Rancho Santa Fe Assoc v. USPAGE 2
3RD CASE of Level 1 printed in FULL format.
RANCHO SANTA FE ASSOCIATION, Plaintiff, v. UNITED STATES OF
AMERICA, Defendant.
Civil No. 83-0547-E(I)
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF
CALIFORNIA
589 F. Supp. 54; 1984 U.S. Dist. LEXIS 10682; 84-2 U.S. Tax
Cas. (CCH) P9536; 54 A.F.T.R.2d (RIA) 5518
January 31, 1984, Decided
January 31, 1984, FILED, ENTERED
DISPOSITION: [*1] Plaintiff's motion for summary judgment granted.
CORE TERMS: exemption, general public, acres, social welfare, housing
development, homeowner, promotion, qualify, general welfare, operated
exclusively, exempt, civic, summary judgment, enjoyment, tennis, common areas,
golf course, athletic, parkland, covenants, exempt status, coextensive, serving,
leagues, common good, open space, regulation, playgrounds, world -at -large,
neighborhood
COUNSEL: DAVID R. CLARK, AYLWARD, KINT2, STISKA, WASSENAAR & SHANNAHAN, San
Diego, CA.
KATHRYN A. SNYDER, AUSA.
NANCY MORGAN, Trial Attorney, Washington, D.C.
JUDGES: WILLIAM B. ENRIGHT, Judge, United States District Court
OPINIONBY: WILLIAM B. ENRIGHT
OPINION: MEMORANDUM DECISION
This is an action for refund of federal income taxes paid under protest in
the amount of $ 313,927.00 by plaintiff Rancho Santa Fe Association, Inc.
(hereinafter referred to as "Association"). Plaintiff seeks a refund of this
amount as well as a declaration of plaintiff's tax exempt status under Section
501(c)(4) of the Internal Revenue Code of 1954, [*2] 26 U.S.C. @
501(c)(4) (1976). The Section 501(c)(4) exemption is available to civic
leagues or organizations not organized for profit but operated exclusively for
the promotion of social welfare.
Rancho Santa Fe is a large, self-contained housing development located just
north of San Diego. The Association was incorporated as a non-profit
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589 F. Supp. 54; 1984 U.S. Dist. LEXIS 10682, *;
84-2 U.S. Tax Cas. (CCH) P9536; 54 A.F.T.R.2d (RIA) 5518
cooperative association on July 4, 1927. On July 9, 1942, plaintiff was granted
exempt status pursuant to the predecessor of Section 501(c)(4) ; this
applicability of exempt status to plaintiff has been reaffirmed by the Internal
Revenue Service (hereinafter "IRS") three times since the initial determination.
Despite the absence of any intervening change in either the statutory
language or the operation of the Association itself, on May 9, 1979 plaintiff's
exempt status was revoked by an IRS determination letter. The reason for this
revocation was stated to be that:
[The Association was] not operated exclusively for the promotion of social
welfare since all of the common areas and the facilities [the Association owned
and maintained were] not open to members of the general public for their use and
enjoyment.
As a result[*3] of this revocation, the Association paid corporate tax under
protest for the fiscal years ending June 30, 1981 and June 30, 1982, and filed a
timely complaint in this court seeking review of the IRS determination that
plaintiff is not exempt and the IRS denial of plaintiff's request for a refund.
Defendant presently moves this court for summary judgment in its favor;
plaintiff cross -moves for summary judgment, as well.
Upon due consideration of the parties' memoranda and exhibits, the arguments
advanced at the hearing, and for the reasons set forth herein, the court grants
plaintiff's motion for summary judgment.
FACTS
The following facts about the Association and Rancho Santa Fe are relevant to
the disposition of these motions. The Association exists to enforce protective
covenants designed to preserve the character of the community of Rancho Santa
Fe. It is a homeowner's association consisting of about 3,000 members who are
property owners within the Rancho Santa Fe development which is governed by the
protective covenants. The property contained in the development consists of
6,100 acres. The Association owns 600 acres outright; the remainder is property
owned by the individual[*4] members. Of the 600 acres owned by the Association,
300 acres are dedicated to parkland and open space, 165 acres are improved as
playgrounds, athletic fields, a public parking lot, a community clubhouse, and
hiking and bridle trails. The remaining 135 acres comprise an 18-hole golf
course and eight tennis courts.
