Homeowners' club loses exemption for enforcing covenants

Plain-English summary

A homeowners' social club operated a swimming pool, recreation area, and other facilities for members, their families, and guests. Its articles and bylaws also gave it authority to enforce the development's restrictive covenants, including collection of membership fees, and it planned to continue doing so. The IRS explained that Revenue Ruling 75-494 bars section 501(c)(7) exemption when a homeowners' club enforces restrictive covenants. The organization's officers agreed that it no longer wished to remain exempt. The IRS revoked its exemption effective January 1 of a redacted year and required Form 1120 filings for that year and later years.

Ruling snapshot

• Question: Does a homeowners' social club remain exempt under section 501(c)(7) while enforcing the development's restrictive covenants?
• Outcome: Revocation effective January 1, 20xx.
• Key authorities: IRC §§ 501(c)(7) and 7428; Treas. Reg. § 1.501(c)(7)-1; Rev. Rul. 69-281; Rev. Rul. 75-494

Full text (IRS public release)

[Redaction note: the IRS release blanks the organization's identity, state, development, facilities, taxpayer and employee identification numbers, contact information, form and tax years, response dates, and other identifying details.]

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201806012
Release Date: 2/9/2018
UIL Code: 501.07-00

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920
Dallas, TX 75242

Date: SEP 8 2017

Person to Contact:
Identification Number:
Contact Telephone Number:
In Reply Refer to:

LAST DAY FOR FILING A PETITION
WITH THE TAX COURT:

CERTIFIED MAIL -Return Receipt Requested

Dear

This is a Final Adverse Determination Letter as to your exempt status under Section 501(c)(7)
of the Internal Revenue Code. Your exemption from Federal income tax under section
501(c)(7) of the Code is hereby revoked effective January 1, 20xx.

Our adverse determination as to your exempt status was made for the following reason(s):

You have not demonstrated that you are operated exclusively for exempt purposes within the
meaning of Internal Revenue Code § 501(c)(7) and Treasury Regulations 1.501(c)(7)-1.
Exempt clubs are organized for pleasure, recreation, and other non-profitable purposes. The
exemption extends to social and recreation clubs that are supported solely by membership

fees, dues; and assessments.

Enforcing restrictive covenants does not fulfill a non-profitable purpose for a social and
recreational club as described in under IRC section 501(c)(7).

You are required to file Federal income tax returns on Form 1120. These returns should be filed
With the appropriate Service Center for the year ending December 31, 20xx, and for all years

thereafter.

Processing of income tax returns and assessments of any taxes due will not be delayed if you file
a petition for declaratory judgment under section 7428 of the Internal Revenue Code.

If you decide to contest this determination in court, you must initiate a suit for declaratory
Judgment in the United States Tax Court, the United States Claim Court or the District

Court of the United States for the District of Columbia before the 91st day after the date this
Determination was mailed to you. Contact the clerk of the appropriate court for the rules for
Initiating suits for declaratory judgment.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help
protect you taxpayer rights. We 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 our
assistance, which is always free, we will do everything possible to help you. Visit
taxpayeradvocate.irs.gov or call 1-877-777-4778.

If you have any questions, please contact the person whose name and telephone number are shown
in the heading of this letter.

Sincerely yours,

Maria Hooke
Director, EO Examinations

Enclosure: Publication 892

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

Date: March 21, 2017
Taxpayer Identification Number:
Form:

Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager’s Name/ID Number:

Manager’s Contact Number:

Response due date:

Certified Mail — Return Receipt Requested
Dear [illegible]:

Why you are receiving this letter

We propose to revoke your status as an organization described in section 501(c)(7) of the
Internal Revenue Code (Code). Enclosed is our report of examination explaining the proposed
action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed
Action — Section 7428, and return it to the contact person at the address listed above (unless
you have already provided us a signed Form 6018). We'll issue a final revocation letter
determining that you aren't an organization described in section 501(c)(3).

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 revocation letter. Failing to respond to this proposal will adversely impact your legal
standing to seek a declaratory judgment because you failed to exhaust your administrative
remedies.

Effect of revocation status
If you receive a final revocation letter, you'll be required to file federal income tax returns for the
tax year(s) shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation

If you disagree with our proposed revocation, you may request a meeting or telephone
conference with the supervisor of the IRS contact identified in the heading of this letter. You also
may file a protest with the IRS Appeals office by submitting a written request to the contact
person at the address listed above within 30 calendar days from the date of this letter.

