Flat Top Lake HOA v. US (868 F.2d 108) was a 1989 federal circuit court case on whether or not the WV HOA qualified as a social welfare nonprofit entitled to receive federal tax breaks. The IRS permits tax exempt status for HOAs as a social welfare entity under its 501(c)4 classification if certain requirements are met. In general, the HOA must primarily provide community benefits to the greater community rather than to its members only.
So much for history. Today, Sun City Grand (Surprise, AZ), a $20 +/- million operation with over 9,000 homes, has been functioning as a social welfare entity since 2015. As best determined, it claims that just being there is sufficient to be granted a tax exemption as a social welfare nonprofit and receive tax benefits.
But, a puzzlement! Why is the board seeking member approval of programs to be made available to the general public after 3 years have gone by? Furthermore, the governing documents do not grant the board any such powers to change the nature of the subdivision without an amendment to the CC&RS. What is going on?
The Flat Top Court held that,
The homeowner’s association must serve a community [subdivision] which bears a reasonably, recognizable relationship to an area ordinarily identified as a governmental subdivision or unit. Congress recognized that a true “community” functions within a broader national fabric.
When a group of citizens elects . . . to separate themselves from society and to establish an entity that solely advances their own private interests, no potential for general social advancement [benefit] is implicated. Wholly private activity, however meritorious, confers no such benefit which would render a compensatory exemption [ tax break] appropriate.
So, from the dawn of HOA history it has been vehemently argued that HOAs are private entities and therefore hands off, we now have an about face just to claim tax benefits. In other words, the HOA by its very nature withdrew from the greater society and cannot claim a tax benefit from it.
In dissenting from the majority holding, a judge maintained that “The Association performs [community benefits], as the majority recognized, ‘tasks of quasi-governmental nature’ for the Association members and others. . . and performs activities which the taxpayers otherwise would have to pay for.” The judge did not address the question of double taxation as a result of reduced municipality services – paying HOA assessments and also paying taxes for services no longer provided by the municipality.
HOA Constitutional Government 