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Sunday, May 5, 2024
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GiftLaw Note:
ORG was recognized as exempt under Section 501(c)(4). ORG owns and maintains common areas and a swimming pool. Membership in ORG is compelled based on fees that are mandated in a covenant to each member's property title.
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May 31, 2013 PLR 201321032 ORG's Tax-Exempt Status Revoked
5/24/2013 (03/05/2007)
1. Should the ORG, an organization exempt under Internal Revenue Code section 501(c)(4), continue to be exempt since it operates a swimming pool open only to the members of the organization?
FACTS
1. ORG was recognized, on 03/27/19xx, as an organization exempt under IRC 501(c)(4) because it was an organization described in IRC 501(c)(3).
2. The organization membership is compelled to belong by fees mandated in a covenant to the member's property title.
3. The organization owns and maintains common areas and a swimming pool.
4. The common areas and swimming pool are restricted to the organization's members and are not for the use and enjoyment of the general public.
5. The organization does not maintain a police (security) force or enact laws or other ordinances normally identified with a governmental subdivision or district.
6. The specific area which encompasses the organization's homeowner's property and common areas does not have its own zip code.
LAW
501(c)(4) of the Internal Revenue Code states that civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, will be recognized as exempt under subsection 501(a) if no part of the net earnings of such entity inures to the benefit of any private shareholder or individual.
Section 1.501(c)(4)-2 of the Income Tax Regulations states that an organization will be regarded as operating 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, because it is operated primarily to bring about civic betterments and social improvements.
Section 1.501(c)(4)-1(a)(2)(ii) of the regulations provides that an organization is not operated primarily for the promotion of social welfare if its primary activity is operating a social club for the benefit, pleasure, or recreation of its members.
Rev. Rul. 73-306, 1973-2 C.B. 179 provided that a nonprofit organization formed to protect the rights of tenants in one rental complex did not benefit the community in general, but rather a select group of individuals. Therefore, exemption under 501(c)(4) was denied.
REV-RUL, Homeowners association, preserving appearance and maintaining common areas, Revenue Ruling 74-99, 1974-1 CB 131, (Jan. 01, 1974)
A homeowners association, to qualify for exemption under section 501(c)(4) of the Code, (1) must serve 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. 72-102 modified.
Rev. Rul. 74-99, 1974-1 C.B. 132 clarified the definition of community as it applies to homeowners associations. A mere aggregation of homeowners in a real estate subdivision is not a community. It must be a geographical unit bearing a reasonably recognizable relationship to an area ordinarily identified as a governmental subdivision or a unit thereof * * *
REV-RUL, Homeowners' associations, Revenue Ruling 80-63, 1980-1 CB 116, (Jan. 01, 1980) was issued to discuss, in question and answer format, certain issues raised by Rev. Rul. 74-99.
Question 1:
Does Rev. Rul 74-99 contemplate that the term "community" for purposes of section 501(c)(4) of the Code embraces a minimum area or a certain number of homeowners?
Answer: No. Rev. Rul 74-99 states that it was not possible to formulate a precise definition of the term "community". The ruling merely indicates what the term is generally understood to mean.
Question 2:
May a homeowners' association, which represents an area that is not a community, qualify for exemption under section 501(c)(4) of the Code if it restricts the use of its recreational facilities, such as swimming pools, tennis courts, and picnic areas, to members of the association?
Answer..
No. Rev. Rul. 74-99 points out that the use and enjoyment of the common areas owned and maintained by a homeowners' association must be extended to members of the general public, as distinguished from controlled use or access restricted to the members of the association. For purposes of Rev. Rul. 74-99, recreational facilities are included in the definition of "common areas".
Rev. Rul. 80-206, 1980-2 C.B. 185 provided that a nonprofit organization formed to protect the legal rights of all the tenants in a community does qualify as a social welfare organization.
Flat Top Lake Association v. United States, 868 F.2d 108 (4th Cir. 1989), the court concluded that a homeowners' association that encompassed a very large area but restricted use of its facilities to its members does not qualify for exemption under IRC 501(c)(4). The court went on to conclude that in order to be exempt under IRC 501(c)(4), the organization must be a community that constitutes an active part of society rather than a private refuge for those who would live apart
GOVERNMENT'S POSITION
Civic leagues and organizations not organized for profit, but operated exclusively for the promotion of social welfare are recognized as exempt under section 501(c)(4) of the Code. An organization will be regarded as operating exclusively for the promotion of social welfare if it is primarily engaged in promoting the common good and general welfare of the people in the community (Section 1.501(c)(4)-1(a)(2)(i) of the regulations).
One crucial element for section 501(c)(4) exemption is promotion of social welfare for the people of a community. The Service granted exempt status to an organization that defended tenants' rights for a whole community, which is considered an exempt activity. Rev. Rul. 80-206. In comparison, the organization in Rev. Rul. 73-306, was denied exempt status because it only benefited the tenants in one rental complex. It did not benefit the community in general, but rather a select group of individuals.
Rev. Rul 74-99 noted that an aggregation of homeowners in a real estate subdivision is not a community. It must also be a geographical unit bearing a reasonably recognizable relationship to an area ordinarily identified as a governmental subdivision or district. This organization is not a community as described above since it is not a recognized governmental subdivision or district and does not possess the powers or responsibilities (i.e., police protection) generally associated with such entities.
Rev. Rul. 80-63 further provides that an area not considered a community cannot be exempt under 501(c)(4) if it operates a swimming pool for the exclusive use of its homeowner members. Flat Top Lake Association v. United States reinforces this ruling by concluding that for an area to be considered a community it must an active part of society rather than a private refuge for its members.
Considering all the facts and circumstances and applying the applicable law the ORG is not an organization described in IRC 501(c)(4) of the Code. However, it may qualify as a homeowners association under section 528 of the Code.
TAXPAYER'S POSITION
The organization agrees with the Government's position.
CONCLUSION
The organization's exemption under section 501(c)(4) of the Code should be revoked for the period beginning January 1, 20xx and for all subsequent periods. If the organization elects, and is eligible under section 528 of the Code, it may begin filing Form 1120-H. Otherwise it must file Form 1120.
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