Property-owners association denied charity status

Plain-English summary

A membership organization of property owners applied for recognition under § 501(c)(3). Its stated purposes included furthering owners' interests, enforcing property restrictions, managing common areas and facilities, and providing supplemental municipal services. The IRS found that its articles did not limit its purposes to charitable purposes and allowed assets at dissolution to pass to another nonprofit with a similar purpose rather than requiring an exempt destination. The organization also operated by collecting member dues and maintaining the subdivision's common areas, which substantially benefited the lot owners rather than the public. It therefore failed both the organizational and operational tests and served private interests. The IRS denied exemption, and the determination became final when the organization did not protest within 30 days.

Ruling snapshot

• Question: Does a property-owners association that maintains subdivision common areas qualify as a § 501(c)(3) charity?
• Outcome: Denied.
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 75-286.

Full text (IRS public release)

~ Internal Revenue Service
Department of the Treasury Date:
f_m 01/30/2025
Tax Exempt and Government Entities Employer ID number:
IRS PO Box 2508
Cincinnati, OH 45201
Person to contact:

   Release Number:202517019
   Release Date: 4/25/2025
   UIL Code: 501.03-00,
   501.03-33, 501.33-00

Dear

This letter is our final determination that you don't qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 50l(a) as an organization described in IRC Section 50l(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 50l(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 Letter 437, Notice oflntention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 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. 11-2021)
                                                                                     Catalog Number 47632S
                   Sincerely,


                   Stephen A. Martin
                   Director, Exempt Organizations
                   Rulings and Agreements

Enclosures:
Letter 437
Redacted Letter 4034
Redacted Letter 4038

                                               Letter 4038 (Rev. 11-2021)
                                               Catalog Number 47632S
       Department of the Treasury

fit
IRS
Internal Revenue Service
PO Box 2508
Cincinnati, OH 45201

                                                                            Date: November 27, 2024

                                                                            Employer ID number:


                                                                            Person to contact:
                                                                             Name:
                                                                             ID number:
                                                                             Telephone:
                                                                             Fax:

Legend: UIL:
B = State 501.03-00
C = Date 501.03-33
D = Subdivision 501.33-00

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 50l(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 as a corporation in B on C. Your stated corporate purpose is to perform all obligations and
duties of the Association and provide an entity for the furtherance of interests of owners of property. The
dissolution clause in your Articles of Incorporation states that if you dissolve, your net assets shall be dedicated
to a public body or conveyed to another nonprofit organization.

Your Articles of Incorporation also indicate you have the power to:
Manage, control, operate, maintain, repair, and improve the common areas and facilities, and any
property subsequently acquired by you, or any property owned by another for which you by rule,
regulation, declaration, or contract, have a right or duty to provide such services;
R Enforce covenants, conditions or restrictions affecting any property to the extent you may be authorized
to do so under the Declaration;
C Engage in activities which will actively foster, promote, and advance the common interests of all
Owners of property subject to the Declaration;
Provide any and all supplemental municipal services to members as may be necessary or desirable.

You are a membership organization consisting of lot owners in D. Membership is connected to and may not
be separated from the ownership of any lot.

                                                                                     Letter 4034 (Rev. 01-2021)
                                                                                     Catalog Number 47628K
                                                      2

Your activities consist of furthering the interests of D lot owners through collecting dues from members and
managing and maintaining the common areas in D. Membership dues fund your activities.

Law
IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and
operated exclusively for charitable, educational, religious, 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 l.50l(c)(3)-l(a)(l) 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)-l(b)(l)(i) states an organization is organized exclusively for one or more
exempt purposes only if its articles of organization limit the purpose of such organization to one or more
exempt purposes. The organization's purposes, as stated in its articles, may be as broad as, or more specific
than, the purposes stated in IRC Section 501 (c)(3).

Treas. Reg. Section 1.501(c)(3)-l(b)(4) requires an organization's assets be dedicated to an exempt purpose
upon dissolution. Such assets would, by reason of a provision in the organization's articles or by operation of
law, be distributed for one or more exempt purposes, or to the federal government, or to a State or local
government, for a public purpose, or would be distributed by a court to another organization to be used in such
manner as in the judgment of the court will best accomplish the general purposes for which the dissolved
organization.

