Flat Top Lake Ass'n, Inc. v. U.S.

• Decision Date: 17 February 1989
• Docket Number: No. 87-1514,87-1514
• Citation: 868 F.2d 108
• Parties: -721, 89-1 USTC P 9180 FLAT TOP LAKE ASSOCIATION, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 108

868 F.2d 108

63 A.F.T.R.2d 89-721, 89-1 USTC P 9180

FLAT TOP LAKE ASSOCIATION, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 87-1514.

United States Court of Appeals Fourth Circuit.

Argued Oct. 3, 1988.

Decided Feb. 17, 1989.

Robert Stephen Kiss (Gorman, Sheatsley & Hutchison, L.C., Beckley, W.Va., on brief) for plaintiff-appellant.

Robert Steven Pomerance (Michael C. Durney, Acting Asst. Atty. Gen., Michael L. Paup, Martha B. Brissette, Tax Div., Dept. of Justice, Washington, D.C.; David A. Faber, U.S. Atty., Charleston, W.Va., on brief) for defendant-appellee.

Before WIDENER, HALL and CHAPMAN, Circuit Judges.

K.K. HALL, Circuit Judge:

Flat Top Lake Association ("Flat Top" or "the Association") appeals an order of the district court granting summary judgment in favor of the United States in a civil action seeking a refund of income taxes. The district court concluded that Flat Top was not entitled to exemption from taxation as a social welfare organization pursuant to Section 501(c)(4) of the Internal Revenue Code, 26 U.S.C. Sec. 501(c)(4). Finding no error in that determination, we affirm.

I.

Flat Top was organized in 1950 as a nonprofit corporation under state law by certain individuals, who wished to develop an artificial lake in the area near Beckley, West Virginia. The purpose of the Association as provided in the articles of incorporation was:

To own, control, lease and sell real estate; to build, maintain and operate a lake and other recreational facilities for the pleasure and convenience of its members without profit upon a cooperative basis, and to do all other things necessary or incidental to the operation of a recreational and conservation project.

In furtherance of its stated goal, the Association acquired approximately 2,200 acres of land whereon it constructed a 230 acre artificial lake. The land surrounding the lake front was subdivided into lots and sold at $1,000 a lot. Access to the property was provided by a two-lane road also constructed by the Association. The road is not a public highway and bears a sign at the entrance to the development stating "Flat Top Lake Association, Private Property, Members Only."

The articles of incorporation and the Association bylaws provide that entry into the development property, and use of the lake or any other Association facilities is restricted to members and their guests. Membership is limited to persons over 21 years of age who own in their own names one or more lots in the development. Members must also pay annual dues and special assessments as levied by the Association's board of directors with the approval of the majority of the members.

At present there are 375 lots in the Flat Top Lake development owned by members. There are permanent structures on 240 of the lots and 80 families reside at Flat Top on a year-round basis. The remaining members use their lots as recreational facilities.

There are no schools, churches or commercial establishments within the bounds of Flat Top lake property, nor is commercial development permitted by the Association bylaws. Although Flat Top has the requisite number of residents to incorporate as a class four municipality under West Virginia law, it has chosen to continue to operate under statutes applicable to private corporations. The Association has, however, undertaken certain tasks of a quasi-governmental nature. It has constructed a bridge within the development, maintains certain common areas including the road, a park, and the lake itself, and provides waste disposal for residents. Finally, the Association has arranged for some law enforcement by obtaining the appointment of a conservator of the peace pursuant to West Virginia Code Sec. 6-3-1. The conservator is paid by the Raleigh County Sheriff's Department which is in turn reimbursed by the Association.

From 1952 until 1979, the Association enjoyed exemption from federal taxation as a social welfare organization. ¹ In 1979, however, the Regional Director of the Internal Revenue Service ("IRS") concluded that the Association could not qualify for exempt status because it did not benefit a "community" bearing a "recognizable relationship to a governmental unit." Reasoning that the Association existed only for the private benefit of its members, the Director revoked the social welfare organization exemption retroactively to 1975.

