202034011: IRS denies 501(c)(3) status to a gated-subdivision homeowners association because it serves private, not public, interests

Plain-English summary

A homeowners association for a residential subdivision applied for 501(c)(3) charitable status. It collects yearly dues, enforces covenants, and maintains commonly owned property, including a marina and tennis court kept behind a locked gate open only to members. The IRS denied exemption. To qualify under 501(c)(3), an organization must operate exclusively for public, not private, benefit. Maintaining member-only recreation areas and common property that owners would otherwise have to maintain themselves serves the private interests of the subdivision's residents. Citing rulings that distinguish public parks and lakes (exempt) from member-only or property-owner benefits (not exempt), the IRS issued a proposed adverse determination; with no protest filed in 30 days, it became final. Donors cannot deduct contributions, and the association must file income tax returns.

Ruling snapshot

• Question: Does a subdivision homeowners association that maintains member-only common areas qualify for 501(c)(3) exemption?
• Outcome: Denied (final adverse determination, no protest filed)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), (d)(1)(ii); Rev. Rul. 69-175; Rev. Rul. 70-186; 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
Tax Exempt and Government Entities
P.O. Box 2508
Cincinnati, OH 45201

Number: 202034011
Release Date: 8/21/2020
Date:
UIL Number: 501.03-00, 501.03-30, 501.03-31

Form you must file:
Tax years:
Person to contact:
Name:
ID number:
Telephone:

Dear

This letter is our final determination that you don't qualify for exemption from federal income tax
under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section
501(c)(3). 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 IRC Section 501(c)(3), donors
generally can't deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c),
by sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from
the date of this letter unless you request an extension of time to file. For further instructions,
forms, and information, visit www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter
available for public inspection after deleting certain identifying information, as required by IRC
Section 6110. 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 call the contact person shown above. If you have
questions about your federal income tax status and responsibilities, call our customer service
number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for
businesses at 800-829-4933.

Letter 4038 (Rev. 5-2020)
Catalog Number 47632S

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 5-2020)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date:
March 5, 2020

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

Contact fax number:

Legend: UIL:

B= state 501.03-00
C = date 501.03-30
D = location 501.03-31
e= 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 were formed in the state of B on C. You did not provide your Articles of Incorporation with your

application, but provided an attestation that your Articles of Incorporation contain a purpose clause limiting
your purposes to one or more purposes described in IRC Section 501(c)(3) as well as a dissolution clause that
permanently dedicates your assets for Section 501(c)(3) purposes. You did submit a copy of your declaration of
covenants and restrictions.

You have stated that you are a homeowners association, whose members are the homeowners of the D
residential subdivision consisting of e homes. You collect yearly dues, enforce covenants and pay maintenance
on mutually owned property. This property includes a marina, tennis court, and entrance area with a sign, all of
which are maintained by a collection of annual membership dues. You indicated that the marina and tennis
court, your recreation area, are located behind a locked gate which only your members have access to by key.

You provided a map of the neighborhood and stated that the entry to the neighborhood is not gated. You also
provided a photograph of the gated entrance to the marina and tennis court area of the neighborhood which has

signs indicating that the area is for "Members Only".

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

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, scientific, 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 for an organization to be exempt under IRC
Section 501(c)(3), it 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 or operational test, it is not exempt.

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 organized and operated exclusively
for charitable purposes unless it serves a public rather than a private interest. To meet this requirement that it
serve a public purpose, an organization must establish that it is not organized or operated for the benefit of

private interests.

Revenue Ruling 69-175, 1969-1 C.B.149 describes an organization which was formed by parents of pupils
attending a private school. The organization provided bus transportation to and from the school for those
children whose parents belong to the organization. The organization did not qualify for exemption under IRC
Section 501(c)(3) because it served a private rather than public interest.

Revenue Ruling 70-186, 1970-1 C.B. 128 held that a nonprofit organization formed to preserve and improve a
lake used extensively as a public recreational facility qualifies for exemption under IRC Section 501(c)(3).

Revenue Ruling 75-286, 1975-2 C.B. 210 held that a nonprofit organization with membership limited to the
residents and business operators within a city block and formed to preserve and beautify the public areas in the
block, thereby benefitting the community as a whole as well as enhancing members' property rights, will not
qualify for exemption under IRC Section 501(c)(3).

Revenue Ruling 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
You are not described in IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) because you are not

operated exclusively for charitable purposes.

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

You are not organized and operated exclusively for any IRC Section 501(c)(3) exempt purpose. Your activities
of collecting funds to maintain areas used by the members of your association provides direct benefits to these
individuals that are more than insubstantial in nature. For this reason, you are not operating exclusively for
exempt purposes as described in Treas. Reg. Section 1.501(c)(3)-1(c)(1). As a result, you do not satisfy the
operational test requirements to be recognized as exempt under Section 501(c)(3) of the Code. This precludes
you from exemption under Section 501(c)(3).

You are similar to the organization in Revenue Ruling 69-175 in that you were formed to provide benefits to
your members. Your activity is to provide regular maintenance for common areas used in private by your
members and collect monthly fees for your operations. Maintaining property that would otherwise have to be
maintained by your individual members serves private interests. 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.

You are dissimilar to the organizations described in Revenue Rulings 70-186 and 78-85 in the sense that you are
not engaged in preserving or maintaining public property. You are similar to the organizations described in
Revenue Ruling 75-286 and in Benedict Ginsberg and Adele W. Ginsberg in that your activities, more
specifically providing maintenance of privately used land for your members, serve private rather than public
interests. Your activity is not useful and beneficial to the general public as a whole.

Conclusion
Based on the information submitted, you are not organized and operated exclusively for exempt purposes within

the meaning of IRC Section 501(c)(3). Rather, you are organized and operated primarily for the private interests
of your members, homeowners of the D residential subdivision, which is a substantial non-exempt purpose.
Accordingly, you do not qualify for exemption 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

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

• 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.

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

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

5

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