The Association oversees the governance of the property within the
development by enforcing the covenants and setting up various boards, including
a planning board, a park board, a health board, a library board, and a
recreation board. The Association also furnishes private security protection by
way of the Rancho Santa Fe Patrol. In addition, the Association functions as a
liaison between the community and the Board of Supervisors on issues which
require the participation of larger governmental entities, such as maintenance
of the rights -of -way and the sanitation system. Finally, the Association serves
the community in loaning out its facilities free of charge to various public
service organizations as well as to the schools.
Of the lands directly under the ownership of the Association, the parklands
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589 F. Supp. 54; 1984 U.S. Dist. LEXIS 10682, *;
84-2 U.S. Tax Cas. (CCH) P9536; 54 A.F.T.R.2d (RIA) 5518
and open space, playgrounds and athletic fields, public parking lot, [*5]
community clubhouse, and the commercial areas are open to the public. The golf
course and tennis courts are less freely accessible; they may be used by the
general public only to the extent that members of the public are guests of the
privately -owned Inn located in Rancho Santa Fe, otherwise only members of the
Association may use these facilities.
In sum, out of the 600 acres owned directly by the Association, 465 of these
acres are available for use by the general public on an unrestricted basis. The
remaining 135 acres are available to all the members of the Rancho Santa Fe
community and to the general public, but only when the public uses the inn
located in Rancho Santa Fe.
DISCUSSION
This case presents the issue of whether the Rancho Santa Fe Association is an
organization operated exclusively for the promotion of social welfare such that
it is exempt from federal income tax under Section 501(c)(4) of the Internal
Revenue Code of 1954.
Section 501(c)(4) provides in pertinent part:
(c) List of Exempt Organizations. The following organizations are referred to
in subsection (a) [i.e. organizations exempt from federal income taxation]:
(4) Civic leagues or[*6] organizations organized not for profit but
operated exclusively for the promotion of social welfare...
26 U.S.C. @ 501(c)(4) (1976). The Treasury Department has issued a regulation
which elaborates the definition of "social welfare":
(2) Promotion of Social Welfare. (i) In general. An organization is operated
exclusively for the promotion of social welfare if it is primarily engaged in
promoting in some way the common good and general welfare of the people of the
community. An organization embraced within this section is one which is operated
primarily for the purpose of bringing about civic betterments and social
improvements.
(ii) Political or social activities. ... Nor is an organization operated
primarily for the promotion of social welfare if its primary activity is
operating a social club for the benefit, pleasure, or recreation of its members,
or is carrying on a business with the general public similar to organizations
which are operated for profit.
26 C.F.R. @ 1.501(c)(4)-1 (1983).
A series of revenue rulings issued by the IRS further details the
availability of this exemption to homeowner associations such as the taxpayer
[*7]in the present case. Revenue Ruling 72-102 indicates that a nonprofit
organization formed to preserve the appearance of a housing development and to
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589 F. Supp. 54; 1984 U.S. Dist. LEXIS 10682, *;
84-2 U.S. Tax Cas. (CCH) P9536; 54 A.F.T.R.2d (RIA) 5518
maintain streets, sidewalks, and common areas for the use of residents is exempt
under Section 501(c)(4) . Rev. Rul. 102, 1972-1 C.B. 149. This ruling notes
that for purposes of Section 501(c)(4) and Treasury Regulation
1.501(c)(4)-1, which speak of "social welfare" in terms of "general welfare of
the people of the community," a neighborhood precinct, subdivision or housing
development may constitute a community. The ruling continues:
For example, exempt civic leagues in urban areas have traditionally represented
neighborhoods or other subparts of much larger political units. By administering
and enforcing covenants, and owning and maintaining certain non-residential,
non-commercial properties of the type normally owned and maintained by municipal
governments, this organization is serving the common good and the general
welfare of the people of the entire development.
