In Texas, homeowners associations (“Associations”) are generally not-for-profit corporations created under Chapter 22 of the Texas Business Organizations Code. As a result, many Associations want to know if they benefit from certain tax exemptions reserved for non-profit entities, which can be significant over the life of the Association. Texas tax law provides an exemption from sales tax on goods and services purchased for use by organizations exempt under section 5.01 (c) (3), (4), (8), (10) or (19) of the Internal Revenue Code (the “code). This article will focus on the qualifications required for an association to achieve the 501 (c) (3) or 501 (c) (4) designation of the ‘IRS, as well as some helpful tips from IRS Revenue Rulings, in which the IRS provided an official interpretation of the Code with respect to a specific set of facts.

Code § 501 (c) (3)

Code §501 (c) (3) provides for exemption from federal income tax for an organization organized and operated EXCLUSIVELY FOR CHARITABLE PURPOSES. The Treasury Regulations provide that an organization is not organized or operated exclusively for exempt purposes, unless it serves a public rather than a private interest. The Treasury Regulations provide that the term “charitable organization” is used in Code §501 (c) (3) in its generally accepted legal sense and includes, among other things, relief from government burdens. Relief from government burdens overlaps with social welfare and may include the provision of services usually provided by a government agency, such as services provided at taxpayer expense.

Achieving relief from government burdens can be a big hurdle to overcome. To prove that an organization reduces the burden of government, it is necessary that (i) its activities are activities that a government unit considers to be its burdens; and (ii) the activities actually reduce this government burden. The organization must demonstrate that a government unit considers the organization to be acting on behalf of the government, thereby freeing up government assets – human, material, and fiscal – that would otherwise have to be spent on the particular activity.

This determination is based on facts and circumstances. An activity is a government responsibility only if there is an objective manifestation by a government unit that it considers the activities of the organization to be its responsibility. Such consideration can be evidenced by the interrelationship between the government unit and the organization. A favorable working relationship between a government and an organization is strong evidence that the organization actually alleviates the burden on government. [1] Here are examples of various charitable projects in this category: (i) the fight against drug trafficking [2] and (ii) maintain volunteer firefighting services [3] and police performance programs. [4]

Even if an organization’s activities reduce government burdens, it must otherwise meet the requirements of Code § 501 (c) (3). Thus, an organization must demonstrate that its activities serve a public rather than a private interest within the meaning of the Treasury Regulations. This means that an organization claiming to alleviate government burdens must demonstrate that any private benefit received by individuals or businesses is both qualitatively and quantitatively incidental to its exempt purposes. To be qualitatively incidental, private benefit must be a necessary accompaniment to activities benefiting the general public. To be quantitatively incidental, the private benefit must be insignificant in the context of the overall public interest.

In short, even if an Association demonstrates that (i) its activities are activities that a government unit considers to be its responsibilities; and (ii) the activities actually reduce this government burden, since the Association would not primarily provide services to, or benefit anyone other than the members of the Association, it will likely be difficult to demonstrate that the Associations serve a public rather than a private interest.

Code § 501 (c) (4)

Code § 501 (c) (4) provides exemption from federal income tax for civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare. The concept of social welfare involves a service or program aimed at benefiting the community rather than a private group of individuals. According to Treasury regulations, an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in the promotion, in one way or another, of the common good and the general welfare of individuals in the country. within a community. According to Treasury regulations, an organization described in Code § 501 (c) (4) is an organization that is operated primarily for the purpose of making civic and social improvements.

The IRS has generally found that homeowners associations in a gated development do not meet exemption requirements under Code § 501 (c) (4) due to the fact that the general public is limited to access to property belonging to the Association. [5] However, the fact that there is a security barrier does not automatically mean that property belonging to the Association is not accessible to the general public. In most cases, the portal restricts access to the general public, but there are two generally recognized exceptions: (1) if the association is able to establish that it serves the community as a whole, it is that is, the association provides benefits to a community that extends beyond the gates; or (2) if the Association occupies substantially the same geographic area as a recognized government entity.

It should be noted that Tax Decision 80-63 generally considers the term “community” to be determined on a case-by-case basis, including analyzing whether the activities of the organization have a sufficient community-wide benefit that promotes the social welfare as required by Code § 501 (c) (4).

Although an area represented by an association may not be a community for the purposes of the exemption, if the activities of the association benefit a community, it may still be eligible for an exemption. For example, if the Association owns and maintains common areas and facilities for the use and enjoyment of the general public as opposed to areas and facilities the use and enjoyment of which are restricted to members of the Association, then it can meet the requirement of serving a community. If the Association represents an area that is not a community, it will generally not be able to benefit from an exemption under Code § 501 (c) (4) if it limits the use of its recreational facilities to its members. , i.e. the use and enjoyment of the common spaces owned and maintained by an association must be available and extended to members of the general public, unlike controlled use or restricted access to the members of the association.[6] Organizations that represent the interests of residents of a particular residential development are generally not eligible.

In conclusion, associations may benefit from an exemption as social protection organizations from the Code § 501 (c) (4), but these organizations often have difficulty in meeting the requirement that they serve the interests of a community and not just the interests of the members of the association.

We suggest that the Association retain the services of a chartered accountant and work with him to advise the Association on tax matters and complete the appropriate tax forms.

[1] Rev. Rul. 85-2, 1985-1 CB 178.
[2] Rev. Rul. 85-1, 1985-1 CB 177.
[3] Rev. Rul. 74-361, 1974-1 CB 130.
[4] Rev. Rul. 74-246, 1974-2 CB 159.
[5] Tax Decision 74-99, 1974-1 CB 131 as amended by Tax Decision 80-63, 1980-1 CB 116; PLR 200706014.
[6] Tax ordinance 80-63, 1980-1 CB 116.