Homeowners association denied charitable exemption

Plain-English summary

A homeowners association applied for exemption as a charity under IRC § 501(c)(3). It maintained resident-only common property, operated a sewage collection and treatment system for a subdivision, collected fees and assessments, enforced covenants, and could place liens on members' property for nonpayment. The IRS concluded that these activities primarily benefited the association's members rather than the public. It compared the association to organizations denied exemption for providing transportation, neighborhood improvements, or waterway dredging that principally benefited a limited group of property owners. Because the private benefit and nonexempt purpose were substantial, the IRS denied exemption under the operational test.

Ruling snapshot

• Question: Does a homeowners association serving residents through common-property maintenance and sewage services qualify under IRC § 501(c)(3)?
• Outcome: Denied because the association served substantial private, member-focused interests
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(1)(ii); Rev. Rul. 69-175; Rev. Rul. 75-286

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 06/11/2025
IRS Tax Exempt and Government Entities Employer ID number:

                                                          Form you must file:

                                                          Tax years:

Release Number: 202536042
Release Date: 9/5/2025
UIL Code: 501.03-00, 501.30-00, 501.33-00

                                                          Person to contact:

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 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.

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
Internal Revenue Service

Date:
04/24/2025

Employer ID number:

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

Legend: UIL:
B = State 501.03-00
C = Date 501.30-00
501.33-00

Dear :

We considered your Streamline Application for Recognition of Exemption Under Section 501(c)(3) of the
Internal Revenue Code, we determined that you don't qualify for exemption under IRC Section 501(c)(3).

Issues

Do you meet the operational requirement of section 501(c)(3)? No for the reasons below:

Facts

You submitted Form 1023-EZ, Streamline Application for Recognition of Exemption Under Section 501(c)(3)
of the Internal Revenue Code.

You attest that you were incorporated on B in the C. 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 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 have not conducted and will not conduct prohibited activities under Section 501(c)(3).
Specifically, you attest you will:

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

• 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.

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

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• 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 more than expenditure limitations
outlined in Section 501(h).

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

You described your mission or most significant activity as “Homeowners Association.”

We asked for more information about your activities. You provide maintenance and operation of common
properties. You also provide a sewage collection and treatment system for a subdivision.

You collect monthly fees from the homeowners. The fees are applied directly towards the operation of sewage
collection and treatment system and maintenance of the common properties. The monthly fees are based upon
the extent of the use of the services. You also have yearly assessments or charges payable in monthly
installments for maintenance, operation, general capital improvement and other special assessments for the
maintenance of the sewage collection and treatment system.

You indicated that your facilities and common areas are for residents only. You administer and enforce
covenants and restrictions to preserve association property. You will take all necessary legal actions, including
placing a lien on a member’s house or property, if the member is in default in paying your fees or assessments.

Law

IRC Section 501(c)(3) provides for the exemption from federal income tax to organizations organized and
operated exclusively for charitable or educational purposes, provided 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) provides 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 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 operating exclusively
for exempt purposes if it engages primarily in activities that accomplish 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) 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. Thus, the
organization must establish that it is not organized or operated for the benefit of private interests such
individuals.

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 a public interest.

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

3

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 benefitting the community as well as enhancing members' property rights, will not qualify for
exemption under IRC Section 501(c)(3).

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the Court held that the existence of a single
non-exempt purpose, if substantial in nature, will destroy a charitable exemption.

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

IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set 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). Based on the information you provided in your application and supporting
documentation, we conclude that you fail the operational test.

You do not meet the operational test under IRC Section 501(c)(3) because you are not operating exclusively for
charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). You provide private benefits to
your members because you operate as a homeowners' association. You maintain common properties and
provide a sewage collection and treatment system for members for a fee, which does not serve an exempt
purpose and is substantial in nature. A single, substantial non-exempt purpose will preclude exemption as
described in Better Business Bureau. Because more than an insubstantial portion of your activities accomplish
non-exempt purposes, you are not exempt.

You are like the organization in Rev. Rul. 69-175 in that you were formed to provide benefits to your members
of your homeowners' association. Your activity is to provide maintenance for common areas used in private by
your members, as well as a sewage treatment facility. Maintaining property that would otherwise have to be
maintained by your individual members serves private interests. Your activities serve the private benefit of your
members, which precludes you from exemption as described in Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).

You are like the organizations described in Rev. Rul. 75-286 and in Benedict Ginsberg and Adele W. Ginsberg
in that your activities, providing maintenance of common use land for your members and sewage services, serve
private rather than public interests. Your activity is not beneficial to the general public because you are a
homeowners' association and serve only the private interests of your members. Any benefits as a result of your
activities would be incidental to the general public.

Conclusion

Based on the facts presented, you are not operated exclusively for exempt purposes as set forth in IRC Section
501(c)(3). You are formed for the private benefit of your members for a substantial non-exempt purpose.
Therefore, 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

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

4

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.

• 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

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

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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
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