PLR 202229037 IRS Denies Exemption to Condominium Association

8/12/2022 (2/8/2022)

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 mutual benefit corporation in B on C. Your Articles state you are a homeowners' association that is organized and operated to provide for the acquisition, construction, management, maintenance, and care of property held by the Association.

Your By-laws state you are organized and operated to provide for the ownership, management, administration, maintenance, preservation and architectural control of the Units, Common Areas and any Exclusive Use Common Areas within the certain real property development known or to be known as D.

You stated, in your Form 1024 application, that your purpose since inception has been to maintain the common areas of the condominium association. These areas are restricted to property owners and their guests.

You are supported by annual member assessments. You listed various expenses under the heading, "disbursements to or for the benefit of members", which you further explained as insurance, professional services, landscaping, and water.

Law

IRC Section 501(c)(4) provides for the exemption from federal income tax of organizations not organized for profit but operated exclusively for the promotion of social welfare. Further, exemption shall not apply to an entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(4)-1(a)(1) states a civic league or organization may be exempt as an organization described in IRC Section 501(c)(4) if it is not organized or operated for profit and it is operated exclusively for the promotion of social welfare.

Treas. Reg. 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 that is operated primarily for the purpose of bringing about civic betterments and social improvements.

Revenue Ruling 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 under IRC Section 501(c)(4).

In Rev. Rul. 74-17, 1974-1 C.B. 130, an organization formed by the unit owners of a condominium housing project to provide for the management, maintenance, and care of the common areas of the project as defined by state statute with membership assessments paid by the unit owners does not qualify for exemption under IRC Section 501(c)(4). Condominium ownership involves ownership in common by all condominium unit owners of a great many so-called common areas, the maintenance and care of which necessarily constitutes the provision of private benefits for the unit owners. Since the organization's activities are for the private benefit of its members, it cannot be said to be operated exclusively for the promotion of social welfare.

In Rev. Rul. 74-99, 1974-1 C.B. 131, a homeowners' association, to qualify for exemption under IRC Section 501(c)(4), (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.

In Flat Top Lake Association v. United States, 868 F.2d 108 (4th Cir. 1989), 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.

Application of Law

You are not as described in IRC Section 501(c)(4) and Treas. Reg. Section 1.501(c)(4)-1(a)(1) because your activities do not primarily promote civic betterment or social welfare. You do not meet the provisions of Treas. Reg. Section 1.501(c)(4)-1(a)(2)(i) because your sole activity benefits your members (property owners in a specific condominium complex). Pooling member funds to pay for maintenance and preservation of condominium common areas (not open to the general public) does not promote the common good and general welfare of the people of the community.

Like the organizations in Rev. Rul. 69-280 and 74-17, you are providing services to members (who own units in the complex) that they would otherwise have to provide for themselves. The maintenance and preservation of common areas of a condominium complex (not open to the general public) primarily serves your members rather than the common good and general welfare of the community as a whole.

Unlike Rev. Rul. 74-99, you do not serve a community that resembles an area that could reasonably be identified as governmental. Instead, you are similar to Flat Top Lake Association because you are providing preservation and maintenance services for common areas of a condominium complex (not open to the general public) which privately benefits your members rather than the general public.

Conclusion

Because you operate primarily for the benefit of your members and not for the social welfare or common good of the community in general, you do not qualify for exemption under IRC Section 501(c)(4).