Homeowners association primarily benefited private property owners

Plain-English summary

A homeowners association sought exemption as a social welfare organization under IRC § 501(c)(4). It maintained common areas and the front yards of private lots, funded those services through owner assessments, and could restrict amenities to owners and their guests. The IRS found that these activities primarily benefited the association's members rather than the general public. The subdivision did not bear a recognizable relationship to a governmental unit, and any public access to its common property was incidental. The IRS denied exemption because the association served private homeowner interests instead of promoting community-wide social welfare. The association signed a closing agreement and waived its right to contest the final determination under IRC § 7428.

Ruling snapshot

• Question: Does an association that maintains private lots and restricts amenities to homeowners qualify under IRC § 501(c)(4)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(4); Treas. Reg. § 1.501(c)(4)-1(a)(2)(i); Rev. Ruls. 69-280, 74-99, and 80-63; Flat Top Lake Association v. United States; Indian Lake Property Owners Association v. Director of Revenue

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Independent Office of Appeals

Date: JUL 11 2025
Form:
Tax periods ended:

Person to contact:
Name:
Employee ID number:
Telephone:
Hours:

Release Number: 202540019
Release Date: 10/3/2025

Employer ID number:

Uniform Issue List (UIL):

501.04-00

501.04-07
Certified Mail

Dear :

Why you are receiving this letter
This is a final adverse 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).

We made the determination for the following reasons:
you benefit your members, rather than the public, by providing exterior maintenance to their property.

You've waived your right to contest this determination under the declaratory judgment provisions of IRC
Section 7428 by your execution of Form 906, Closing Agreement Covering Specific Matters, an executed copy
of which is being sent to you under separate cover.

After removing identifying information, this letter and the previously sent proposed adverse determination letter
will be made available for public inspection under IRC Section 6110.

In a separate mailing to you, we provided Letter 437, Notice of Intention to Disclose. Please review Letter 437
and the attached documents describing our proposed deletions. If you disagree with our proposed deletions,
follow the instructions in Letter 437.

Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax
returns and pay tax, where applicable.

Letter 1371-A (Rev. 8-2024)
Catalog Number 62960H

If you have questions, contact the person at the top of this letter.

Sincerely,

Danny Werfel
Commissioner

By
Enclosures:
IRS Appeals Survey

Christopher R. Martin, CFE
cc: Appeals Team Manager

Letter 1371-A (Rev. 8-2024)
Catalog Number 62960H

Department of the Treasury
Internal Revenue Service

IRS

Date: 11/06/2023

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = STATE 501.04-00
C = DATE 501.04-07
D = MEASUREMENT
E = NUMBER
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 were formed as a nonprofit corporation in B on C as a homeowners association.

Your purpose, as stated in your articles of incorporation, is to further the interest of the owners of property subject
to your Declaration. You have the power:

• to fix, levy, and collect assessments and other charges to be levied against the property subject to the
Declaration of any other property for which the corporation by rule, regulation, declaration, or contract
has a right or duty to provide such services.

• to engage in activities which will actively foster, promote, and advance the common interest of all owners
of property subject to your Declaration. to provide or contract for services benefiting the property subject

to the Declaration, including, without limitation, garbage removal and any and all supplemental municipal
services as may be necessary or desirable.

Your By-Laws state your board of directors has the power to:

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

2

• prepare and adopt in accordance with the declaration of annual budgets in which there shall be
established contribution of each owner of the common expenses.
• levy and collect assessments from the owners to fund the common expenses.
• provide for the operation, care, upkeep, and maintenance of the area of common responsibility.
• make or contract for the making of repairs, additions, and improvements to or alterations of the common
properties in accordance with the Declaration and By-Laws.

• enforce by legal means the provisions of the Declaration, By-Laws and the rules adopted by it and
bringing any proceedings which may be instituted on behalf of or against the owners concerning you.

• pay the cost of all services rendered to you or its members and not chargeable directly to specific
owners.

Your Declaration states that all lot owners must be members and pay their portion of the expenses. Your
Declaration is intended to establish an association to administer responsibilities with respect to the common
properties and the front yards of lots subject to the Declaration and to administer and enforce the provisions of
the Declaration and By-Laws. The subdivision is D divided into E. Your Declaration defines front yards as the
portion of the lot laying between the street toward which the dwelling faces and the line formed by the
dwelling’s exterior and any fence running generally parallel to the street. In the case of a corner lot, the term
shall also include any portion of the lot lying between the side street and the line formed by the side of the

dwelling and any fence or privacy gate running generally parallel to the street toward which the dwelling faces
or the side street.

