Homeowners association denied social-welfare exemption because it primarily benefits its members

Plain-English summary

A homeowners association sought exemption as a social-welfare organization under section 501(c)(4). It maintained common areas and provided services such as landscaping, snow removal, exterior work, and roof replacement for the owners of townhomes in the development. The IRS concluded that these activities primarily provided private benefits to the association's members rather than promoting the common good of the broader community. The IRS also emphasized that the association maintained private residences, limited common-area use to owners and guests, and would distribute its assets equally among members upon dissolution. The IRS issued a final adverse determination after the association did not protest the proposed denial within 30 days.

Ruling snapshot

• Question: Does a homeowners association primarily serving townhome owners qualify for exemption under section 501(c)(4) as a social-welfare organization?
• Outcome: denied
• Key authorities: IRC § 501(c)(4); Treas. Reg. § 1.501(c)(4)-1; Rev. Ruls. 69-280, 74-17, and 74-99

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR against all nine page images. Obvious OCR misreads were corrected, redacted identifiers are marked [redacted], and wording is otherwise verbatim.

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
Date: November 7, 2017

Number: 201805014                         Employer ID number: [redacted]

Release Date: 2/2/2018                    Contact person/ID number: [redacted]

                                            Contact telephone number: [redacted]

                                            Form you must file: [redacted]

                                            Tax years: [redacted]

UIL: 501.04-07

Dear [redacted]:

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(4) 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.

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.

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 4034, Proposed Adverse Determination under IRC Section 501(a) Other Than 501(c)(3)
Redacted Letter 4040, Final Adverse Determination under IRC Section 501(a) Other Than 501(c)(3) - No
Protest

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: September 11, 2017
Employer ID number: [redacted]

Contact person/ID number: [redacted]

Contact telephone number: [redacted]

Contact fax number: [redacted]

Legend:                                     UIL:
                                            501.04-07
U = State
V = Date

W = Number

X = Date

Y = Law

b dollars = Amount

Dear [redacted]:

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)(4) 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)(4) of the Code? No, for the reasons stated below.

Facts

You incorporated in the State of U on V. The purpose in your Articles of Incorporation is the “administration
and operation of property owned by the homeowner’s association as well as maintenance of townhomes owned
by members of the homeowner’s association”. Your assets upon dissolution would be divided equally among
the members.

There are W units. Ownership of one of the W units in the townhome development is the only qualification for
membership and there is one membership per unit. The membership automatically terminates upon the sale,
transfer, or other disposition of the title interest of the unit. The W members pay dues currently of b dollars per
quarter.

You conduct landscape, exterior surface sealing program application and snow removal services for members,
as well as roof replacement. You submitted a Declaration of Covenants, Conditions, and Restrictions, which
states in part:

• Article 3.1 states that you are the governing organization, in charge of the maintenance, repair,
  replacement, administration, and operation of the common areas and the exterior of the townhouse
  buildings. You may levy and collect assessments to provide the funds for such purposes.

• Article 3.2 indicates each owner and the members of his or her family and his or her authorized guests,
  invitees and visitors shall have the right and easement of ingress and egress and enjoyment in and to the
  Common Areas and the amenities thereon.

• Article 3.4 states that you “shall be considered a “Common Interest Community Association” as defined
  by state law specifically Y.

• Article 6 explains the Covenant for Maintenance Assessments and indicates that unit owners by
  accepting the deeds to their property agree to pay you all annual and special assessments for such items
  as the exterior maintenance of the residential buildings, landscaping, insurance premiums, real estate
  taxes, any special assessments or other special taxes, and necessary reserves for contingencies and
  replacements.

• Article 8 explains the specific use of all common areas. Each unit owner has the right and easement of
  ingress and egress in, through, over, and across the common areas and any recreational facilities
  located on your property. You also have the right to limit the number of guests of the unit owners.

Furthermore, you have the right to suspend the voting rights and the right of each delinquent owner to have
access to common areas. Moreover, you have the right to suspend the right of any unit owner to use any
recreational facilities located on the common areas for up to several days for any infractions of your published
rules and regulations.

