is not sufficient to qualify as a charitable low
income housing activity under Rev. Proc. 96-32. Further, you do not have a policy for maintaining in residence
those who become unable to pay their lot rent; rather, you said you will follow collections and eviction
procedures.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

6

Rev. Proc. 96-32 describes units occupied by residents. The Rev. Proc. requires the “housing [to be] affordable
to the charitable beneficiaries.” The terms “units” and “housing” are understood to be shelters with walls and
ceilings. The affordability criteria of the Rev. Proc. only make sense if compared to an entire dwelling. A unit
can be a manufactured housing unit, but it must be the entire unit. The affordability criteria are designed to
measure the complete expense of housing against the income of a resident. You do not provide a complete
housing unit; therefore, Rev. Proc. 96-32 does not apply.

You are formed by current residents in an effort to obtain and maintain control over lot rental amounts. Similar
to the organizations described in Rev. Rul. 73-306 and Commissioner v. Lake Forest, Inc., you were formed to
promote the common interest of tenants who reside in your mobile home park. While the organizations in these
rulings were seeking exemption under Section 501(c)(4) of the Code and did not qualify, logically, they also
would not have qualified under Section 501(c)(3). In the same way, you are operated to benefit your members
and not the general public. As discussed in Old Dominion Box Co. v. United States and Syrang Aero Club Inc.
v. Commissioner, operating for the benefit of private parties constitutes a substantial non-exempt purpose and
prevents you from qualifying from exemption under Section 501(c)(3).

Conclusion
You fail the operational test because you are formed for the private benefit of your members for a substantial
non-exempt purpose. Therefore, you do not qualify for exemption under Section 501(c)(3) of the Code.

If you don’t agree
You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you

must send a statement to us within 30 days of the date of this letter. The statement must include:

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

• A copy of this letter highlighting the findings you disagree with
• An explanation of why you disagree, including any supporting documents
• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including

accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts 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 he or she hasn’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 provided a basis for us to reconsider our determination. If
so, we’ll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

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

Where to send your protest
Please send your protest statement, Form 2848, if needed, 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
Room 7-008 550 Main Street, Room 7-008

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your statement 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 he or she received
it.

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 4036 (Rev. 7-2014)
Catalog Number 47630W

8

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If
you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W