## Facts

- Flat Top Lake Association, Inc. was formed in 1950 as a nonprofit corporation to develop, maintain, and operate an artificial lake and recreational facilities for members on a cooperative, non-profit basis.
- The Association acquired about 2,200 acres, built a 230-acre artificial lake, subdivided lakefront property into residential lots, and built a two-lane access road.
- The access road and development were marked as private (“Private Property, Members Only”), and governing documents restricted entry and use of facilities to members and their guests.
- Membership required ownership of at least one lot, being over age 21, and paying annual dues and any special assessments approved under the Association’s procedures.
- By the time of litigation, members owned 375 lots; structures existed on about 240 lots; roughly 80 families lived there year-round, with others using the property seasonally.
- The development had no schools, churches, or commercial establishments; commercial activity was barred by the bylaws.
- The IRS treated the Association as exempt under I.R.C. § 501(c)(4) for decades, then revoked the exemption in 1979 on the ground that the Association’s activities primarily benefited a limited private membership rather than the community at large.
- The Association paid income taxes after revocation and sued for refunds, claiming continued eligibility for § 501(c)(4) exemption.

## Issues

1. Whether a nonprofit association operating and maintaining a private residential lake development, with facilities restricted to members and guests, qualifies as a “social welfare” organization exempt from federal income tax under I.R.C. § 501(c)(4).
2. Whether performing services similar to municipal or governmental functions within a private development satisfies the “community” and “social welfare” requirements of § 501(c)(4).

## Decision

- The Fourth Circuit affirmed summary judgment for the United States.
- The court held the Association did not qualify under § 501(c)(4) because it operated primarily for the benefit of its members and limited benefits to a closed class of property owners.
- The court concluded that quasi-governmental services performed only for members within a private development do not convert a member-benefit association into a community-serving social welfare organization.
- The Association was not entitled to a refund of income taxes paid after the IRS revoked its exemption.

## Legal Principles

- Under § 501(c)(4) and implementing regulations, an organization must be operated primarily to promote social welfare by advancing the common good and general welfare of the community.
- “Exclusively” in § 501(c)(4) is applied, by regulation, as a “primarily” test focused on the organization’s main operations and beneficiaries.
- The “community” requirement is not met when the organization’s benefits are confined by property ownership, dues, and controlled access that restricts use to members and their guests.
- Providing road maintenance and other municipal-type services does not establish § 501(c)(4) status when the services are directed to a defined membership rather than to the public or a broad segment of a geographic community.
- An organization structured and operated to deliver private amenities to members is treated as a mutual benefit association, not a social welfare organization, for federal income tax exemption purposes.

## Conclusion

The court held that a homeowners-style association operating a private, access-restricted lake development primarily for lot owners and their guests does not promote social welfare within the meaning of I.R.C. § 501(c)(4), even if it performs services resembling local government functions, and therefore is not exempt from federal income tax.


Flat Top Lake Ass'n, Inc. v. United States, 868 F.2d 108 (4th Cir. 1989)