IRS denies exemption to an association maintaining a road for its members

Plain-English summary

The IRS denied Section 501(c)(3) status to an association whose activity was maintaining a road used by its member property owners. The owners either performed the work or hired a contractor, and every owner had to pay an annual maintenance fee or face a lien on the property. The IRS concluded that maintaining the road relieved the members of an expense they otherwise would bear personally and therefore provided a substantial direct benefit to designated private individuals. Because the association primarily served its members' private interests rather than a public charitable purpose, it failed the operational test. The final letter states that the applicant did not protest the proposed denial within 30 days.

Ruling snapshot

• Question: Does maintaining an access road for member property owners, funded by mandatory owner fees, qualify as a charitable activity under § 501(c)(3)?
• Outcome: Exemption denied
• Key authorities: IRC §§ 170, 501(c)(3), 6104(c), 6110, and 7428; Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 69-175

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

Tax Exempt and Government Entities
PO Box 2508
Cincinnati, OH 45201

Number: 202052034
Release Date: 12/24/2020

UIL: 501.03-00, 501.33-00

Date:
September 29, 2020

Employer ID number:
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

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

number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for
businesses at 800-829-4933.

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
P.O. Box 2508
Cincinnati, OH 45201

Date:
June 22, 2020

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

Contact fax number:

Legend:
U = date 1
V = date 2
W = state
X = road
Y = number
Z = city

UIL:
501.03-00
501.33-00

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, Streamline Application for Recognition of Exemption Under Section 501(c)(3) of
the Internal Revenue Code, on U.

You attest that you were incorporated on V, in the state of W. You attest that you have the necessary organizing
document, that your organizing document limits your purposes to one or more exempt purposes within the
meaning of IRC Section 501(c)(3), that your organizing document does not expressly empower you to engage
in activities, other than an insubstantial part, that are not in furtherance of one or more exempt purposes, and
that your organizing document contains the dissolution provision required under Section 501(c)(3).

You attest that you are organized and operated exclusively to further charitable purposes. You attest that you
have not conducted and will not conduct prohibited activities under IRC Section 501(c)(3). Specifically, you
attest you will:

• Refrain from supporting or opposing candidates in political campaigns in any way

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• Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
  individuals

• Not further non-exempt purposes (such as purposes that benefit private interests) more than
  insubstantially

• Not be organized or operated for the primary purpose of conducting a trade or business that is not related
  to your exempt purpose(s)

• Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you
  made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations
  outlined in Section 501(h)

• Not provide commercial-type insurance as a substantial part of your activities

During review of your Form 1023-EZ, detailed information was requested supplemental to the above
attestations. You provided a statement indicating your activity is the maintenance of a ; X.
Either the Y property owners perform the road maintenance work, or a contractor is hired. All property owners
must pay the annual fee to support the road maintenance or a lien is placed on their property. This work is done
as needed.

You also provided a copy of your road maintenance agreement which lists the property owners at the time it
was adopted, indicates X is a dedicated roadway not maintained by Z County, and outlining owner
responsibilities.

Law

IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net
earnings may inure to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described
in IRC Section 501(c)(3), 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(c)(1) provides 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 purpose 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: A nonprofit organization, formed by parents of pupils attending a private school, that
provides bus transportation for members' children serves a public rather than a public interest and does not
qualify 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

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3

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.

In Old Dominion Box Co. v. United States, 477 F2d. 344 (4th Cir. 1973), cert. denied, 413 U.S. 910 (1973), the
court held that operating for the benefit of private parties constitutes a substantial non-exempt purpose.

Application of law

You are not described under Section 501(c)(3) of the Code or Treas. Reg. Section 1.501(c)(3)-1(a)(1) because
you do not meet the operational test.

Per 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 not operated exclusively for any exempt purpose. Your activities of maintaining X, used
by your members, and collecting fees from them to cover maintenance costs, 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 and in Benedict Ginsberg and Adele W. Ginsberg
in that you were established to fulfill a need of your members. Your activity is to provide regular maintenance
to the road that leads to your members’ homes and collect fees for your operation. Maintaining a road that
would otherwise have to be maintained by your individual members serves private interests, rather than public
purposes. Per Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii), and Old Dominion, an organization is not operated
exclusively for one or more exempt purposes unless it serves a public rather than a private interest.

Conclusion

Based on the above facts and analysis, you are not operated exclusively for purposes described in Section
501(c)(3) of the Code because you further the private interests of your members and do not conduct an activity
that is either charitable or educational. In addition, you fail to meet the organizational test as required 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

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• 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.

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.

Letter 4034 (Rev. 11-2018)
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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