Neighborhood mutual-benefit corporation denied 501(c)(3) status

Plain-English summary

A group of homeowners incorporated to fight the expansion of a commercial storage facility they say was built next to their subdivision without proper zoning or permits. They applied for 501(c)(3) charitable status using the short Form 1023-EZ. When the IRS looked closer, it found the group was set up as a mutual benefit corporation whose stated purpose is to represent and assist the subdivision's homeowners in resisting environmental degradation and over-development, and that nearly all its money comes from three board members who all live in the neighborhood. The IRS ruled the group qualifies neither as organized nor as operated exclusively for charitable purposes: its governing document is broader than 501(c)(3) allows, and its activities (lawsuits and legal defense to protect the neighborhood and its property values) serve the private interests of local residents rather than the public. Because the group did not protest within 30 days, the proposed denial became final. Contributions to the group are not tax-deductible, and it must file regular income tax returns. The case matters because it shows the line the IRS draws between charities that maintain public property (which can qualify) and neighborhood groups that protect their own members' interests (which cannot).

Ruling snapshot

• Question: Does a neighborhood mutual-benefit corporation formed to fight a nearby development qualify for exemption under Section 501(c)(3)?
• Outcome: denied (final adverse determination; no protest filed)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 69-175; Rev. Rul. 75-286; Rev. Rul. 78-85; Ginsberg v. Commissioner, 46 T.C. 47 (1966)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
IRS P.O. Box 2508

Cincinnati, OH 45201

Number: 202033006
Release Date: 8/14/2020

UIL Number: 501.00-00, 501.03-05,
501.03-30, 501.33-00, 501.35-00

Date:
May 19, 2020

Employer ID number:
Contact person/ID number:

Contact telephone number:

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 4034, Proposed Adverse Determination Under IRC Section 501(a)

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
P.O. Box 2508
IRS Cincinnati, OH 45201
Date:
March 23, 2020

Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = State 501.00-00
C = Date 501.03-05
D = Name 501.03-30
E = Street 501.33-00
F = Business : 501.35-00
G = Number

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

Facts

You submitted Form 1023-EZ seeking exemption under IRC Section 501(c)(3). You attested that you were
formed as a corporation on C in the state of B. Your application described your mission or most significant
activities as “to benefit the homeowners in the community of D Village” in a specific city in B.

You attest to have the necessary organizing document limiting your purposes to one or more exempt purposes
within the meaning of IRC Section 501(c)(3). You also attest your organizing document does not empower you
to engage, other than insubstantially, in activities that are not in furtherance of one or more exempt purposes.
You attest your organizing document contains the dissolution provision required under Section 501(c)(3) and
the provisions required (if necessary) by Section 508(e). You attest to be organized and operated exclusively to
further charitable purposes and you have not and will not conduct prohibited activities under Section 501(c)(3).

During review of your Form 1023-EZ, detailed information regarding your activities was requested
supplemental to the above attestations. We shared with you the Articles of Incorporation from the state of B
which confirms that you were formed on C. However, it shows that you were formed as a mutual benefit
corporation. In addition, your Articles of Incorporation state that your purpose is to represent and assist

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

2

homeowners in the D subdivision to resist environmental degradation and over-development that negatively
impacts the D subdivision.

We asked for more details regarding your activities. You explained that you were formed in response to a
developer expanding a storage facility situated under the powerlines directly adjacent to E, which is a street
situated in the D subdivision. The storage facility, F, is a commercial facility that you say is located in a
residential zone without proper zoning, without proper permits, and with disregard to county laws and
guidelines. The state of B has fined F for destroying wetlands.

F is operational and serves hundreds of tenants. The only access to F is through E. You have filed complaints
and entered into lawsuits against the County and F in an attempt to stop the project’s expansion of an additional
G acres. So far, your efforts have been unsuccessful, but you intend to exhaust all legal outlets. You said that
your activities occur in response to the legal proceedings. This has been very regular as there are two lawsuits
and many legal actions.

You have raised some funds from the general public, but a vast majority of your funding comes from your three
board members, who write personal checks to cover all costs. All of the governing body members are residents

of the D subdivision. Costs incurred include document preparation for court and legal defense attorney fees. No
fees are charged to any of the residents of D or to the neighbors residing on E.

Law

IRC Section 501(c)(3) provides, in part, for the exemption from federal income tax to organizations organized
and operated exclusively for charitable, religious or educational purposes, where 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) states that in order to qualify under IRC Section 501(c)(3), an
organization must be both organized and operated exclusively for one or more exempt purposes. If an
organization fails to meet either the organizational or operational test, it is not exempt.

