Everybody Hates HOAs.
HOA officials and board members are probably invited to neighborhood Christmas parties even less often than IRS agents. We hate getting letters from either of the bastards, let’s just be honest. But it’s kind of silly that we hate HOAs and the IRS for doing the things we need done and pay them to do. And without which our communities would decline. Still, we don’t often mourn when the IRS loses in court and I don’t know of too many people in my neighborhood who would object to our HOA getting its comeuppance in court every now and again. That’s what happened last week. An HOA got its comeuppance. Well deserved, if you ask me.
Last month, Chris introduced us to the Corporate Transparency Act and its effect on exempt organizations. The CTA requires business entities to file “Beneficial Ownership Information” (BOI) reports so the government can better fight money laundering. For the most part, the 29 different types of corporations exempt under 501(c), along with political organizations exempt under IRC 527, need not be concerned about the CTA reporting requirements. But as Chris points out, there are exceptions that can surprise even those organizations. Last week, a federal district judge strictly interpreted the exempt organization exclusion. The judge ruled that the exclusion for exempt organizations is not available to homeowner associations exempt from tax under IRC 528.
The CTA grants Treasury the authority to exempt other entities not specified in the statute. But only with the concurrence of the Attorney General and the Secretary of Homeland Security. So the HOAs sent a letter asking Treasury to expand the list to include HOAs exempt under IRC 528. According to the Court:
FinCEN responded to HOA’s letter in July 2024. Deputy Director Jimmy Kirby wrote to the HOA that HOAs “are not specifically listed” among the CTA’s exemptions and must therefore report to FinCEN their beneficial owners if they “otherwise meet the definition of a ‘reporting company.’” Deputy Director Kirby further explained that FinCEN was considering whether to exempt HOAs as a “class of entities” under Section 5336(a)(11)(B)(xxiv), but noted that to do so it must make certain factual findings and obtain the written concurrence of the Attorney General of the United States and the Secretary of Homeland Security.
It sounds like Treasury was looking into the matter but apparently not soon enough for the HOAs. We all know how pushy HOAs can be. Treasury recognizes that HOAs exempt as social welfare organizations under IRC 501(c)(4) are exempt from the CTA. But exemption for HOAs under (c)(4) is not as advantageous and generally unavailable to HOAs that do not open their common facilities – like a neighborhood pool or community center – to the general public. Most HOA’s restrict common facilities to its dues paying members, naturally. The plaintiffs asserted that the HOAs exempt under IRC 528 share characteristics similar to 501(c) organizations and therefore should be exempt from the CTA as well. They added that IRC 528 requires that they be treated as exempt organizations “for purposes of any law which refers to organizations exempt from income taxes.” Thus, they should and indeed must be exempt from the disclosure and reporting requirements of the CTA. Did I mention how pushy the HOA can be? The Court explained the HOAs argument:
Plaintiffs cannot rely directly on Section 501 of the Internal Revenue Code to demonstrate that they are covered by the exemption here. Section 501(c) lists a number of different types of organizations (29 in total) that are exempt from taxation under Section 501(a). And 501(a) simply grants tax-exempt status to all those organizations listed in 501(c) and 501(d). But HOAs like Plaintiffs are not included among those organizations “described in section 501(c).” Indeed, they are described elsewhere, in Section 528 of the Internal Revenue Code. Stuck with this reality, Plaintiffs rely on a more roundabout argument in their attempt to shoehorn HOAs into the CTA’s nonprofit exemption. They argue that Section 528(a), where Congress provided that a “homeowners association shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes,” means that the reference to exempt organizations in the CTA should be read to include Plaintiffs. That is, the CTA is “any law,” and it “refers to organizations exempt from income taxes,” and so HOAs should “be considered an organization exempt from income taxes for the purpose of” the CTA.
Nope, said the Court. The law is limited to 501(c) and does not exempt 528 organizations. And then it went on to reject a bunch of other arguments based on the Administrative Procedure Act and the Constitution. The Court noted that there is a bill pending in Congress that would exclude all HOA’s, exempt under (c)(4) or IRC 528, from CTA requirements. The bill is still in committee.
The HOAs, pushy as always, are not happy with the ruling I imagine. But I’d be lying if I said I sympathize. I don’t. Hell, if I can’t even display my Steeler flag in my yard, if I get a nasty gram for not recovering my garbage bins soon enough after trash pick-up, or a fee for my dues being being a half a second late, or an assessment for violating some other stupid nitpicky rule, then dadgummit these HOA jokers should be held to the precise letter of the law too. Serves them right.
darryll k. jones