(a) General Rules

The regulations amplifying the law concerning this category of tax-exempt organizations offer two basic precepts: (1) “Social welfare” is commensurate with the “common good and general welfare” and “civic betterments and social improvements,”² and (2) the promotion of social welfare does not include activities that primarily constitute “carrying on a business with the general public in a manner similar to organizations which are operated for profit.”³ The regulations also include a prohibition on political campaign activity⁴ and state that an organization is not 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.”⁵ The conduct of social functions for the benefit of its members will not defeat social welfare status for an organization, however, where these activities are something less than primary,⁶ or are otherwise incidental to a primary function.⁷

Like all tax-exempt organizations, the social welfare organization, to be operated exclusively for the promotion of social welfare, must be operated primarily for that purpose.⁸ The key principle is that, to qualify as an exempt social welfare organization, the activities of the organization must be those that benefit a community, rather than merely benefit the organization's membership or other select group of individuals or organizations.⁹ Thus, an organization that restricted its membership to individuals of good moral character and health belonging to a particular ethnic group residing in a geographical area and that provided sick benefits to members and death benefits to their beneficiaries was ruled to not be exempt as a social welfare organization, inasmuch as it was essentially a mutual, self-interest type of organization.¹⁰ Likewise, an individual practice association was denied categorization as an exempt social welfare organization because its primary beneficiaries were its member-physicians, in that it provided an available pool of physicians who abided by its fee schedule when rendering medical services to the subscribers of a health maintenance organization and provided its members with access to a large group of patients (the subscribers) who generally may not be referred to non–member-physicians.¹¹

As an additional example, a nonprofit organization, incorporated for the purpose of furnishing television reception to its members on a cooperative basis in an area not adaptable to ordinary reception, where the members contracted for services and the payment of installment fees, was deemed to not be a tax-exempt social welfare organization because it was “operate[d] for the benefit of its members rather than for the promotion of the welfare of mankind.”¹² Yet a similar organization, which obtained memberships and contributions on a voluntary basis, was found to be an exempt social welfare organization, since it “operate[d] its system for the benefit of all television owners in the community.”¹³

Similarly, because of the lack of sufficient benefit to the entire community, a trust to provide group life insurance only for members of an association was not considered a tax-exempt social welfare organization.¹⁴ Likewise, a resort operated for a school's faculty and students was held to not be an exempt social welfare organization.¹⁵ In the latter instance, a federal court of appeals wrote that the “exemption granted to social welfare organizations is made in recognition of the benefit which the public derives from their social welfare activities.”¹⁶ Conversely, a consumer credit counseling service that assisted families and individuals with financial problems was ruled to qualify as an exempt social welfare organization because its objectives and activities “contribute to the betterment of the community as a whole” by curbing the rising incidence of personal bankruptcy in the community.¹⁷ Also, exempt social welfare status was accorded an organization that processed consumer complaints concerning products and services provided by businesses, met with the parties involved to encourage resolution of the problem, and recommended an appropriate solution, and (where the solution was not accepted) informed the parties about the administrative or judicial remedies available to resolve the dispute.¹⁸ Likewise, an organization created to maintain a system for the storage and distribution of water to raise the underground water level in a community was ruled to be an exempt social welfare organization because of the benefits to those whose wells were thereby supplied.¹⁹

Organizations that operate in a manner inimical to principles of what constitutes the common good and the general welfare of the people in a community will not, of course, qualify as a tax-exempt social welfare organization. In part for that reason, the IRS denied tax exemption to an antiwar protest organization that urged demonstrators to commit violations of local ordinances and breaches of public order.²⁰ Said the IRS: “Illegal activities, which violate the minimum standards of acceptable conduct necessary to the preservation of an orderly society,…are not a permissible means of promoting social welfare.”²¹

