Homeowners association denied social welfare exemption

Plain-English summary

A homeowners association applied for exemption as a social welfare organization under IRC § 501(c)(4). It collected annual dues to insure and maintain common areas, provide utilities, and perform landscaping, tree trimming, irrigation, and fence repairs. Membership was tied to ownership of a limited number of residential lots, and the common areas were restricted to homeowners and their visitors. The IRS concluded that the association primarily provided private benefits to its members, did not serve an area resembling a governmental community, and did not make its common facilities available to the public. It therefore denied exemption, and the final letter states that the adverse determination became final after no timely protest was received.

Ruling snapshot

• Question: Did an association serving only its homeowners and their visitors qualify under IRC § 501(c)(4)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(4); Treas. Reg. § 1.501(c)(4)-1; Rev. Rul. 74-99; Rev. Rul. 80-63; Lake Petersburg Assn. v. Commissioner; Flat Top Lake Association v. United States

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Date: 04/09/2025
Tax Exempt and Government Entities Employer ID number:

IRS PO Box 2508
Cincinnati, OH 45201

Person to contact:

Release Number: 202527014
Release Date: 7/3/2025
UIL Code: 501.04-00, 501.04-07

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)(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.

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 of Intention 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.

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
Internal Revenue Service
IRS PO Box 2508
Cincinnati, OH 45201
Date:

02/06/2025
Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = Date 501.04-00
C = State 501.04-07

D = Number
F = Community

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)(4).
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)(4)? No, for the reasons stated below.

Facts

You are a corporation formed on B under the laws of the state of C. Your Articles of Incorporation state your
purpose is to act as a management body for the preservation, maintenance, improvement and architectural
control of the common area of F. You are a homeowner’s association consisting of D members in F. You
conduct regular landscaping, tree trimming, irrigation repairs and fence repairs for F common areas.

Your covenants, conditions, and restrictions state that you were formed for the purposes of enhancing and
protecting the desirability, value, and attractiveness of F as well as for the purpose of enhancing the quality of
lives for the owners and occupants of F. Your covenants, conditions, and restrictions also state the common area
is owned equally by all homeowners in F.

Your Bylaws state the qualifications for membership as every owner of a residential lot in F shall be your
members and membership is connected to and may not be separated from ownership of any lot. Your
membership cannot be transferred, pledged, or alienated in any way, except upon the sale of the residential lot
to which it is connected, and then only to the purchaser.

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

2

Your revenue comes from yearly home dues which are used pay for insurance and maintenance of the common
areas, and for the electrical and water for common areas. You explained common areas are limited to the use of
homeowners and their visitors.

Law

IRC Section 501(c)(4) provides for the exemption from federal income tax of organizations not organized for
profit but operated exclusively for the promotion of social welfare. Further, exemption 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(a)(1) states a civic league or organization may be exempt as an
organization described in IRC Section 501(c)(4) if it is not organized or operated for profit and it is operated
exclusively for the promotion of social welfare.

Treas. Reg. Section 1.501(c)(4)-1(a)(2)(i) 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.

Revenue Ruling 74-99, 1974-1 C.B. 131, clarifies the circumstances under which a homeowners’ organization
may qualify for exemption under IRC Section 501(c)(4). Several factors lead to the prima facie presumption
that homeowner's associations are essentially and primarily formed and operated for the individual business or
personal benefit of their members, and, as such, do not qualify for exemption under Section 501(c)(4).
However, the ruling goes on to state that a homeowner's association may in certain circumstances overcome the
presumption and qualify for recognition of exemption under Section 501(c)(4) by (1) serving a "community"
which bears a reasonable recognizable relationship to an area ordinarily identified as governmental, (2) it must
not conduct activities directed to the exterior maintenance of private residences, and (3) the common areas or
facilities it owns and maintains must be for the use and enjoyment of the general public.

Rev. Rul. 80-63, 1980-1 C.B. 116, clarifies Rev. Rul. 74-99, and provides answers to specific questions as to
whether the conduct of certain activities will affect the exempt status under IRC Section 501(c)(4) of otherwise
qualifying homeowners’ associations. The ruling states that: 1) the term ‘community’ does not embrace a
minimum area or a certain number of homeowners, 2) a homeowners’ association may not receive an exemption
if it represents an area that is not a community and it restricts the use of its recreational facilities to only
members of the association, 3) an affiliated recreational organization operated totally separate from the
homeowners' association may be exempt so long as there is no benefit flowing back to any member.

In Lake Petersburg Assn. v. Commissioner, 33 T.C.M. (CCH) 259 (1974), the Tax Court held that an
organization formed to construct a lake and develop lakeshore property, including recreational areas was not
exempt under IRC Section 501(c)(4). The reason for this decision was that the organization benefitted its
members only, as the members were the only ones who could enjoy the facilities and the lake environment. The
original public benefit idea was determined to be indirect and remote.

In Flat Top Lake Association v. United States, (1989 4th Circuit), 868 F.2d 108, the Court held that a
homeowners’ association did not qualify for exemption under IRC Section 501(c)(4) when it did not benefit a

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

3

"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

You are not as described in IRC Section 501(c)(4) and Treas. Reg. Section 1.501(c)(4)-1(a)(1) because your
activities do not primarily promote civic betterment or social welfare. Specifically, the facts indicate that you
are operated rather for the private benefit of lot owners in F by paying for insurance, for electrical and for water
usage for the common areas of F. You also do regular landscaping, tree trimming, irrigation repairs and fence
repairs for F common areas.

You do not meet the provisions of Treas. Reg. Section 1.501(c)(4)-1(a)(2)(i) because 1) you have a defined
limited membership consisting of only D homeowners, 2) your membership is required to pay dues and
assessments and 3) your members receive a benefit for said fees. These facts show that you do not promote the
common good and general welfare of the people of the community but operate for the private benefit for a
limited group of individuals.

You are not a “community” as described in Rev. Rul. 74-99 and Rev. Rul. 80-63 because the general public is
not significantly benefitting from your operations. You have a small membership of D. The area you maintain
does not bear a recognizable relationship to an area ordinarily identified as a governmental subdivision. In
addition, your covenants, conditions, and restrictions state that you were formed for the purposes of enhancing
and protecting the desirability, value, and attractiveness of F as well as for the purpose of enhancing the quality
of lives for the owners and occupants of F.

Like the organization in the court case, Lake Petersburg Association, your activities of maintaining the common
areas of F are designed to benefit your members and are for the convenience of your members. Therefore, you
do not meet IRC Section 501(c)(4).

You are similar to the organization described in the court case, Flat Top Lake Association, Your activities
primarily benefit your members rather than the community at large. You are not primarily promoting in some
way the common good and general welfare of the people of a community as Treas. Reg. Sec. 1.501(c)(4)-1
requires and do not qualify for exemption under IRC Section 501(c)(4).

Conclusion

Based on the facts presented above, you do not meet the requirements for tax exemption under IRC Section
501(c)(4) because you are not primarily promoting the general welfare and common good of the community.
You are not a “community” within the meaning of the regulations because the general public is not significantly
benefitting from your operations. You are operating for the benefit of your members, who are lot owners in F.
There is little benefit conferred to the general public. Therefore, you fail to qualify under Section 501(c)(4).

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

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

4

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
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 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.

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

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. 01-2021)
Catalog Number 47628K