Like any Section 501(c)(4) social welfare organization, a homeowners' association described under Section 501(c)(4) is required to be operated exclusively for the promotion of social welfare by primarily promoting the common good and general welfare of the people of the community. Homeowners associations by their very nature benefit certain individuals, typically their members. Weighing whether benefits flow primarily to the general public rather than certain individuals is an essential part of determining whether a homeowners' association qualifies for exemption as an IRC Section 501(c)(4) social welfare organization. IRC section and Treasury Regulation IRC Section 501(c)(4)(A). Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees. Treas. Reg. 1.501(c)(4)-1(a)(ii). A civic league or organization may be exempt as an organization described in section 501(c)(4) if: (i) it isn't organized or operated for profit; and (ii) it's operated exclusively for the promotion of social welfare. Resources (court cases, Chief Counsel Advice, Revenue Rulings, internal resources) Rev. Rul. 69-280, 1969-1 C.B. 152, held that a nonprofit organization formed to provide maintenance of exterior walls and roofs of homes of members who own houses in a housing development isn't exempt as a social welfare organization. Distinguished by Rev. Rul. 72-102. Rev. Rul. 72-102, 1972-1 C.B. 149, held a nonprofit organization formed to preserve the architecture and appearance of a housing development, and to own and maintain common green areas, streets, and sidewalks for use of all the development residents qualifies for exemption. Modified by Rev. Rul. 74-99. Rev. Rul. 74-99, 1974-1 C.B. 131, held that to qualify for exemption a homeowners' association must serve a "community" which bears a reasonable, recognizable relationship to an area ordinarily identified as governmental. It musn't conduct activities directed to the exterior maintenance of private residences, and 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, clarified by Rev. Rul. 80-63. Rev. Rul. 80-63, 1980-1 C.B. 116, provides answers to specific questions about the effect of certain activities on the exempt status under Section 501(c)(4) of otherwise qualifying homeowners associations. Clarifying Rev. Rul. 74-99. Commissioner v. Lake Forest, Inc., 305 F. 2d 814 (4th Cir., 1962), denied exemption to a social welfare organization because the organization didn't benefit the public at large, nor was its contribution of a public character. The court looked to the benefits provided and not the number of persons who received benefits through membership. Rancho Santa Fe Association v. U.S., 589 F. Supp. 54 (S.D Cal.1984), held that a housing development function as a public municipality, constituted an independent community under Section 1.501(c)(4)-1 of the Treasury Regulations, and that the homeowners' association representing the property owners within the housing development bestowed benefits on the entire community. Therefore, the association was exempt under Section 501(c)(4) even though the public was restricted from certain recreational facilities. Flat Top Lake Ass'n v. United States, 868 F.2d 108 (4th Cir., 1989), held that a homeowners' association that encompassed a very large area but restricted use of its facilities to its members doesn't qualify for exemption under Section 501(c)(4). Analysis A homeowners' association described as a social welfare organization under Section 501(c)(4) must primarily engage in promoting the common good and general welfare of the people of the community. An essential step in determining whether a specific homeowners' association qualifies for exemption is identifying the "community" served by the association and assessing whether that "community" meets the scope of community within the meaning of Section 501(c)(4) as explained in Rev. Rul. 74-99. However, identifying the community and assessing its scope is not necessarily a straightforward determination. As noted in Rev. Rul. 80-63, the area represented by an association may not be a community within the meaning of that term as contemplated by Rev. Rul. 74-99, and yet if the association's activities benefit a community, it may still qualify for exemption. In other words, the determination is based on facts and circumstances. When considering the facts and circumstances, weighing whether benefits flow primarily to the general public rather than to certain individuals is essential in determining whether a homeowners' association operates exclusively for the promotion of social welfare by primarily promoting the common good and general welfare of the people of the community. To do so, identify any benefits provided from each activity and determine whether a given benefit flows to the general public or to certain individuals. Then, weigh whether the overall balance of benefits tilts in favor of the general public or in favor of certain individuals. Several court cases and revenue rulings provide guidance on how to evaluate whether the services provided by homeowners' associations primarily benefit the community or primarily benefit certain individuals. A significant court case for homeowners' associations is Commissioner v. Lake Forest, Inc. The case involved a nonprofit membership housing cooperative that provided low cost housing to its members. In denying exemption as a