Other examples of tax-exempt social welfare organizations include an organization that provided a community with supervised facilities for the teaching of the safe handling and proper care of firearms,²² encouraged industrial development to relieve unemployment in an economically depressed area,²³ helped to secure accident insurance for the students and employees in a school district,²⁴ provided bus transportation between a community and the major employment centers in a metropolitan area during rush hours when the regular bus service was inadequate,²⁵ conducted a community art show for the purpose of encouraging interest in painting, sculpture, and other art forms,²⁶ provided assistance to low-income farm families in a particular state,²⁷ conducted a free public radio forum for the dissemination of progressive social views,²⁸ maintained parking for visitors to a downtown business district,²⁹ provided low-cost rural electrification,³⁰ and established and maintained a roller-skating rink for residents of a particular county.³¹ Junior chambers of commerce usually qualify as exempt social welfare organizations.³²

Organizations formed to promote sports frequently are a type of nonprofit organization likely to gain status as tax-exempt social welfare organizations. A corporation formed to initiate programs designed to stimulate the interest of youth in organized sports, by furnishing youths virtually free admission and encouraging their attendance at sporting events, was considered an exempt social welfare organization because it provided “wholesome entertainment for the social improvement and welfare of the youths of the community.”³³ Sports organizations can fall short of the requisite criteria in this regard, however, as illustrated by the fate of a nonprofit corporation that was organized to provide facilities for training individuals and horses for use in emergencies, and obtained recognition as an exempt social welfare organization, only to subsequently lose its exemption because it evolved into a commercial riding stable.³⁴ The court said that “the few persons eligible to use…[the organization's] facilities as members or on any basis other than by paying a regular commercial fee for such use causes…[the] operation (no matter how laudable) to be such as not to come within the meaning of ‘social welfare.'”³⁵

The IRS, from time to time, denies recognition of tax exemption of an organization as a social welfare organization and revokes the exempt status of a social welfare organization.³⁶

(b) Benefits to Members

A related criterion of the tax-exempt social welfare organization is that it must not be operated primarily for the economic benefit or convenience of its members.

Thus, a corporation that purchased and sold unimproved land, invested proceeds received from the sales, and distributed profits to members, was deemed to not be a tax-exempt social welfare organization.³⁷ Similarly, as noted, an organization formed to manage low- and moderate-income housing property for a fee was ruled to not qualify for exempt social welfare status.³⁸ Likewise, a federal court of appeals held that a consumer and producer membership cooperative that rebated a percentage of net income to members as patronage dividends made the disbursements “primarily to benefit the taxpayer's membership economically” and not exclusively for promotion of social welfare,³⁹ and that a membership corporation composed of buyers of ready-to-wear apparel and accessories was not an exempt social welfare organization, since its functions were largely social and many of its activities were designed to enable presently employed members to earn more money.⁴⁰ Subsequently, another federal court of appeals denied exempt social welfare status to a mutual assistance association established by a church in furtherance of its “mutual aid” practices, because its practices and policies were found to benefit only its members, rather than the requisite community.⁴¹

Similarly, an association of police officers primarily engaged in providing retirement benefits to members and death benefits to beneficiaries of members was held to not qualify for exemption as a social welfare organization because the primary benefits from the organization were limited to its members,⁴² although the exemption may be available where this type of an association is established and is maintained by, and where the benefits provided are funded primarily by, a government.⁴³ Likewise, an individual practice association providing health services through written agreements with health maintenance organizations was ruled to not qualify as an exempt social welfare organization because the primary beneficiaries were its member physicians,⁴⁴ an organization carrying on a business with the public was found to not qualify as an exempt social welfare entity because it was operated primarily for the benefit of its members,⁴⁵ and an organization providing assistance to those owning recreational residences in a natural forest had its exemption as a social welfare entity revoked because its activities were almost exclusively for the benefit of its membership.⁴⁶ As still another illustration, it was held that, although an exempt social club was entitled to retain its exempt status, the club's operation of a beach club and parking lots was not substantially related to the promotion of community welfare because they are not open to the public.⁴⁷