Rev. Rul. 102, 1972-1 C.B. 149 at 150.
In the instant case, Rancho Santa Fe Association, Inc. falls within the
definition of a tax exempt organization devoted[*8] to the promotion of the
general welfare. It performs the functions of a governmental entity and brings
about civic betterments and social improvements that would be sorely missed by
the Rancho Santa Fe community should they be lost or curtailed. In addition to
providing recreational facilities in the form of a golf course, numerous tennis
courts, playgrounds, athletic fields, parks and open spaces, the Association
also serves a variety of governmental functions through the activities of its
various boards. Further, the Association serves as a liaison to larger
governmental bodies to protect the interests of the community which it
represents.
This conclusion is not altered by additional IRS interpretations of the
exemption, as the government argues. In Revenue Ruling 74-99, the IRS concluded
that to qualify for the Section 501(c)(4) exemption a homeowners'
association (1) must serve a "community" which bears a reasonable relationship
to an area ordinarily defined as a governmental unit, (2) it must not conduct
activities directed to the exterior maintenance of private residences, and (3)
the common areas or facilities it owns must be for the use and enjoyment of the
general public. [*9] Rev. Rul. 99, 1974-1 C.B. 131 at 132-33.
In addition, Revenue Ruling 74-99 sets forth the limits which, in the view of
the IRS, apply to the availability of the public welfare exemption for housing
developments. This ruling states that the term "housing development" is not to
be viewed as necessarily coextensive with the term "community," so that not
every association which oversees a housing development is entitled to claim the
exemption.
Finally, Revenue Ruling 74-99 states that the exemption was "intended only to
approve ownership and maintenance by a homeowners' association of such areas
as roadways and parklands, sidewalks and street lights, access to, or the use
and enjoyment of which is extended to members of the general public, as
distinguished from controlled use or access restricted to the members of the
homeowners' association. ..." Rev. Rul. 99, 1974-1 C.B. 131 at 133. In other
words, under this ruling, to qualify for the exemption an association must
benefit the entire community; it cannot exclude community members from sharing
in its largesse.
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589 F. Supp. 54; 1984 U.S. Dist. LEXIS 10682, *;
84-2 U.S. Tax Cas. (CCH) P9536; 54 A.F.T.R.2d (RIA) 5518
The most recent pronouncement on the scope of the Section 501(c)(4)
exemption by the IRS broadens the earlier view and notes[*10] that even
where the association does not represent an entire community, it qualifies for
an exemption if the association's activities benefit the community as a whole.
That ruling notes:
Whether a particular homeowners' association meets the requirements of
conferring benefit on a community must be determined according to the facts and
circumstances of the individual case. Thus, although the area represented by an
association may not be a community within the meaning of that term as
contemplated by, Rev. Rul. 74-99, if the association's activities benefit a
community, it may still qualify for exemption. For instance, if the association
owns and maintains common areas and facilities for the use and enjoyment of the
general public as distinguished from areas and facilities whose use and
enjoyment is controlled and restricted to members of the association then it may
satisfy the requirement of serving a community.
Rev. Rul. 63, 1980-1 C.B. 116 at 116. The ruling continues on to note that a
homeowners' association, which represents an area that is not a community,
does not qualify for the exemption under Section 501(c)(4) if it restricts the
use of its recreational[*11] facilities to members of the association. Id.
Under the above analysis, the availability of the exemption to a
homeowners' association which restricts the use of a portion of its facilities
to members of the association depends on whether the housing development in
question is coextensive with the community it serves. If the development and the
community are one and the same, then the benefits bestowed by the association on
the development benefit the general public within the requirements of the
statute, because the association is "promoting in some way the common good and
general welfare of the people of the community" in accordance with Treasury
Regulation 1.501(c)(4)-1, 26 C.F.R. @ 1.501(c)(4)-1 (1983) (emphasis added). On
the other hand, if the association does not benefit the entire community, under
Revenue Ruling 80-63 it would only qualify for the exemption if the benefits it
offers to the housing development are available to the general public and not
restricted to the members of the association.
