This article examines the findings of the United States Tax Court in Mira Vista Homeowners Association, Inc. v. Commissioner of Internal Revenue, T.C. Memo. 2025-102, which addressed a homeowner association’s denial of tax-exempt status under Internal Revenue Code (I.R.C.) § 501(c)(4). The petitioner, Mira Vista Homeowners Association, Inc. (the Association), sought a declaration that the Commissioner’s final adverse determination, issued on April 6, 2022, was erroneous.

Factual Background of the Petitioner

Mira Vista Homeowners Association, Inc. was organized as a nonprofit corporation under Texas law on March 25, 1988. The Association operates within the Mira Vista development, a gated community in Fort Worth, Texas, comprising approximately 700 acres, 657 single-family homes, and 2,000 residents.

The Association’s specific and primary purpose is the governing, improving, operating, and maintaining of common areas within the development. These common areas include 96 acres of greenbelts and sloping fences, 25 miles of privately maintained streets, nature trails, and a recreational facility featuring a lake, restrooms, a fishing dock, a playground, and a picnic area. Membership is mandatory for all homeowners within the Mira Vista development.

The Association claimed that its activities lessened the burdens of government through code enforcement, private security patrols, maintenance of infrastructure (signs, greenbelts, fences, roads), operating a 24-hour guard post facility, and cooperating with local government regarding services like water usage, garbage/recycling collections, and streetlight maintenance.

An unrelated organization, the Mira Vista Country Club (Country Club), a § 501(c)(7) entity, owns and operates golf, tennis, and other recreational amenities. The Association grants daily access to the Country Club’s members, guests, and employees. Approximately 50% of the Country Club members are also members of the Association. The Country Club hosts several annual charitable and community events (collectively, charitable events), such as the Kathy Whitworth Invitational and the Dallas-Fort Worth Qualifier for the US Amateur Championship.

The Taxpayer’s Request for Declaratory Relief

On December 12, 2019, the Association submitted an application to the Internal Revenue Service (IRS) seeking recognition as a tax-exempt organization under Internal Revenue Code (I.R.C. or Code) § 501(c)(4). An organization described in § 501(c)(4) is generally exempt from federal income tax under § 501(a). While the Association presumably elected and qualified for the preferable tax status under § 528 (taxation only on non-exempt function income), the primary issue before the Court was qualification as a social welfare organization under § 501(c)(4).

The IRS initially denied the application by letter dated February 2, 2021, stating that the Association did not qualify for exemption because it did not benefit the community on an unrestricted basis, limiting benefits to those within the gated community (members, guests, and members of the unrelated Country Club).

A CPA acting on behalf of the Association, Gary Porter, protested this conclusion, arguing that the Association’s activities qualified it as a social welfare organization. He also contended that other gated homeowner associations in Texas had been recognized by the IRS as § 501(c)(4) organizations. The IRS Independent Office of Appeals subsequently issued a final adverse determination on April 6, 2022. The Appeals Office determined that the Association did not promote social welfare or provide a community benefit because it did not allow public access.

Following the final adverse determination, the Association filed a Petition seeking a declaration that the IRS’s determination was in error. The Tax Court’s jurisdiction for this matter is conferred by I.R.C. § 7428(a)(1)(E).

Judicial Standard and Legal Framework

The disposition of this declaratory judgment action is ordinarily based on the stipulated administrative record (Rule 217(a)). The Tax Court’s scope of review is generally limited to the propriety of the reasons given by the Commissioner for denying the exemption, rather than a de novo review (citing IHC Health Plans, Inc. v. Commissioner, T.C. Memo. 2001-246, aff’d, 325 F.3d 1188 (10th Cir. 2003)). The taxpayer bears the burden of proving that the Commissioner’s determination is incorrect (Rule 142(a); Partners in Charity, Inc. v. Commissioner, 141 T.C. 151, 162 (2013)).

To qualify under § 501(c)(4), an entity must satisfy three criteria: it must be (1) a civic organization, (2) not organized for profit, and (3) operated exclusively for the promotion of social welfare (Treas. Reg. § 1.501(c)(4)-1(a)(1); People’s Educ. Camp Soc’y, Inc. v. Commissioner, 331 F.2d 923, 929 (2d Cir. 1964), aff’g 39 T.C. 756 (1963)).