Treas. Reg. Section l.501(c)(3)-l(c)(l) states 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 50l(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 1.50l(c)(3)-l(d)(l)(ii) provides that an organization is not organized or operated
exclusively for one or more exempt purposes unless it serves a public rather than a private interest. To meet the
requirement of this subsection, the burden of proof is on the organization to show that it is not organized or
operated for the benefit of private interests, such as designated individuals, the creator or his family,
shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.

Rev. Rul. 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 benefiting the community as a whole as well as enhancing the members' property rights, will not qualify
for exemption under IRC Section 50l(c)(3) because the organization was organized and operated for the benefit
of private interests by enhancing the value of members' property.

Application of law
IRC Section 50l(c)(3) sets forth two main tests for an organization to be recognized as exempt. An organization
must be both organized and operated exclusively for purposes described in Section 501(c)(3) as specified in
Treas. Reg. Section 1.501(c)(3)-l(a)(l). You fail both tests.

                                                                                   Letter 4034 {Rev. 01-2021)
                                                                                   Catalog Number 47628K
                                                     3

You do not meet the organizational test.
Your Articles oflncorporation state your purpose is to further the interests of owners of property. Because your
Articles ofincorporation do not limit your purposes to those described in Treas. Reg. Section l.501(c)(3)-
l(b)(l)(i), you fail the organizational test under IRC Section 50l(c)(3).

In addition, your Articles of Incorporation allow for the conveyance of your assets upon dissolution to another
nonprofit organization with a similar purpose as you. However, per Treas. Reg. Section 1.501 (c)(3)-1 (b )(4) any
remaining assets must be dedicated exclusively for purposes described in IRC Section 501(c)(3). Therefore,
this also causes you to fail the organizational test under IRC Section 50l(c)(3).

You do not meet the operational test.
To satisfy the IRC Section 50l(c)(3) operational test, an organization must establish that it is operated
exclusively for one or more exempt purposes, as stated in Treas. Reg. Section 1.501(c)(3)-l(c)(l). The
information you submitted does not show that you are operated exclusively for one or more exempt purposes.

You are serving private interests.
Treas. Reg. Section 1.501 (c)(3 )-1 (d)(l )(ii) provides that an organization is not organized or operated
exclusively for one or more exempt purpose unless it serves a public rather than a private interest. Your
activities consist of collecting dues from members who are lot owners in D in order to manage and maintain the
common areas in D. You have the power to manage, control, operate, maintain, repair, and improve the
common areas and facilities, and any property subsequently acquired by you, or any property owned by another
for which you by rule, regulation, declaration, or contract, have a right or duty to provide such services. These
facts show you are serving a private interest rather than a public interest which is a substantial nonexempt
purpose. Because you are serving a substantial nonexempt purpose, you are not operated exclusively for exempt
purposes as described in Treas. Reg. Section 1.50l(c)(3)-l(c)(l).

Like the organization in Rev. Rul. 75-286, your activities substantially benefit your members who are lot
owners in D. This illustrates you are serving the private interests of your members rather than public interests
which precludes you from qualifying for exemption under IRC Section 50l(c)(3).

Conclusion
You do not meet the organizational test because your organizing document does not limit your purposes to
those in IRC Section 501 (c)(3) or dedicate remaining assets upon dissolution to one or more exempt purposes
described in Section 501 (c)(3 ). You also do not meet the operational test because you are serving the private
interests of your members. This is a substantial nonexempt purpose. Accordingly, you do not qualify for
exemption under Section 501(c)(3).

Ifyou 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:

                                                                                  Letter 4034 (Rev. 01-2021)
                                                                                  Catalog Number 47628K
                                                      4

• Your name, address, employer identification number (BIN), 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.

We '11 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 '11 send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Determination 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
   PO 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

                                                                                    Letter 4034 (Rev. 01-2021)
                                                                                    Catalog Number 47628K
                                                    5

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, T AS
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. 01-2021)
                                                                                 Catalog Number 47628K