IRS denies social-welfare exemption to a condominium association

Plain-English summary

A condominium association maintained and controlled common property for unit owners, whose membership was automatic and tied to ownership. The building was fenced against public access, and the association stated that none of its services served a broader neighborhood or other public area. The IRS concluded that maintaining common areas produced private benefits for the owners rather than promoting the common good and general welfare of a community. It also found that the association did not meet the standards for exempt homeowners associations because its facilities were restricted to owners and their guests. The IRS denied Section 501(c)(4) exemption, and the decision became final after no timely protest was filed.

Ruling snapshot

• Question: Did the condominium association operate primarily to promote community social welfare under Section 501(c)(4)?
• Outcome: Denied.
• Key authorities: IRC § 501(c)(4); Treas. Reg. § 1.501(c)(4)-1; Rev. Rul. 69-280; Rev. Rul. 74-17; Rev. Rul. 74-99; Rev. Rul. 80-63

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service Date: May 5, 2021
Tax Exempt and Government Entities

IRS PO Box 2508 Employer ID number:
Cincinnati, OH 45201 Form you must file:
Tax years:

Number: 202130015

Person to contact:

Release Date: 7/30/2021 Name:
ID number:
UIL Number: 501.04-00; 501.04-07 Telephone:
Dear [redacted]:

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)(4). 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.

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. 1-2021)
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. 1-2021)
Catalog Number 47632S

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

Cincinnati, OH 45201
Date: March 9, 2021
Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

w dollars = Dollar Amount 501.04-00
X = State 501.04-07
Y = Date

Z = Condominium Name

Dear [redacted]:

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (IRC). Based on the information provided, we determined that you don’t qualify for
exemption under Section 501(c)(4) of the Code. This letter explains the basis for our conclusion. Please keep it
for your records.

Issue

Do you qualify for exemption under IRC Section 501(c)(4)? No, for the reasons stated below.

Facts
You were formed as an X Nonprofit Corporation on Y as Condominium Association.

Your purpose as stated in your articles of incorporation is to provide for the maintenance, preservation, and
control of the common property within the condominium development know as Z. Z was established by the
declaration of covenants, restrictions, easements and liens for condominium and to promote the health, safety
and welfare of the property owners of Z.

The Bylaws state that members shall consist exclusively of all owners and no other person shall be entitled to
membership. A person will automatically become a member of the association at the time they acquire legal
title to the unit. Owners will not be permitted to resign from membership in the association prior to the time at
which the owner transfers title of the unit to another. No membership may be transferred in any way except as
an appurtenance to the transfer of title of the unit to which the membership pertains. Each unit will have the
right to cast [redacted] vote at any meetings of the association. No unit owner may exempt themselves from liability
for their contribution toward the general common expenses and/or limited common expenses by waiver of the

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K
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use or enjoyment of any of the common elements and/or limited common elements or by abandonment of their
unit.

The executive board holds the following powers:

[redacted]

You have stated the condominium has a metal fence to restrict the public from entering the building. That none
of your services serve the neighborhood, subdivision, housing, development or other type of area. The property
the association manages is owned by all the homeowners.

Law
IRC Section 501(c)(4) reads:

(a) Exemption from taxation. An organization described in subsection (c) or
(d) or Section 401(a) shall be exempt from taxation under this subtitle unless
such exemption is denied under Section 502 or 503. The following
organizations are referred to in subsection (a): (4) (A) Civic leagues or
organizations not organized for profit but operated exclusively for the
promotion of social welfare, or local associations of employees, the
membership of which is limited to the employees of a designated person or
persons in a particular municipality, and the net earnings of which are devoted
exclusively to charitable, educational, or recreational purposes. (B)
Subparagraph (A) shall not apply to an entity unless no part of the net earnings
of such entity inures to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(4)-1 reads:

Letter 4034 (Rev. 11-2018)
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3

(a) Civic organizations--(1) In general. A civic league or organization may
be exempt as an organization described in Section 501(c)(4) of the Code if:
(i) It is not organized or operated for profit; and (ii) It is operated exclusively
for the promotion of social welfare. (2) Promotion of social welfare--(i) In
general. An organization is operated exclusively for the promotion of social
welfare if it is primarily engaged in promoting in some way the common good
and general welfare of the people of the community. An organization
embraced within this section is one which is operated primarily for the
purpose of bringing about civic betterments and social improvements.

Rev. Rul. 69-280, 1969-1 C.B. 152, holds that a nonprofit organization formed to provide maintenance of

exterior walls and roofs of members' homes in a development is not exempt from federal income tax under
IRC Section 501(c)(4).

In rev. Rul. 74-17, 1974-1 C.B. 130, the Service stated that the nature and structure of a condominium system of
ownership (rights, duties, privileges, and immunities of the members of an association of unit owners) derive
from, and are established by, statutory and contractual provisions, and are inextricably and compulsorily tied to
the owner’s acquisition and enjoyment of his property in the condominium. In addition, condominium
ownership involves the maintenance and care of many common areas which necessarily constitutes the
provision of private benefits for unit owners.