social welfare organization, the court found that although the organization's activities were available to all citizens eligible for membership, "its contribution is neither to the public at large nor of a public character." The court looked to the benefits provided and not to the number of persons who received benefits through membership. In this case, benefits were largely directed to certain individuals rather than the general public so the organization did not qualify as a social welfare organization. Similarly, in Flat Top Lake Ass'n v. United States, the court held that: (1) an organization that operated for the exclusive benefit of members didn't serve a "community," as that term relates to the broader concept of social welfare; and (2) an association that had done everything within its power to create a wholly private environment for its members wasn't a "community" within the contemplation of Section 501(c)(4), and couldn't claim tax exemption for benefiting itself. Again, the benefits were wholly directed to certain individuals rather than the general public so the organization didn't qualify as a social welfare organization. As an aside, the distinction of whether a benefit flows to the general public or to certain individuals is illustrated in two Section 501(c)(4) social welfare revenue rulings that involve providing television reception. For both rulings, improved television reception is the only benefit provided which makes the only item left to consider is whether the benefit flows to the general public or to certain individuals. In Rev. Rul. 54-394, 1954-2 C.B. 131, the organization provided the improved television reception only to members who contracted for the services and paid a fee. In Rev. Rul. 62-167, 1962-2 C.B. 142, the organization provided the improved television reception to anyone within the range of the signal without regard to being a member and without regard to making a contribution. In Rev. Rul. 54-394, the members-only structure resulted in the benefit flowing only to certain individuals so the organization did not qualify as a social welfare organization. In Rev. Rul. 62-167, the open-ended structure resulted in the benefit flowing indeterminately to any member of the general public so the organization was operated for the benefit of the general public and qualified as a social welfare organization. In addition to illustrating the difference of who receives the benefits, this example also provides some factors to consider when making a determination: whether benefits are limited to members and whether a fee is required. Although this example involves television reception, the same social welfare concept and analysis of who receives the benefit applies to homeowners' associations. However, with homeowners' associations, benefits typically flow to both the general public and certain individuals. Thus, weighing whether the overall balance of benefits tilts in favor of the general public or in favor of certain individuals becomes a more integral aspect in making the determination. Switching back to the two homeowners' association court cases: A key point in Lake Forest and Flat Top Ass'n is it's unlikely that an organization can serve social welfare purposes if it primarily directs benefits to certain individuals and denies benefits to the general public. However, Rancho Santa Fe Association v. U.S. presented a unique situation where the court found that the housing development itself constituted a "community" within the meaning of Section 1.501(c)(4)-1 of the Treasury Regulations and the relevant revenue rulings. Since the housing development and the community were one and the same, the benefits bestowed by the association weren't directed to certain individuals and did promote the common good and general welfare of the community. This organization presented distinguishing facts because it wasn't an ordinary group of tract homes banded together as a homeowners' association. It was an independent community separated geographically from the central area of a large city that had its own post office and zip code. In addition, the organization performed the functions of a governmental entity, and it brought about civic betterments and social improvements on an unrestricted basis that would be sorely missed by the community without the activities of the organization. In Flat Top Lake Association, the circuit court of appeals noted about the organization in Rancho Santa Fe that it "in virtually every meaningful fashion, functioned as a public municipality. Access to the development by nonresidents was unrestricted and the use of a substantial portion of the development's recreational facilities by the general public was unlimited." Thus, the court in Flat Top Lake Association distinguished the housing development in Rancho Santa Fe from the housing development in that case. When determining whether a housing development constitutes a "community," within the meaning of the Treasury Regulations, Rev. Rul. 74-99 and Rev. Rul. 80-63 provide the following factors to consider: A community within the meaning of Section 501(c)(4) and the regulations isn't simply an aggregation of homeowners bound together in a structured unit formed as an integral part of a plan for the development of a real estate subdivision and the sale and purchase of homes therein. An exact delineation of