The Association sought administrative review of the Director's adverse decision but the revocation of exempt status was affirmed by the Commissioner of the IRS on June 18, 1981. Thereafter, Flat Top, as required, filed returns and paid taxes for the years 1975-81. ² Amended returns were subsequently filed again asserting exempt status and seeking a refund. After the refunds were denied, the Association filed the instant civil action seeking a judicial determination that it is and has been a tax exempt organization.

By memorandum opinion filed on October 14, 1986, the district court granted summary judgment in favor of the United States. The district judge noted that she was aware of no authority that authorized tax exemption for "a private association of home owners which restricts use of its facilities to the exclusive use of its members."

This appeal followed.

II.

At issue is the proper interpretation and application of section 501(c)(4) of the Internal Revenue Code, 26 U.S.C. Sec. 501(c)(4) which provides a tax exemption for:

Civic leagues or organizations not organized for profit, but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to employees of a designated person or persons in a particular municipality and the net earnings of which are devoted exclusively to charitable or recreational purposes.

The chief analytical difficulty lies in the need to formulate a workable definition of "social welfare." The IRS has attempted to advance the analysis by promulgating a regulation at 20 C.F.R. Sec. 1.50(c)(4)-1 which defines a social welfare organization as one "primarily engaged in promoting in some way, the common good and general welfare of the community." (emphasis added) Unfortunately, the regulation itself is of limited value since it merely substitutes one amorphous term (i.e. "community") for another ("social welfare").

On appeal, the Association contends that the district court failed to recognize that in reality Flat Top Lake is a separate, distinct, definable "community" and urges our consideration of Vecellio v. United States, 196 F.Supp. 1 (D.W.Va.1961), in which the district court repeatedly described Flat Top Lake in those terms. Citing, inter alia, Rancho Santa Fe Association v. United States, 589 F.Supp. 54 (S.D.Cal.1984), and Lake Petersburg Association v. United States, 35 T.C.M. (P-H) 74,055 (1974), appellant argues that an organization that directs its efforts to the betterment of all inhabitants of a community equally thereby serves the social welfare even if the benefits are not available to the public at large.

We acknowledge that the IRS has been something less than fully successful in establishing the precise limits of a Section 501(c)(4) exemption. We are further aware that some judicial decisions, most notably Rancho Santa Fe, supra, wherein the district court approved a social welfare exemption for an association serving a privately built housing development, do offer some support for appellant's position. Nevertheless, we find the Association's argument ultimately unsatisfying. Instead, we are persuaded as was the district court, that an organization that operates for the exclusive benefit of its members does not serve a "community" as that term relates to the broader concept of social welfare.

In 1972, the IRS recognized that "a neighborhood, precinct, subdivision, or housing development may constitute a community" for purposes of section 501(c)(4). See Rev.Rule 72-102, 1972-1 C.B. 149. Within two years, however, the IRS found it necessary to clarify that determination to avoid the claims for exemption advanced by home owners associations--private organizations formed by property owners in real estate developments, funded by member assessments and dedicated to the maintenance of the development. In Rev.Rule 74-99, 1974-1 (C.B. 131, the IRS stated:

A community within the meaning of section 501(c)(4) of the code and the regulations is not simply an aggregation of homeowners bound together in a structured unit formed as a integral part of a plan for the development of a real estate subdivision and the sale and purchase of homes therein. Although an exact delineation of the boundaries of a "community" contemplated by section 501(c)(4) is not possible, the term as used in that section 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.

Significantly, in 1976 Congress amended the Internal Revenue Code to create a specialized exemption for "homeowners associations" Tax Reform Act of 1976, Pub.Law No. 94-455, 90 Stat. 1520 Sec. 2101. The legislative history of the new section 528 reveals Congress' assessment of the then existing law and particularly the scope of the social welfare exemption provided by section 501(c)(4).

Under present law, generally a homeowner association may qualify as an organization exempt from federal income tax (under sec. 501(c)(4) of the Code) only if it meets three requirements (Rev.Rul. 74-99, 1974-1 C.B. 131). First, the homeowner's association must serve a "community" which bears a reasonably, recognizable relationship to an area ordinarily identified as a governmental subdivision or unit. Second, it must not conduct activities directed to the exterior maintenance of any private residence. Third, common areas or facilities that the homeowner's association owns and...