Revenue Ruling 74-99, 1974-1 C.B. 131, modified Rev. Rul. 72-102 and held that a homeowners association, in
order to qualify for exemption under IRC Section 501(c)(4), must, in addition to otherwise qualifying for
exemption under Section 501(c)(4), satisfy the following requirements: (1) It must engage in activities that
confer benefit on a community comprising a geographical unit which bears a reasonably recognizable
relationship to an area ordinarily identified as a governmental subdivision or a unit or district thereof; (2) It
must not conduct activities directed to the exterior maintenance of private residences; and (3) It owns and
maintains only common areas or facilities such as roadways and parklands, sidewalks and street lights, access
to, or the use and enjoyment of which is extended to members of the general public and is not restricted to
members of the homeowners' association.

In Rev. Rul. 80-63, 1980-1 C.B. 116, the Service iterated the point that a homeowners’ association that does not
represent a community cannot restrict the use of its facilities and be exempt under IRC Section 501(c)(4).

In Flat Top Lake Association v. United States, 868 F.2d 108 (4th Cir. 1989), , the Court held that a
homeowners’ association did not qualify for exemption under IRC Section 501(c)(4) of the Code when it did
not benefit a "community" bearing a recognizable relationship to a governmental unit and when its common
areas or facilities were not for the use and enjoyment of the general public.

Application of law

IRC Section 501(c)(4) of the Code provides that civic leagues or organizations not organized for profit but
operated exclusively for the promotion of social welfare, or local associations of employees, the membership of
which is limited to the employees of a designated person or persons in a particular municipality, and the net
earnings of which are devoted exclusively to charitable, educational, or recreational purposes and no part of the

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net earnings of such entity inures to the benefit of any private shareholder or individual may be exempt from
federal income tax.

Treasury Regulation Section 1.501(c)(4)-1 provides that an organization is operated exclusively for the
promotion of social welfare if it is primarily engaged in promoting in some way the common good and general
welfare of the people of the community. An organization embraced within this section is one which is operated
primarily for the purpose of bringing about civic betterments and social improvements and is not an action
organization as set forth in paragraph (c)(3) of Treas. Reg. Section 1.501(c)(4)-1.

You are not similar to organizations described in IRC Section 501(c)(4) of the Code and Treas. Reg. Section
1.501(c)(4)-1 that promote social welfare. By virtue of the essential nature and structure of a condominium
system of ownership, the rights, duties, privileges, and immunities of the members of an association of unit
owners in a condominium property derive from, and are established by, statutory and contractual provisions and
are inextricably and compulsorily tied to the owner's acquisition and enjoyment of their property in the
condominium. In addition, condominium ownership necessarily involves ownership in common by all
condominium unit owners of a great many common areas, the maintenance and care of which necessarily
constitutes the provision of private benefits for the unit owners. Therefore, you are not primarily engaged in
promoting in some way the common good and general welfare of the people of the community and are not
operated exclusively for the promotion of social welfare.

You are similar to the organization described in Rev. Rul. 69-280, in that you provide for the maintenance of
common areas of the whole building that contains the members units.

You share many of the attributes described of a condominium association in Rev. Rul. 74-17. Your owners have
ownership rights as well as other duties, privileges, and immunities derived from statutory and contractual
provisions. Your activities involving the maintenance and care of many areas which necessarily constitutes the
provision of private benefits for unit owners.

You are not similar to the organization in Revenue Ruling 74-99 where the general public significantly benefited
from the organization’s operations. You restrict the general public from access to your facilities, thereby failing
to confer a benefit onto the community. Where there is failure to serve the community, there is a failure to
promote social welfare, which is a requirement for an organization to be described under IRC Section 501(c)(4)
of the Code. An organization exempt under Section 501(c)(4) must operate "exclusively for the promotion of
social welfare” which is further explained by the Regulations thus: being primarily engaged in promoting in some
way the common good and general welfare of the people of the community. Revenue Ruling 74-99 confirms that
the benefit must be conferred to "the community". Access to the building is restricted to the owners and their
guests and the owners are responsible for the actions of their guests. Unlike the organization in Revenue Ruling
74-99 your activities do not serve the general public.

As you do not represent a community and you restrict the use of your facilities to your member/owners, you are
not described in IRC Section 501(c)(4).

You are similar to the organizations in Flat Top Lake Association, supra and Indian Lake Property Owners
Association, supra, where the general public did not significantly benefit from the activities of the organizations.

The lack of public benefit is closely aligned with those as seen in Flat Top Lake v. U.S.A., supra. You limit the
common facilities to members and their guests. As stated in Flat Top, the organization "operates for the exclusive

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

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benefit of its members and does not serve a ‘community’ as that term relates to the broader concept of social
welfare." The courts denied exemption to these aforementioned organization. Following similar fact patterns,
tax-exempt status should also be denied.

Conclusion

Since the organization's activities are for the private benefit of its members, it cannot be said to be operated
exclusively for the promotion of social welfare. Accordingly, it does not qualify for exemption from Federal
income tax under section 501 (c) (4) 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.

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

6

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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:

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