The Appeals office is independent of the Exempt Organizations division and resolves most
disputes informally.

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

a

For your protest to be valid, it must contain certain specific information including a statement of
the facts, the applicable law, and arguments in support of your position. For specific information
needed for a valid protest, please refer to page one of the enclosed Publication 892, How to
Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498,
The Examination Process. Publication 3498 also includes information on your rights as a
taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in
Publication 3498 generally doesn’t apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication

892. Please contact the individual identified on the first page of this letter if you are considering
     requesting technical advice. If we issue a determination letter to you based on a technical
     advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no
     further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn’t a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by
law) to file a petition in a United States court. They can, however, see that a tax matter that
hasn't been resolved through normal channels gets prompt and proper handling. You may call
toll-free 1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may
contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information

If you have any questions, please call the contact person at the telephone number shown in the
heading of this letter. If you write, please provide a telephone number and the most convenient
time to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

Maria Hooke .
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018-A
Publication 892
Publication 3498

2 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer

ISSUE:

Whether
qualifies for exemption under Internal Revenue Code (IRC) section 501(c)(7)?

FACTS:

was incorporated in the state of on October 5, 19xx. received
the exemption under IRC Section 501(c)(7) on October 23, 19xx.

was formed for social and recreational purpose of the homeowners of the

development defined in Article 1 of their Bylaws. operates and
maintains the swimming pool, recreational area, and other related facilities (to be known
as the ), and other recreational and social facilities

for use of members of the corporation, their families and guests.

The membership of is limited to the homeowners of the
development defined in Article 1 of their Bylaws. The homeowners of the
development automatically become members of

Per Articles of Incorporation and Bylaws, has power to enforce CC &R of the
development. Articles of Incorporation (AOI), Article II,
Section 4 states:

To exercise the power vested in this by body by
, a corporation, which said powers are set forth in that certain Amend
Declaration of Conditions, Covenants, Restrictions, Easements and Charges,

dated November 26, 19xx, made by said , and
recorded in the office of the County Recorder of the County of , State
of , on November 29, 19xx.

Bylaws at Article 1, Section 1, Paragraph D states:

Together with any and all other real property which may hereafter through the
operation of conditions, covenants, restrictions, easements, reservations, or charges
pertaining to the same be placed under the jurisdiction of this corporation.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer
The plans to continue enforcing CC & R of the homeowners of the
development.
LAW:

Internal Revenue Code

IRC section 501(c)(7) provides exemption from income taxes for clubs organized for
pleasure, recreation, and other nonprofitable purposes, substantially all of the activities
of which are for such purposes and no part of the net earnings of which inures to the
benefit of any private shareholder.

Revenue Rulings

Rev. Rul. 69-281, 1969-1 C.B. 155, holds that a club whose membership is limited to
homeowners in a housing development and that provides recreational facilities that
afford opportunities for fellowship and social commingling is exempt from Federal
income tax under section 501(c)(7) of the Code. Although the club was incorporated by
a housing developer, it is not controlled by him nor operated as a commercial venture
for his benefit.

Rev. Rul. 75-494, 1975-2 C.B. 214, states that a club providing social and recreational
facilities, whose membership is limited to homeowners of a housing development, will
be precluded from qualifying for exemption under section 501(c)(7) of the Code by
owning and maintaining residential streets, enforcing restrictive covenants, or providing
residential fire and police protection and trash collection service.

GOVERNMENT’S POSITION:

Revenue Ruling 75-494 states that an organization enforcing restrictive covenants does

not qualify for the exemption under IRC Section 501(c)(7). has power, and
enforces CC &R of the development where their members
come from. plans to continue enforcing the CC & R of the

development, which includes enforcement of collection of the membership fee.

Based on the examination, the organization does not qualify for exemption as a social
club described in IRC §501(c)(7).

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer
TAXPAYER’S POSITION:
Per initial interview with the officers, and subsequent telephone discussion,

no longer wishes to be exempt under section 501(c)(7), thus agreeing with the
government position.

CONCLUSION:

The organization does not qualify for exemption from federal income tax under
IRC § 501(c)(7).

The proposed date of the revocation is January 1, 20xx.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -3-