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(iv) states that in no case shall an organization be considered to be
organized exclusively for one, or more exempt purposes, if, by the terms of its articles, the purposes for which
such organization is created are broader than the purposes specified in IRC Section 501(c)(3).

Treas. Reg. Section 1.501(c)(3)-1(c)(1) states that 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 IRC Section 501(c)(3). 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) states that an organization is not operated exclusively for one or
more exempt purposes unless it serves a public rather than a private interest. It must not be operated for the
benefit of designated individuals or the persons who created it.

Revenue Ruling 69-175, 1969-1 C.B. 149, describes an organization that was formed by the parents of pupils
attending a private school. All control over the organization rested in the parents. The organization provided bus
transportation to and from the school for those children whose parents belonged to the organization. The
organization's income approximately equaled the expenses involved in its operations. The ruling found that

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

3

when a group of individuals associate to provide a cooperative service for themselves, they are serving a private
interest. Thus, the organization served a private benefit rather than a public interest. Accordingly, it is not
exempt from federal income tax under IRC Section 501(c)(3).

Rev. Rul. 75-286, 1975-2 C.B. 210, ruled on an organization formed by the residents of a city block to preserve
and beautify that block, to improve all public facilities within the block, and to prevent physical deterioration of
the block. The restricted nature of its membership and the limited area in which its improvements were made,
indicate that the organization was organized and operated to serve the private interests of its members.
Accordingly, although the organization was primarily engaged in promoting the general welfare of the
community, it was not organized and operated exclusively for charitable purposes and did not qualify for
exemption from federal income tax under IRC Section 501(c)(3).

Rev. Rul. 78-85, 1978-1 C.B. 150, held that a nonprofit organization with membership open to the general
public that was formed by residents of a city to help preserve, beautify, and maintain a public park located in the
city and whose support is derived from membership dues and contributions from the general public is operated
exclusively for charitable purposes and qualifies for exemption under IRC Section 501(c)(3).

In Benedict Ginsberg and Adele W. Ginsberg v. Commissioner, 46 T.C. 47, 1966, exemption was retroactively
revoked from a corporation organized to conduct the dredging of certain waterways. It was held that the
corporation was organized and operated primarily for the benefit of those persons owning property adjacent to
the waterways dredged rather than for public or charitable purposes.

Application of law

As explained in Treas. Reg. Section 1.501(c)(3)-1(a)(1), to be exempt as an organization described in IRC
Section 501(c)(3), you must be both organized and operated exclusively for one or more of the purposes
specified in such section. You are neither organized nor operated exclusively for exempt purposes.

To demonstrate it is organized exclusively for exempt purposes, thus satisfying the organizational test, an
organization must have a valid purpose clause as described in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(iv). Your
Articles of Incorporation state that your purpose is to represent and assist homeowners in the D subdivision to
resist environmental degradation and over development that negatively impacts the D subdivision. This does not
exclusively further charitable or educational purposes as described in IRC Section 501(c)(3) or corresponding
regulations. Additionally, you are organized as a mutual benefit corporation, which means that you operate
specifically for the benefit of your members. For these reasons, you do not meet the organizational test and do
not qualify for exemption under Section 501(c)(3).

You are formed to represent and legally assist D subdivision homeowners in protecting and preserving their
neighborhood. This provides a benefit to the D subdivision homeowners. Therefore, you are not operated
exclusively for charitable and educational purposes under IRC Section 1.501(c)(3)-1(c)(1).

Your governing body consists of persons residing in the D neighborhood and your activities are primarily going
to benefit the residents of the D neighborhood. Your net earnings are set to substantially benefit private
individuals, which precludes exemption under Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).

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

4

The group of parents described in Rev. Rul. 69-175 provided a cooperative service for themselves and thus
served their own private interests. Like that organization, you were formed to provide benefits to the
homeowners of the D neighborhood.

You are dissimilar to the organization described in Rev. Rul. 78-85 because you not engaged in preserving or
maintaining public property. Rather, you are like the organizations described in Rev. Rul. 75-286 and Benedict
Ginsberg and Adele W. Ginsberg in that your activities serve private, rather than public, interests. Protecting the
property values for the residents of the D neighborhood serves a private interest and precludes exemption under
IRC Section 501(c)(3).

Conclusion

Based on the above facts and analysis, you are neither organized nor operated exclusively for purposes
described in IRC Section 501(c)(3). You fail the organizational test because you are formed as a mutual benefit
corporation and your purposes are not limited to those described in Section 501(c)(3). You fail the operational
test because you are formed for the private benefit of the residents of the D neighborhood. Accordingly, you are
not exempt under Section 501(c)(3).

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

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

5

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 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