501(c)(4) tax status

It will be very difficult, but not impossible, for you to secure a 501(c)(4) (community benefit organization) ruling from the IRS. Right now, according to my informal contacts at the IRS they are only looking at "master" associations for (c)(4) status.

With that said, what is the value of a (c)(4) status to you? It is far more restrictive.

That certainly makes sense. It doesn't hurt to give it a shot. Yours must be a very large association which may give it an edge up on making the case for public benefit.

Check out my earlier post on (c)(4) issues:

Most homeowners associations formed prior to the Tax Reform Act of 1976 (and, perhaps, some thereafter) are 501(c)(4) social welfare (community benefit) organizations. Indeed, many homeowners associations formed prior to that time were not even incorporated, but organized as unincorporated associations.

However, the vast majority of homeowners associations today would not qualify for a 501(c)(4) exemption. (See my paragraphs below.)

In 1976 Congress added section 528 specifically for homeowners associations in response to conflicting Revenue Rulings 72-102, 74-17 and 74-99 which held that condo associations are not tax exempt under section 501(c)(4) and Revenue Ruling 74-199 which made it extremely difficult for homeowners associations to meet the community benefit test of section 501(c)(4) and avoid the private benefit disqualification.

(In 74-99 the IRS said that homeowners associations are prima facie presumed to be essentially and primarily formed and operated for the benefit, "private inurement," of the individual members and hence not exempt.)

So, in order to qualify for a 501(c)(4) exemption today, a homeowners association must (1) serve the broader community, (2) not conduct (or at least minimize) exterior maintenance of a private residential building (e.g. a condominium building), and (3) must, at best, minimize the ownership and maintenance of common areas not for the use and enjoyment of the general public. (As an aside, gifts to 501(c)(4) organizations are not deductible from individual income taxes.)

The IRS defines a community as one that "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." Further, "a community is not 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."

So what Congress did in 1976 is add section 528 which provides for elective exemption of membership dues (fees, assessments) from income taxes, similar to the tax treatment of exempt social clubs (section 512(a)(3)) and political organizations (section 517). Only "exempt function income," however, escapes taxation.

Although I have not researched homeowners association status nationwide in this regard, I suspect very few are (remain) 501(c)(4) organizations, since most do not dedicate common areas to public use, but, rather restrict them to members of the association. The only benefit I can see to a newly established homeowners association to seek 501(c)(4) status, is if the common areas are owned for public benefit, such as an urban park open to all. It may be that the mega-homeowners association with thousands of units may be one type that successfully maintains a 501(c)(4) exemption. I would have to research that further.

Nevertheless, were I a 501(c)(4) homeowners association, I would be very careful not to raise any notice with the IRS.

It has been a long time since I dredged up my involvement in the tax law changes brought about through the major reforms in 1976. To many people this is ancient history, but for those of us who went through it, it was a challenging, uncertain time. Since 528 was enacted, things have been much quieter on the IRS front in regard to homeowners associations.

http://www.hoatalk.com/Forum/tabid/55/view/topic/forumid/1/postid/55179/Default.aspx

Perhaps a poor term for me to use. Most of our pools are very crowded except toward end of the season. That is the reason many in our community are fearful of somehow being required to open the pools to the general public. Most that I have talked with would rather not take the tax benefit but board gets to make that decision and it is not up for a homeowner vote.

My question is if that is valid advice or not? Most of our board seems to think it is OK but it seems very odd to me that an HOA could qualify as 501(c)(4) and then give residents priority over the general public by restricting the pool use. According to the board additional advice we are getting says that we can go back and get tax refunds for prior years if we change status even though we had signs in prior years saying that ponds were only for the use of residents. Last issue is that our HOA maintains and provides snow removal to private lanes that are not owned by the HOA but instead are owned by residents who live on those lanes. I've not yet heard the advice our HOA got on that item

does becoming a community benefit organization create any other problems for the HOA? for example, perhaps you can bypass the actual public COMING to the pool by claiming crowding, but because the public CAN come to the pool, that may put the HOA under the rules of the ADA, ADAAA, FHA, EEOC (for employment?) etc..

THAT is certainly worth thinking about.

http://www.501c4taxexempt.com/index.php?option=com_content&view=article&id=3&Itemid=3
I like what i heard when I talked to him the most knowledgeable source I could find regarding this subject

Simple question: I am in an HOA in Texas which about a year ago became a 501(c4). We are 600 homes+ with several parks and a private lake. The idea of becoming a 501(c4) was only proposed as a money saving idea, but now we are finding out our parks and lakes may not be allowed to be private any longer. IS THIS CORRECT?. Does this mean anyone can use our parks and force us to allow them access to our lake? What is the truth??

Basically yes. In order to qualify for 501(c)(4) status the common areas must be available for the general public and not just the members of the association. Realistically, no-one can force the association to allow access - but someone who is denied access and knows of the exempt status could certainly file a complaint with the IRS requesting that the exempt status be revoked.

About the only money savings you have in Texas is that because of 501(c)(4) your association would be exempt from State sales taxes. You don't live in LOHG do you - if so I'll be over to use the pool when it gets warmer :-)