Many other types of membership service groups have been denied categorization as tax-exempt social welfare organizations, such as an automobile club,⁴⁸ an organization that operated a dining room and bar for the exclusive use of its members,⁴⁹ and a national sorority controlled by a business corporation that furnished the member chapters with supplies and services.⁵⁰ In another instance, an organization formed to purchase groceries for its membership at the lowest possible prices on a cooperative basis was denied exempt social welfare status.⁵¹ The rationale: “The organization…is a private cooperative enterprise [operated primarily] for the economic benefit or convenience of the members.”⁵² Similarly, the IRS denied recognition as an exempt social welfare entity to a cooperative organization providing home maintenance services to its members, even though payments for the services were made in kind.⁵³ In another instance, an organization whose membership was limited to persons who owned shares of public utility companies was ruled to not qualify as an exempt social welfare entity because it was operated to serve private interests, in that it promoted the interests of the public utility industry and its stockholders by preparing and filing statements concerning public utility matters pending before state and federal agencies and legislative bodies, and by publishing a newsletter about matters affecting the stockholders.⁵⁴

The rendering of services to members does not, however, necessarily work a denial or loss of tax-exempt social welfare status. For example, a memorial association formed to develop methods of achieving simplicity and dignity in funeral services and to maintain a registry for the wishes of its members in regard to funeral arrangements qualified for exemption as a social welfare organization,⁵⁵ as did an organization engaged in rehabilitation and job placement of its members.⁵⁶ Likewise, an organization that promoted the legal rights of all tenants in a particular community and occasionally initiated litigation to contest the validity of legislation adversely affecting tenants was held to qualify as an exempt social welfare organization because its activities were directed toward benefiting all tenants in the community.⁵⁷ By contrast, a tenants' rights group was denied exempt social welfare organization status because its activities were directed primarily toward benefiting only tenants who were its members.⁵⁸

Also, qualification as a tax-exempt social welfare entity will not be precluded where an organization's services are equally available to members and nonmembers. As an illustration of this point, the IRS accorded exempt social welfare classification to an organization formed to prevent oil and other liquid spills in a city port area, and to contain and clean up any spills that occur.⁵⁹ Had the organization confined its repairs to property damaged by its members, this exemption would not have been available.⁶⁰

Veterans' organizations may qualify as tax-exempt social welfare organizations;⁶¹ however, the IRS has ruled to the contrary.⁶² Organizations that have a membership of veterans may qualify as exempt social welfare groups,⁶³ although exemption is more likely to be available under a separate category of exemption enacted for the benefit of veterans' groups.⁶⁴ The IRS, from time to time, reviews the status of a veterans' organization and concludes that the entity cannot qualify for this category of exemption.⁶⁵ A subsidiary organization must establish exempt status on its own rather than on the basis of the functions of the parent veterans' organization.⁶⁶

(a) Community and Condominium Associations

The IRS has struggled with the concept of community in relation to the advent of homeowners' associations, other community associations, and condominium associations. A homeowners' association, for example, typically maintains common areas for the use of all residents; enforces covenants for preservation of the architecture and general appearance of the development; and participates in the formulation of public policies impacting the development, such as road expansion, land development, and encroachment of commercial enterprises. In this latter capacity, an association of this nature is functioning much like a conventional civic league.⁶⁸

The IRS ruled that an association performing the first two of these functions is exempt from federal income tax as a social welfare organization.⁶⁹ The association was found to be “serving the common good and the general welfare of the people of the entire development,” with the IRS noting that a “neighborhood, precinct, subdivision, or housing development” may constitute the requisite community.⁷⁰ Even though the association was established by the developer and its existence may have aided the developer in selling housing units, any benefit to the developer was dismissed as incidental. Also deemed incidental were the benefits that accrued to the individual members, such as the preservation and protection of property values.⁷¹