the boundaries of a "community" isn't possible but the term has traditionally been construed as having reference to a geographical unit bearing a reasonably recognizable relationship to an area ordinarily identified as a governmental subdivision or a unit or district thereof. A community doesn't embrace a minimum area or a certain number of homeowners. Whether a particular homeowners' association meets the requirements of conferring benefit on a community must be determined according to the facts and circumstances of the individual case. Thus, when the area represented by a homeowners' association is not a community, qualification as a social welfare organization depends largely on whether the overall balance of benefits tilts in favor of the general public or in favor of certain individuals. Rev. Rul. 69-280 presents a situation where benefits are restricted to certain individuals and don't benefit the community as a whole. The organization provides maintenance of exterior walls and roofs of the individual home units in a housing development. The ruling holds that the organization isn't exempt as a social welfare organization because it's operated primarily and directly for the benefit of certain individuals rather than for the general public. Rev. Rul. 72-102 presents a situation where a homeowners' association provides benefits partially to its members and partially to the general public. The ruling holds that although benefits accrue to the property owner members, the benefit to certain individuals is incidental and the primary benefit is directed to the general public so the organization qualifies as a social welfare organization. Thus, the overall balance of benefits tilted in favor of the general public rather than to certain individuals. Rev. Rul. 74-99, which clarified and modified Rev. Rul. 72-102, introduced a prima facie presumption that a homeowners' association is presumed to be primarily formed and operated for the individual business or personal benefit of their members and doesn't qualify for exemption as a social welfare organization. To overcome this presumption and qualify as a social welfare organization, a homeowners' association must satisfy the following conditions: Must serve a "community" which bears a reasonably recognizable relationship to an area ordinarily identified as governmental, Must not conduct activities directed to the exterior maintenance of private residences, and The common areas or facilities it owns and maintains must be for the use and enjoyment of the general public. If the organization doesn't satisfy these conditions, it's evidence that the homeowners' association is operated primarily for certain individuals and doesn't qualify as a social welfare organization. If the organization does satisfy these conditions, the organization overcomes the prima facie private benefit presumption but must still demonstrate that it primarily operates for the common good and general welfare of the community, as opposed to primarily for certain individuals. Ultimately, a determination that an organization primarily benefits a community and qualifies as a social welfare organization will hinge on the type(s) of benefits provided and assessing the benefits directed to certain individuals versus the public at large. When a homeowners' association serves a community, doesn't provide for exterior maintenance of residences, the common areas or facilities it owns and maintains are for the use and enjoyment of the general public, and the overall balance of benefits tilts in favor of the general public, the organization will generally qualify as a social welfare organization. This issue snapshot focuses on the community qualification requirement specifically for Section 501(c)(4) homeowners associations. For an analysis on the community qualification requirement for all Section 501(c)(4) social welfare organizations, see the Section 501(c)(4) What is a Community? Issue snapshot. Issue indicators or audit tips When conducting an examination of a homeowners' association, the following should be reviewed to determine qualification as an exempt organization: Inspect the property and facilities for indications of restricting access by the general public to property and facilities owned and maintained by the association (No Trespassing Signs, gates blocking access). Review minutes of meetings and newsletters for evidence of restricting access to facilities to members only. Consider interviewing officers regarding access to the facilities. Read the covenants and minutes of association meetings, and review disbursements and other financial records to determine if the association is performing exterior maintenance on private dwellings. Review a plot or map of the area covered by the homeowners' association. Is it a subdivision of tract homes, or, under the facts and circumstances, possesses the characteristics of a community? If access to the organization's facilities is restricted, question the officers concerning the possibility of a separate organization holding title to the restricted access facilities. For example, a clubhouse which serves as a gathering place for social and recreational programs and activities of the members of the association could be a separate IRC section 501(c)(7) organization. Secure a copy of the exemption letter to verify its status. See Rev. Rul. 80-63.
