HOAs keep Old Cars and Couches Off Front Lawns
People hate HOAs more than the IRS. All they do is try to make life better for everyone. HOAs keep couches, old refrigerators, and old cars on cinder blocks from cluttering up the neighborhood. My wife loathes and despises ours. When we first moved into our neighborhood, my brother and his family came for a visit. We made the mistake of not moving his car parked in front of the house before midnight. You are supposed to go online and download some kind of parking script, good for two or three days at a time. We didn’t do that and sure enough, the HOA towed the car during the wee hours. Wifey went absolutely ballistic. But its a small price to pay if you ask me. There would be DeSatan signs all over the place without an HOA. And my wife would paper our entire house and half the neighborhood with Biden signs if it weren’t for the HOA, believe you me. So I’m good with the HOA.
Easy to read PLR 20233300, released earlier this summer, demonstrates the difficulties of an HOA getting tax exemption. Here are the facts:
You formed on B, in the state of C as a nonprofit mutual benefit corporation. Your Articles of Incorporation state that your specific purpose is to maintain the subdivision’s roads. You are a successor to a previous nonprofit corporation, and you assumed 100% of their assets. The previous organization was not exempt under IRC Section 501(c)(4) .
Your bylaws state that your primary objective and purpose is to maintain the roads in your subdivision, for use by the community and the public, to engage in such other activities that will assist in the achievement of maintaining the roads in your subdivision and to carrying out the terms listed in the Declaration of Covenants, Conditions, and Restrictions. Your bylaws further state that you are a membership organization and that members of your organization are defined in the Declaration of Covenants and Conditions, and Restrictions’ agreement as established by the subdivision’s developer. The Declaration of Covenants and Conditions, and Restrictions’ agreement defines each of your members as being lot owners and as such shall be entitled to one vote for each lot owned. Only one vote may be cast per lot owned. There are E members.
Your primary activity is road maintenance and repair of the D road that each lot owner in your subdivision has access to. The road that is maintained is about F miles long. It is bordered on three sides, by lots that are owned by your members, and it finishes or dead ends at a member’s home where there is a private water source. By agreement, the private water source is made available to fire trucks for firefighting purposes to serve the community and the adjacent wilderness.
The ruling concisely summarizes relevant rulings and opinions before concluding that the HOA in the ruling is not exempt:
Revenue. Ruling 74-99 , 1974-1 C.B. 131, clarifies the circumstances under which a homeowners’ organization like the one described in Revenue Ruling 72-102 may qualify for exemption under IRC Section 501(c)(4) . According to this revenue ruling, several factors lead to the prima facie presumption that homeowner’s associations are essentially and primarily formed and operated for the individual business or personal benefit of their members, and, as such, do not qualify for exemption under Section 501(c)(4) . However, the ruling goes on to state that a homeowner’s association may in certain circumstances overcome the presumption and qualify for recognition of exemption under Section 501(c)(4) by (1) serving 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 Lake Petersburg Association v. C.I.R., T.C. Memo 1974-55 , 33 T.C.M. (CCH) 259 , T.C.M. (P-H) P 74,055 , 1974 PH TC Memo 74,055 (1974), the association was an idea presented by the Petersburg Chamber of Commerce to help stimulate the economy in the surrounding area. A group of businessmen contributed capital and acquired capital from other sources such as the City, the Chamber and two banks, to obtain funding to purchase property and develop it. They formed an association, which required prospective owners to become dues-paying members. The dues helped finance the development of the lake and recreational facilities on said property. Use of the assets was limited to members and their guests. The Association’s basis for their argument is that the organization was created to stimulate the economy and make it a better place to live, thereby fulfilling the requirement of a social welfare organization under Section 501(c)(4) of the Code. The respondent argued that it was operated primarily for the benefit of its members and therefore did not qualify. The Court found that regardless of the original intent, the actual benefit went to the members and any economic benefits to the Petersburg citizens were “indirect and remote.” Exemption was denied.
In Rancho Santa Fe Association v. United States, 589 F. Supp. 54 (D.C. S.D. Calif. 1984), the court held that the organization was entitled to exemption under IRC Section 501(c)(4) despite the fact that some of its facilities were restricted to its members. The association supervised property inside the subdivision of Rancho Santa Fe by enforcing the covenants and establishing several boards, such as a planning and park boards, etc. It also functioned as a liaison between the community and the local government on issues such as maintenance of the rights-of-way and the sanitation system. In addition, the association loaned out its facilities free of charge to various public service organizations as well as to the schools. The court found that that the critical factor is that the association benefited the community it served and represented on an unrestricted basis. The court further stated that it was only where an association represents less than the entire community is it a concern whether the benefits of the association are made available to the general public, because in that situation the benefits which are restricted to the association of members are not benefiting the community as a whole. It was also found that the association performed the functions of a governmental entity and brought about civic betterments and social improvements that would be sorely missed by the Rancho Santa Fe community should they be lost or curtailed.
In Flat Top Lake Association v. United States (1989 4th Circuit), 868 F.2d 108 , the Court held that a homeowner’s 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.
The lack of tax exemption only increases homeowner costs, of course. Costs we pay for the private benefits we derive though.
darryll k. jones