Properties subject to your Declaration shall be held, sold, transferred, used, and conveyed subject to the
easements, restrictions, covenants, and conditions herein, which shall run with the title of the property. The
common properties are those areas which by the Declaration, any Supplemental Declaration or other applicable
covenants or contract become your responsibility, including, but not limited to, the front yards of lots. These

properties are all real and personal property which you own, lease or otherwise hold possessory or use rights for
the common use and enjoyment of the owners, which may include easements.

The common expenses shall be the actual and estimated expenses incurred or anticipated to be incurred by the
association for the general benefit of all owners including any reasonable reserves for repairs and replacements
as the board may find necessary. Your board has the right to adopt rules regulating the use and enjoyment of the
common properties including limiting the number of guests who may use the common properties, suspending
owners use of any amenities, and to charge admission fees to use the amenities.

Your Declaration gives you the right to enter and execute contracts with any party for the purpose of providing
management, maintenance, or other material services to you and the owners consistent with your purpose and
the Declaration. Maintenance includes all landscaping, including the front yard of lots. If an owner fails to
perform proper maintenance of property, you may perform other maintenance and assess all cost incurred
against the owner. You may carry insurance for lots and bill the owner for the cost accrued.

Law

IRC Section 501(c)(4) 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

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

3

earnings of which are devoted exclusively to charitable, educational, or recreational purposes and no part of
the 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(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.

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).

Rev. Rul. 74-99, 1974-1 C.B. 131, 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.

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 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 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
"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.

In Indian Lake Property Owners Association v. Director of Revenue, 813 S.W.2d 305 (1991) the court held
that: (1) homeowners’ association that enforced subdivision covenants, maintained subdivision roads, and
provided security and trash collection services to residences within subdivision was not "civic organization"
entitled to sales and use tax exemption, and (2) to qualify as "civic organization," organization's purposes and
functions must be concerned with and relate to citizenry at large. The case further discusses Flat Top Lake by
stating, "Clearly Congress believed that an organization cannot serve social welfare if it denies its benefits to
the general public. Implicitly Congress recognized that a true “community” functions within a broader national
fabric. Service to such a community thereby furthers the national interest by expanding potential, by opening
opportunities to all citizens who may find themselves within the bounds of that particular community.” The
denial of exemption was affirmed.

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

Application of law

IRC Section 501(c)(4) provides for the exemption from Federal income tax of civic leagues or organizations
not organized for profit but operated exclusively for the promotion of social welfare. You do not meet the
requirements of this section because your sole activity benefits your members who are residential property
owners in the subdivision. You do not show you provide benefits to the community as a whole, as described in
the rulings below. Securing member funds to pay for the maintenance and preservation of residents in a
specified area does not promote the common good and general welfare of the people of the community.
Therefore, you do not meet the exemption requirements of Section 501(c)(4). See Treas. Reg. Section

1.501(c)(4)-1(a)(2)(i).

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 subdivision including lot owner maintenance.

You are not a “community” as described in Rev. Rul. 74-99 and Rev. Rul. 80-63. In these rulings the general
public significantly benefited from the organization's operations. The housing development that you maintain,
which consists of less than [redacted] homes, does not bear a recognizable relationship to an area ordinarily
identified as a governmental subdivision. Also, the enjoyment of your common area is intended for your members
as evidenced by your organizing documents stating your activities are for the common interest of all owners of
property and their guests. Your board has the right to regulate the use and enjoyment of the common properties
including limiting the number of guests who may use the common properties, suspending owners use of any
amenities, and to charge admission fees to use the amenities. Thus, any use of your common property used by
the general public is insubstantial.

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

Court documents for Indian Lake Property Owners Association state that an organization “cannot serve social
welfare if it denies its benefits to the general public." Similar to the Indian Lake case, you are not serving the
public. Clearly, you are denying benefits to the public by having services and amenities available only to your
lot owners and their guests. The usage of the services and amenities by the general public is minimal and
incidental. This is not in accordance with IRC Section 501(c)(4). Based on these fact patterns, tax-exempt status
should be denied as you do not meet the qualifications for exemption.

The lack of public benefit is closely aligned with those as seen in Flat Top Lake v. U.S.A. You limit the common
areas to members and their guests. As stated, the organization “operates for the exclusive 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 organizations. Since you are operating in a similar fashion, you do not qualify
for exemption under IRC Section 501(c)(4).

Conclusion
Based on the information provided, you are operating for the benefit of your members, who represent lot

owners within your subdivision, and not for the general public. Lot owners are required to pay their yearly
common expenses which cover personal maintenance of the front yards of the subdivision and any other

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

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maintenance or amenities you are responsible for maintaining. If an owner does not pay the required fees, their
rights to service and amenities can be suspended and liens can be issued. Although the public has limited access
to the services and amenities, the public access is a byproduct of providing services and amenities to the
individual homeowners of your subdivision. Since you are established to provide your members with services
and amenities, you are established to serve the private interests of your members. Therefore, you do not qualify
for exemption under IRC 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
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:

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

6

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

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