In a private letter ruling released April 13, 2012, the IRS denied tax exemption under IRC §§ 501(c)(6) and 501(c)(4) to an organization formed to represent the interests of homeowners in a gated home community. PLR 201215014. The purpose of the organization was to represent homeowners in matters relating to the business and governance of the subdivision. Among other things, this included advising, informing, influencing, and assisting in the election of members of the board of the local homeowners’ association.
As explained by the IRS, IRC § 501(c)(6) grants exemption from federal income taxation to business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues which are not organized for profit and no part of whose net earnings inures to the benefit of any private shareholder or individual. The applicable Treasury Regulation provides that a business league is an association of persons having some common business interest, the purpose of which is to promote such common business interest and not to engage in a regular business of a kind ordinarily carried on for profit. Its activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons.
In denying § 501(c)(6) status, the IRS wrote to the applicant that “[r]epresenting the interests of select property owners as it relates to the governance of your community subdivision and attempting to influence your owner’s association are not the activities of a business league, chamber of commerce, or real estate board.” The Service determined that the applicant’s members did not “share or promote a common business interest,” and that the organization’s “activities consist of providing services to members instead of improving the business conditions of one or more lines of business.” According to the IRS, “[o]wning a home is not a line of business.”
The exemption from federal income taxes afforded by IRC § 501(c)(4) is available to social welfare organizations, which primarily engage “in promoting in some way the common good and general welfare of the community.” In the instant letter ruling, the IRS determined that the applicant was “operating for the private interest of [its] members,” rather than for the general welfare of the community. For this reason, the Service found that the organization was not entitled to the 501(c)(4) exemption.