The critical point of contention was whether the Association operated "exclusively for the promotion of social welfare".

The Supreme Court established for § 501(c)(3) organizations that the presence of a single, substantial nonexempt purpose precludes exempt status, irrespective of the importance of any exempt purposes (Better Bus. Bureau of Wash., D.C., Inc. v. United States, 326 U.S. 279, 283 (1945)).

The U.S. Court of Appeals for the Fifth Circuit has adopted this “substantial nonexempt purpose test” for § 501(c)(4) organizations (Mem’l Hermann Accountable Care Org. v. Commissioner, 120 F.4th 215, 219–20 (5th Cir. 2024)). Treasury Regulations specify that an organization operates exclusively for social welfare only if it is primarily engaged in promoting the common good and general welfare of the people of the community (Treas. Reg. § 1.501(c)(4)-1(a)(2)(i)).

A consistent legal conclusion reached by the Fifth Circuit and other courts of appeals is that an organization operating primarily for the benefit of its members, rather than for the community as a whole, does not qualify under § 501(c)(4) (Mem’l Hermann Accountable Care Org. v. Commissioner, 120 F.4th at 221). Courts have stressed that an organization that provides substantial benefits to private members alongside the public is not “’primarily’ devoted to the common good” (Contracting Plumbers Coop. Restoration Corp. v. United States, 488 F.2d 684, 687 (2d Cir. 1973)). If an organization operates for the exclusive benefit of its members, it does not serve a "community" within the broader social welfare context (Flat Top Lake Ass’n, Inc. v. United States, 868 F.2d 108, 111 (4th Cir. 1989)).

Application of Law to the Facts and Conclusion

The Association conceded that it was “not a ’community’ in and of itself.” It argued that public benefit, rather than public access, should be the determining factor. It claimed that the general public received benefits through its facilities (fishing lake, dock, playground) and services (private patrol).

The Court concluded that the Association failed to meet its burden.

Incidental Public Benefit

The Court found that any public benefits were merely incidental. The Association’s facilities (the lake and recreational venues) are primarily for the benefit of its members and are generally inaccessible to the public. In accordance with the Association’s governing documents, the gates are opened only for members, residents, and their guests, with the sole exception being the charitable events hosted by the unrelated Country Club. Even when the public is permitted entry for these charitable events, the Association’s facilities are not a part of, nor intended for, those events. Furthermore, the charitable events and their associated facilities are neither owned nor maintained by the Association but by the Country Club.

The Court determined that the benefits derived from the Association’s private security patrols, code enforcement, road maintenance, and cooperation with local government were principally undertaken for the benefit of its members and guests, offering only an incidental public benefit. Therefore, the Court found the Association’s facilities are maintained for the benefit of its members and not used by the public (Mem’l Hermann Accountable Care Org. v. Commissioner, 120 F.4th at 221–22).

Citing Flat Top Lake Ass’n, Inc., the Court highlighted that restricting membership to property owners within a subdivision and maintaining member-only common areas behind a gated private road indicates that the entity "solely advances their own private interests," thereby not implicating potential for general social advancement (868 F.2d at 111, 112). The size of the population served is not controlling, as a large private project may still fail to qualify as a civic or social undertaking (Commissioner v. Lake Forest, Inc., 305 F.2d at 818).

Treatment of Similarly Situated Taxpayers

The Association attempted to introduce evidence that other gated Texas homeowner associations had received § 501(c)(4) status from the IRS, contending that the IRS was arbitrarily applying the law. The Court declined to consider this supplemental information as it was outside of the administrative record. Furthermore, the Tax Court emphasized that the tax treatment of another taxpayer, analogous or not, cannot be a deciding factor in determining the Association’s qualifications, as the Association must establish its own entitlement to the exemption (Easter House v. United States, 12 Cl. Ct. 476, 487 (1987), aff’d, 846 F.2d 78 (Fed. Cir. 1988)).

Final Holding

The Tax Court concluded that the facilities and activities offered by the Association are primarily for the use and enjoyment of the Association’s members and their invited guests.

The Association failed to meet its burden of showing that it is an organization described under section 501(c)(4). Accordingly, the decision was entered for the Commissioner.

Prepared with assistance from NotebookLM.