Did a homeowners' association qualify for the former Texas franchise-tax exemption when the development included commercial ranching property?

Plain-English summary

The association did not qualify because the development included commercial ranching and therefore was not legally restricted entirely to residential use.

Section 171.082 required a homeowners' association's development or project to be legally restricted for use as residences. The commercial-use ranching property defeated that condition.

The Comptroller suggested a possible alternative path if the organization later qualified for federal exemption under a designated Section 501(c) subsection. As of the 1998 letter, it listed subsections (3), (4), (5), (6), (7), (8), (10), and (19) for franchise-tax exemption, with a smaller subset also qualifying for Texas sales-and-use-tax exemption. Those historical lists should not be assumed current.

What this means for you

HOAs and property owners' associations with mixed uses

Commercial or agricultural use can defeat an exemption requiring a legally residential-only development.

Organizations considering another exemption category

A separate federal exempt-organization determination might support a different state exemption, but it requires its own qualification and documentation.

Common questions

Q: What nonresidential use existed?
A: Commercial ranching.

Q: Why did that matter?
A: Section 171.082 required a legal restriction to residential use.

Q: Did the letter guarantee another exemption?
A: No. It only suggested considering qualifying federal Section 501(c) status.

Citations and references

• Texas Tax Code Sec. 171.082
• I.R.C. Sec. 501(c)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9810051L

Original ruling text

October 1, 1998

Dear Mr. **:

Thank you for the additional information you provided concerning your request
for franchise tax exemption for **, Taxpayer Number **.

To qualify for exemption as a homeowners' association, Tax Code Section
171.082, a copy of which was previously sent to you, requires, among other
things, that the development or project must be legally restricted for use as
residences.

The information provided reflects that the development includes commercial use
property, specifically, ranching. Consequently, the corporation presently does
not qualify for franchise tax exemption as a homeowners' association.

You may wish to consider whether the corporation may subsequently qualify for
exemption under another provision of the state statutes, however. The state
statutes also provide exemption for certain organizations that qualify for
federal income tax exemption under one of certain designated subsections of
Internal Revenue Code Section 501(c).

The relevant subsections of Section 501(c) presently qualifying for franchise
tax exemption are: (3), (4), (5), (6), (7), (8), (10) and (19). Currently, an
organization exempt under subsection (3), (4), (8), (10) or (19) also qualifies
for exemption from the Texas limited sales and use tax.

An organization with a qualifying federal exemption establishes its exemption
from state tax by sending a photocopy of the complete Internal Revenue Service
(IRS) determination letter to the attention of the Exempt Organizations
Section, P.O. Box 13528, Austin, Texas 78711-3528.

To obtain an information booklet, Publication 557, and Forms 1023 and 1024 for
applying for a federal exemption, you may telephone the IRS toll free at
1-800-829-3676.

If you have any questions, please call me directly in Austin at 463-4931.

Sincerely yours,

William E. York
Exempt Organizations Section