You have been filing Form 1120-H, as a homeowner’s association exempt under Section 528 of the Internal
Revenue Code, annually since X when you began earning interest on your money market account and certificate
of deposits.

Law

Section 501(c)(4) of the Internal Revenue Code 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.

Treasury Regulation 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. 69-280, 1969-1 CB 152 describes an organization formed to provide maintenance of exterior walls
and roofs of homes of members who owned houses in a development. It was held that the organization was
operated primarily for the private benefit of members and not operated primarily for the common good and
general welfare of the people of the community. The services provided to members included maintenance of
the exterior walls and roofs of the individual units. If a person purchases a unit in the housing development, he
is required to become a member of the organization. The organization is supported entirely by annual dues
charged members. The dues are based on the estimated expenses of the organization plus an amount for
reserves to cover large expenditures, such as replacement of roofs.

Rev. Rul. 74-17, 1974-1 C.B. 130 describes an organization formed by the unit owners of a condominium
housing project to provide for the management, maintenance, and care of the common areas of the project with
membership assessments paid by the unit owners that did not qualify for exemption under Section 501(c)(4) of
the Code. Condominium ownership involved ownership in common by all condominium unit owners of a great
many so-called common areas, the maintenance and care of which necessarily constituted the provision of
private benefits for the unit owners. Since the organization's activities were for the private benefit of its
members, it could not be said to be operated exclusively for the promotion of social welfare.

In Rev. Rul. 74-99, 1974-1 C.B. 131, it is explained that a homeowner’s association, to qualify for exemption
under Section 501(c)(4) of the Code, (1) must serve a "community" which bears a reasonable recognizable
relationship to an area ordinarily identified as governmental, (2) it must not conduct activities directed to the
exterior maintenance of private residences, and (3) the common areas or facilities it owns and maintains must be
for the use and enjoyment of the general public.

Application of Law

You are not as described in Section 501(c)(4) of the Code and Treas. Reg. Section 1.501(c)(4)-1(a)(1) because
your activities do not primarily promote civic betterment or social welfare; you are primarily operating for the
benefit of your members. You are limiting your services to your W member owners. In addition, your net assets
upon dissolution will be divided equally among your members. These facts illustrate you are serving the private
interests of the W member owners, not the people of a community.

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 member owners and do not primarily promote civic
betterment or social welfare. In addition, only members and their guests have rights of ingress and egress to
your common areas and recreational facilities. Because you are limiting access to the common areas, you are
operating primarily for the private benefit of members.

You are like the organization described in Rev. Rule 69-280. You were formed to provide maintenance of
individual townhome units including roof maintenance and replacement. Owners in your development are
required to become members and you charge member/owners dues and assessments based on your estimated
expenses plus an amount for reserves to cover large expenditures. Similarly, you are primarily operated for the
private benefit of members and any benefits to the community are not sufficient to meet the requirement you are
being operated primarily for the common good and general welfare of the people of the community and
therefore you are not exempt under Section 501(c)(4) of the Code.

You are similar to the organization that was denied exemption in Rev. Rul. 74-17. You have W unit owner
members who pay quarterly dues of b dollars and assessments for larger expenditures which are used to provide
for the exterior maintenance of the townhomes and your common areas that are not opened to the community.
Because your activities are directed for the benefit of the W member owners you are not operated primarily for
the promotion of social welfare.

Contrary to Revenue Ruling 74-99, you do not serve a community that resembles an area that could reasonably
be identified as governmental because you are a condominium association of only W owners defined by state
law. In addition, your activities of roof replacement and exterior maintenance for the members’ townhomes
benefit the owners. You also limit access to the common areas which you maintain to owners and guests. These
activities cannot be considered maintaining common areas for the use and enjoyment of the general public.