Following issuance of this ruling in 1972, the IRS concluded that its “increasing experience” with homeowners' associations demonstrated that the ruling was being misconstrued as to its scope. Consequently, in 1974, the IRS issued a “clarifying” ruling.⁷² The IRS said that homeowners' associations, as described in the 1972 ruling, are prima facie presumed to be essentially and primarily formed and operated for the benefit of the individual members and, accordingly, to not be tax-exempt.⁷³ Subsequently, however, the IRS ruled that an organization with membership limited to the residents and business operators within a city block and formed to preserve and beautify the public areas in the block, thereby benefiting the community as a whole as well as enhancing the members' property rights, may qualify as an exempt social welfare entity.⁷⁴ Moreover, a membership organization formed to help preserve, beautify, and maintain a public park was ruled to qualify as an exempt charitable organization.⁷⁵

The position of the IRS as to the definition of the word community, as stated in this 1974 ruling, is that the term 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.”⁷⁶ Thus, the IRS held that a community is “not simply an aggregation of homeowners bound together in a structured unit formed as an integral part of a plan for the development of a real estate subdivision and the sale and purchase of homes therein.”⁷⁷

The IRS, in this 1974 ruling, also held that, where the association's activities include those directed to exterior maintenance of private residences, the above prima facie presumption is reinforced. Moreover, the 1974 ruling stated that, as far as ownership and maintenance of common areas is concerned, the IRS's approval is extended only to those areas “traditionally recognized and accepted as being of direct governmental concern in the exercise of the powers and duties entrusted to governments to regulate community health, safety, and welfare.”⁷⁸ That is, the IRS's “approval” was extended only to ownership and maintenance by a homeowners' association of areas such 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.”⁷⁹

Thereafter, the IRS somewhat moderated its position in these regards by stating that whether a homeowners' association meets the requirements of conferring benefit on a community must be determined according to the facts and circumstances of each case. The agency continues to insist, however, that exemption as a social welfare organization is not available to a homeowners' association (that does not represent a community) if it restricts the use of its facilities (such as parking and recreational facilities) to its members.⁸⁰ This position of the IRS is generally being accepted by the courts.⁸¹ Nonetheless, a federal district court rejected some of the positions of the IRS concerning the eligibility of homeowners' associations for tax-exempt status as social welfare organizations, holding that the association in the case represented a development that is an “independent community” (with 3,000 members and 6,100 acres of land), so that its benefits were provided to persons within the requisite community.⁸² The court stated: “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.”⁸³

As noted, another court was in agreement with the IRS position in these regards, holding that an association of homeowners, which owned, controlled, leased, and sold real estate and built, maintained, and operated recreational facilities for the pleasure and convenience of its members, did not qualify as a tax-exempt social welfare organization.⁸⁴ Holding that a “private association of homeowners which restricts its facilities to the exclusive use of its members” cannot be exempt, the court observed that in other court holdings to the contrary there was “availability of taxpayer's facilities to the general public.”⁸⁵

An organization operating a vision care plan by contracting with subscribers was held to not qualify for tax-exempt status as a social welfare organization, in part because the membership-based structure caused the entity to not serve the requisite community.⁸⁶ Likewise, an organization claiming to be an agency providing home health care services to residents of five facilities in various locations was found by the IRS to be merely a registry, matching the needs of residents with independent service providers for a fee; the organization was denied recognition of exemption as a social welfare entity primarily because it did not serve the requisite community.⁸⁷ An organization established for the purpose of developing and distributing dental benefit products was denied recognition of exemption as a social welfare organization, in part because it was not promoting the welfare of a community.⁸⁸

