Condominium association denied social-club exemption

Plain-English summary

A seven-unit condominium association sought exemption as a social club under section 501(c)(7). Membership automatically followed ownership of a unit, and member dues paid for lawn care, snow removal, electricity, garbage service, building maintenance, and reserves for future capital work. The IRS concluded that the association primarily provided residential services rather than pleasure, recreation, or fellowship, and that its meetings did not demonstrate the member commingling required of a tax-exempt social club. After the association did not protest the proposed adverse determination within 30 days, the IRS issued a final denial.

Ruling snapshot

• Question: Did the condominium association qualify for exemption as a social club under section 501(c)(7)?
• Outcome: Denied because its primary activities maintained residential property and provided services to unit owners, without material social commingling.
• Key authorities: IRC §§ 501(c)(7), 6110, and 7428(b)(2); Rev. Rul. 58-589; Rev. Rul. 69-635; Rev. Rul. 75-494

Full text (IRS public release)

Transcriber's note: this document is a six-page scan containing a two-page final adverse determination and an attached four-page proposed adverse determination. All six page images were checked. Obvious OCR errors in bullet symbols, page artifacts, redacted blank spaces, and form layout were corrected by comparison with the images; repeated form footers and standalone page numbers were omitted. Original grammatical and typographical irregularities, including “comingling,” are preserved. The wording is otherwise verbatim.

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201928016
Release Date: 7/12/2019
UIL: 501.00-00, 501.07-00

Date:
April 16, 2019
Employer ID number: [redacted]

Contact person/ID number: [redacted]

Contact telephone number: [redacted]

Form you must file: [redacted]

Tax years: [redacted]

Dear [redacted]:

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(7) 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
P.O. Box 2508
Cincinnati, OH 45201

Date:
February 15, 2019
Employer ID number: [redacted]

Contact person/ID number: [redacted]

Contact telephone number: [redacted]

Contact fax number: [redacted]

Legend:                                      UIL:
B = State                                    501.00-00
C = Date                                     501.07-00

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

Facts

You were incorporated on C under the laws of the state of B. Your Articles of Incorporation state that you are
organized for the “administration and operation of property owned on a condominium basis or by a homeowner
[sic] association.”

Your Bylaws state that each unit owner is a member. The membership terminates upon the sale or other
disposition of the member’s unit, at which time the new owner shall automatically become a member. Members
are required to pay monthly dues, which covers current and future maintenance expenses.

There are three buildings in your condominium complex, with a total of seven units. You indicated that each of
the seven units has an equal ownership interest in the common elements of the condominium complex.

You provided a list of your activities and percentage of time spent on each. Your activities include quarterly
meetings ([redacted]%), annual meetings ([redacted]%), monthly bookkeeping ([redacted]%) and acquiring bids
([redacted]%).

The meetings you hold address the homeowners’ concerns. These concerns include, but are not limited to,
lot/lawn maintenance, snow removal, and building repairs/maintenance. Unit owners share ideas involving any
maintenance or budgetary expense issues.

The monthly unit owner dues are used for current expenses with [redacted] percent of the dues each year accruing for
any future major capital expenditures. The Treasurer and/or President pay monthly expenses and track monthly
income of each unit owner’s association dues.

Your revenue comes from the unit owners’ monthly dues. Your current expenditures include lot/lawn care,
snow removal, electricity, and garbage. Future expenses include major capital improvements, such as building
repairs and maintenance.

Law

Section 501(c)(7) of the Code provides for the exemption from federal income tax of 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 Ruling 58-589, 1958-2 CB 266, sets forth the criteria for exemption under Section 501(c)(7) of the
Code and provides that a club must have a membership of individuals, personal contacts, and fellowship. A
commingling of members must play a material part in the activities of the organization.

Rev. Rul. 69-635, 1969-2 CB 126, holds that an automobile club whose principal activity is rendering
automobile services to its members but has no significant social activities, does not qualify for exemption under
Section 501(c)(7) of the Code. The rendition of automobile services was not in the nature of pleasure and
recreation within the meaning of Section 501(c)(7) and commingling of members did not play a material part in
the activities of the organization.

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.

Application of law

Your primary activity is coordinating and providing homeowners with lot/lawn maintenance, snow removal,
building repairs, and maintenance. A social club is not organized for exempt purposes if it provides services to
members rather than social activities. You are not operating for pleasure, recreation, and other non-profitable
purposes, precluding you from exemption under Section 501(c)(7) of the Code.

To be operated for the purposes described in Section 501(c)(7) of the Code, an organization must promote
fellowship as a social club. A social club is generally denoted as having membership and personal contact,
comingling, fellowship, and the sharing of interests and goals. Therefore, the commingling of the members
must play a material part in the life of a tax-exempt social club, as described in Rev. Rul. 58-589 and 69-635. In
your case, membership is automatic based on ownership in a condominium unit in your development. It is not
evident that your meetings promote fellowship, comingling, or personal contact between members.
Accordingly, you do not qualify for exemption under Section 501(c)(7).

As stated in Rev. Rul. 75-494, an organization that maintains residential property and administers covenants for
preserving the architecture and appearance of a housing development may not qualify under Section 501(c)(7)
of the Code. Since your primary objective is to oversee maintenance and provide adequate reserves for repair
and replacements of the elements of the property, you do not qualify for exemption under Section 501(c)(7).

Conclusion
Based on the information provided, we conclude that you are not organized or operated for pleasure, recreation,
or other non-profitable purposes and there is no commingling of your members. Accordingly, you do not
qualify for recognition of exemption under Section 501(c)(7) 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,

Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892