In the present case, Rancho Santa Fe as a development constitutes an
independent community within the meaning of the statute. Rancho Santa Fe is a
housing development, [*12] significant in size and self-contained in
orientation. It is not the ordinary residential grouping of tract homes, but is
an independent community separated geographically from the central area of the
city of San Diego of which Rancho Santa Fe is a sub -part. Rancho Santa Fe has
its own post office and zip code and, while a few nearby developments such as
Fairbanks Ranch share that post office, it is not alleged or contended that
Fairbanks Ranch and Rancho Santa Fe are part of the same community.
Given the conclusion that the development of Rancho Santa Fe is coextensive
with the community of Rancho Santa Fe, and that Rancho Santa Fe is an
independent community, it necessarily follows that the benefits which are
provided to the members of the Association which represents the entire community
of Rancho Santa Fe promote the general welfare of the people of the community in
accordance with the statutory exemption. The fact that in so doing the
Association also benefits whoever else might want to avail themselves of the
open space, athletic fields, parklands, hiking and bridle trails that
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589 F. Supp. 54; 1984 U.S. Dist. LEXIS 10682, *;
84-2 U.S. Tax Cas. (CCH) P9536; 54 A.F.T.R.2d (RIA) 5518
constitutes over two-thirds of the Association's land, is but an added benefit
of the Association's[*13] activities. The critical factor is that the
Association benefits the community it serves and represents on an unrestricted
basis.
Thus, only where an association represents less than the entire community is
it a concern whether the benefits of the association are made available to the
general public, because in that situation the benefits which are restricted to
association members are not benefiting the community as a whole. There is no
requirement, however, that if the work of the association benefits the entire
community, that it must also benefit the general public in terms of the
world -at -large. To graft upon the exemption this additional requirement negates
the statutory intent and the language of the regulation which speaks in terms of
benefiting the "community." It would also undermine the purpose behind this
legislation which was to encourage communities such as Rancho Santa Fe to
provide benefits to its residents. See, People's Educational Camp Society, Inc.
v. Commissioner, 331 F.2d 923, 932 (2d Cir. 1964).
To require that Rancho Santa Fe give unlimited access to its golf course and
tennis courts beyond the community it serves to the world -at -large in order to
obtain[*14] the exemption at issue is a neither necessary nor mandated
condition. To impose such a requirement would defeat the statutory purpose of
the exemption which encourages the provision of services to communities, in that
requiring unlimited access to these facilities would necessarily lessen the
benefit to the community which the Association represents. Only so many rounds
of golf and games of tennis can be played at these facilities and the demand
upon them created by the Rancho Santa Fe community alone is great. To order that
these facilities must also benefit surrounding communities would result in a
concomitant decrease in availability of these facilities to Rancho Santa Fe
itself. Congress did not require that, in order to obtain this exemption, an
association must serve an entire city, or even several communities; service to a
single community was viewed as sufficient. The Rancho Santa Fe Association, by
serving well the community of Rancho Santa Fe, is entitled to this exemption.
That has been the position of IRS, as communicated to the Association, for many
years. Nothing whatever has changed during those years in the operation, custom
or usage of the Association facilities except[*15] to broaden public access
to those facilities. Under such circumstances, to now seek to eliminate such
exemption for the Association without any change whatever in the statutory
scheme of regulations of the agency would appear to be inequitable at best.
For these reasons, plaintiff's motion for summary judgment must be granted.
DATED: January 31, 1984.
WILLIAM B. ENRIGHT, Judge
United States District Court
ORDER
Pursuant to the court's Memorandum Decision dated January 31, 1984, the court
hereby grants plaintiff's motion for summary judgment.
IT IS SO ORDERED.
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589 F. Supp. 54; 1984 U.S. Dist. LEXIS 10682, *;
84-2 U.S. Tax Cas. (CCH) P9536; 54 A.F.T.R.2d (RIA) 5518
DATED: January 31, 1984.
WILLIAM B. ENRIGHT, Judge
United States District Court