The position of the IRS is that condominium management corporations do not qualify as tax-exempt social welfare organizations inasmuch as the organizations' activities are for the private benefit of the members.⁸⁹ The IRS's rationale underlying this position is of two parts. First, the IRS ruled that, because of the essential nature and structure of the condominium system of ownership, the rights, duties, privileges, and immunities of the members are “inextricably and compulsorily tied to the owner's acquisition and enjoyment of his property in the condominium.”⁹⁰ Second, the IRS noted that “condominium ownership necessarily involves ownership in common by all condominium unit owners of a great many so-called common areas, the maintenance and care of which necessarily constitutes the provision of private benefits for the unit owners.”⁹¹

The IRS traces its position as to condominium management organizations to a 1962 federal court of appeals opinion.⁹² In 1965, the IRS ruled that a cooperative organization operating and maintaining a housing development and providing housing facilities did not qualify as an exempt social welfare organization.⁹³ Again, in 1969, the IRS ruled that a nonprofit organization formed to provide maintenance of exterior walls and roofs of members' homes in a development was not exempt as a social welfare entity.⁹⁴

A homeowners' association or condominium management organization may, if attempts to qualify as a tax-exempt social welfare organization fail, qualify as an exempt social club.⁹⁵ That is, an organization may have as its primary purpose the establishment and operation of social facilities, such as a swimming pool, for the benefit of the homeowners in a community.⁹⁶

Also, a tax-exempt homeowners' association may establish a separate but affiliated organization to own and maintain recreational facilities and restrict their use to members of the association, as long as the organization is operated totally separate from the association.⁹⁷

Congress, in 1976, brought some clarification of the tax law concerning homeowners' associations.⁹⁸ This provision provides an elective tax exemption for condominium management and residential real estate management associations.⁹⁹

(b) Broader Requirement of Community

The IRS subsequently adopted a far more expansive view of the concept of a community in this context, equating it essentially to the entirety of the nation's public. This position largely rested on a federal court of appeals decision issued in 1962.¹⁰⁰ The court rejected the claim that a nonprofit organization operated to provide low-cost housing for veterans was a tax-exempt social welfare entity, portraying it as merely an “economic and private cooperative undertaking.”¹⁰¹ This appellate court wrote that an exempt social welfare organization must “offer a service or program for the direct betterment or improvement of the community as a whole”; these organizations must, added the court, function on a “community basis.”¹⁰² The IRS's lawyers characterized this opinion as meaning that social welfare is the “well-being of persons of a community” and that the “benefits provided by a social welfare organization must be municipal or public.”¹⁰³ The IRS also relies on an appellate court decision rendered in 1964.¹⁰⁴ In this case, the court characterized the promotion of social welfare as involving the serving of “purposes beneficial to the community as a whole” or the promotion of the “welfare of mankind.”¹⁰⁵ The IRS ruled that a state-approved discharge cleanup organization that worked to prevent oil spills and had pollution-control programs was a tax-exempt social welfare organization.¹⁰⁶ Certain members of the organization could meet part of the state's licensing requirements for their facilities. The IRS concluded that, by cleaning up spills of members and nonmembers, however, the organization acted to prevent deterioration of a port community and not merely to prevent damage to its members' facilities. The agency thus ruled that this organization was primarily engaged in activities designed to benefit all inhabitants of the community served by it.¹⁰⁷ In reliance on this ruling, the IRS held that an organization that promoted uniform codes and otherwise provided programs concerning hazardous situations supported the “public sector” and generally worked to “ensure the public safety,” and therefore qualified as an exempt social welfare organization because it benefited the “community as a whole.”¹⁰⁸ By contrast, the IRS ruled that an entity could not qualify as an exempt social welfare organization inasmuch as its sole function was maintenance of a private road that was essentially a common driveway for its four members' homes.¹⁰⁹

(a) Legislative Activities

In general, a tax-exempt social welfare organization is permitted to engage in unlimited legislative activity, as long as the primary reason¹¹⁵ for these activities is achievement of the organization's exempt purposes.¹¹⁶

(b) Political Campaign Activities

A tax-exempt social welfare organization can engage in political campaign activity without jeopardizing its exemption, as long as this type of activity is not its primary purpose or function.¹¹⁷