Protest Position

Your provided a copy of an amendment to Article 13 of The Declaration of Covenants. Article 13.2 of this
amendment lists your responsibilities and state that they will be financed through quarterly assessments,
reserves, or special assessments. Your responsibilities are:

• Painting, staining, and weather proofing external surfaces including all utility meters
• EIFS (Exterior Insulated Finish Systems) inspections and routine maintenance
• All exterior caulking maintenance
• Sprinkler system maintenance and repairs
• All lawn care, landscaping, and tree shrub replacement and trimming
• Roof replacement but not maintenance or repairs.
• Driveway and walkway paver maintenance repairs, and replacement
• Snow removal
• All fire alarm systems maintenance, repairs, and replacement
• Water and electric service for the common areas
• Liability insurance
• Fence maintenance, repairs, and replacement

Article 13.3 of your amended Declaration provides that the townhome owners responsibilities consist of:

• All roof repairs other than full replacement
• All deck and patio cleaning, repairs, and replacement including steps, railings, concrete slabs, footings,
  and rock under the deck.
• Gutter and downspout replacements and repairs
• EIFS (Exterior Insulated Finish Systems) repairs and replacements
• Fascia maintenance, repairs, and replacements
• All window maintenance, repairs, and replacements
• Chimney cleaning, repairs, and tuckpointing
• All door maintenance, repairs, and replacements
• Mailbox maintenance, repairs, and replacements
• Front and back stoop maintenance, repairs, and replacement
• All vents (roof and chimney) maintenance, repairs, and replacements
• All exterior sewer and water pipes and their connection to the main line
• All garage light fixtures, repairs, and replacement
• HVAC and Water heating systems
• Concrete sidewalk maintenance, repair, and replacement

You also indicated the following:

• You are a nonprofit common interest community organization of town homes.

• Each home is owned by its owner, which includes full responsibility for exterior and interior
  maintenance. This includes the roof over their townhome and individual home owner’s insurance which
  includes the roof.

• You have a community reserve fund which is being used to replace the roofs.

• Your assets only consist of the community reserve fund which is contained in CD’s; as all roofs are
  replaced over time, which is now in process, this will be depleted. Minimal interest is paid which is the
  sole reason you have requested exemption. The land on which the town homes rest would never be
  divided equally as it is in violation of the architectural intention of your community.

• You also provide EIFS inspections and routine maintenance. You do this because of the common nature
  of multiple units along with the need to sustain civic betterment.

• You promote civic and social betterment because you have chosen to have your central alarm system
  monitored by the city although you had a choice of any number of fire alarm services. While the city
  requires a central fire alarm system, it does not require use of its fire alarm service.

• You have also been an active community contributor because you have participated in development
  projects within the broader community. For example, you have participated in city hearings, and
  discussions on behalf of civic betterment including community rezoning issues, and road access debates.

Your members volunteer their services. Most of your membership fees are used to maintain the outside areas.
You are not a gated community, and the public has access to and frequents your community area. You stated
that all organizations for civic betterment and social welfare have membership or they could not exist. You
further explained that membership provides support, almost always by fees collected or donated to fund their
domicile and in your case, the outside grounds take most your operating budget. You have no recreational
facilities.

Finally, you wrote that your members frequent your community more than guests so you have set guidelines for
the guests to follow in the form of your rules and regulations. Further, membership is part of your ability to
apply these guidelines for civic betterment. You stated that you were not sure why the issue of membership was
raised as an issue.

Our Response to Your Protest Position

Roof replacement and inspections and general maintenance of the town home exterior building is considered a
private interest to the townhome owners, and is considered disqualifying. You were formed to provide
maintenance of individual townhome units including roof replacement. Owners in your development are
required to become members and you charge member/owners dues and assessments based on your estimated
expenses plus an amount for reserves to cover large expenditures. Similarly, you are primarily operated for the
private benefit of members and any benefits to the community are not sufficient to meet the requirement you are
being operated primarily for the common good and general welfare of the people of the community and
therefore you are not exempt under Section 501(c)(4) of the Code.

Conclusion
Because you operate primarily for the benefit of your members and not for the social welfare or the common
good of the community in general, you do not qualify for exemption under Section 501(c)(4) 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.

  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.

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