Homeowners association denied section 501(c)(3) status

Plain-English summary

A small homeowners association collected monthly fees from four members and used the pooled funds for property insurance and gardening. Its submitted articles bore a different name, did not establish that it was legally formed, authorized any lawful activity under the state mutual-benefit-corporation law, and stated a purpose of providing services and facilities to owners in a particular development. The IRS concluded that the association failed both the organizational and operational tests because it was organized and operated for the private benefit of its members. It therefore denied exemption under section 501(c)(3).

Ruling snapshot

• Question: Does the homeowners association qualify as an organization described in section 501(c)(3)?
• Outcome: denied, because it failed the organizational and operational tests and served substantial private interests
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

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

Date: May 20, 2019

Number: 201933013                         Employer ID number:
Release Date: 8/16/2019

                                          Contact person/ID number:
                                          Contact telephone number:

                                          Form you must file:

                                          Tax years:

UIL Number: 501.30-30

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: March 13, 2019

Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend:                                   UIL:

B = Date                                  501.30-30
C = State

D = Location

E = City

F = Date

x dollars = Amount

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 Section 501(c)(3) of the Code? No, for the reasons stated below.

Facts

You applied for exempt status by filing Form 1023 requesting exemption under Section 501(c)(3) of the Code.
Previously, you were never recognized for exemption but had filed Form 990’s. You were subsequently
revoked for failure to file Form 990 for 3 consecutive years as of B.

You submitted Articles of Incorporation that state:

• You are a nonprofit mutual benefit corporation organized pursuant to the Nonprofit Mutual Benefit
Corporation Law of the State of C. The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the Nonprofit Mutual Benefit Corporation
Law.

• Your specific primary purpose is to provide community services and facilities, or contract for the
provision thereof, for the general use, benefit and welfare of the owners of D situated within that
certain real property in the city of E.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

2

The Articles of Incorporation also have a different name from yours and there is no indication they were filed
with C. However, you stated they were filed on F.

Your activities consist of operating a home owners association for members. You have members who each
pay a monthly fee of x dollars per dwelling. Your expenses consist of property insurance and gardening
expenses. You have a volunteer manager who is responsible for collecting the fees and ensuring your
expenses are paid.

Law

Section 501(c)(3) of the Internal Revenue Code provides that corporations may be exempt from tax if they are
organized and operated exclusively for charitable or educational purposes and no part of their net earnings
inures to the benefit of any private shareholder or individual.

Treas. Reg. 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
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 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(c)(1) states that in order to meet the operational test, 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 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 exempt organization must serve a public rather than
a private interest.

Application of Law:
You are not as described in Section 501(c)(3) of the Code because you are not exclusively organized and operated
for charitable or educational purposes.

You are not as described in Treas. Reg Section 1.501(c)(3)-1(a)(1) because you fail both the organizational and
operational tests.

You do not meet the organizational test described in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i). For example,
you have not shown that you are a legally formed entity. In addition, even if you were a legally formed entity,
your Articles of Incorporation state you are organized to provide community services and facilities, or contract
for the provision thereof, for the general use, benefit and welfare of the owners of D situated within that certain
real property in the city of E. This purpose indicates you are organized for private purposes.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

You are not described in Treas. Reg. Section 1.501(c)(3)-1(c)(1). Your members pay monthly fees to you.
These dues are pooled for the purpose of paying you for insurance and gardening fees that are for your four
members’ sole benefit. This precludes you from exemption because you have a substantial nonexempt private
purpose.

You are not described in Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) because you are a membership organization
operating for the mutual benefit of members. For example, you pool members’ resources to pay property insurance
and gardening. This demonstrates you are operating for substantial private interests, which precludes you from
qualifying under Section 501(c)(3) of the Code.

Conclusion

You do not qualify for exemption under Section 501(c)(3) of the Internal Revenue Code, because you do not
meet the organizational and operational tests. You are not organized and operated exclusively for an exempt
purpose. You are operated for the private purpose of benefiting your members.

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.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

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 Decision 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:                                  Street address for delivery service:
Internal Revenue Service                    Internal Revenue Service

EO Determinations Quality Assurance         EO Determinations Quality Assurance
Mail Stop 6403                              550 Main Street, Mail Stop 6403

P.O. Box 2508                               Cincinnati, OH 45202

Cincinnati, OH 45201

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. 11-2018)
Catalog Number 47628K