## Facts

- Rancho Santa Fe Association, Inc. was a nonprofit homeowners’ association for a large residential development north of San Diego, with about 3,000 member property owners.
- The Association’s primary function was to administer and enforce protective covenants and provide community services intended to preserve the development’s character.
- The Association owned about 600 acres within a roughly 6,100-acre development, including parkland, open space, and improved areas such as playgrounds, athletic fields, a public parking lot, a community clubhouse, and hiking and bridle trails.
- The Association also operated a golf course and tennis courts that could be used by the public only as guests of members.
- The Association had long been treated as tax-exempt under the statutory predecessor to I.R.C. § 501(c)(4), and the IRS had reaffirmed that status multiple times.
- In 1979, the IRS revoked the exemption, reasoning the Association was not operated exclusively for social welfare because all common areas and facilities were not open to the general public.
- The Association paid corporate income taxes under protest for two fiscal years (totaling $313,927) and sued for a refund and a declaration of exemption under § 501(c)(4).
- Both sides moved for summary judgment.

## Issues

1. Whether a homeowners’ association primarily performing community governance and common-area functions within a defined residential development is “operated exclusively for the promotion of social welfare” under I.R.C. § 501(c)(4).
2. Whether § 501(c)(4) requires that all facilities be open to the general public, such that partial restrictions (e.g., golf and tennis limited to members and guests) defeat exemption.
3. Whether the IRS’s revocation was improper where there was no material change in the association’s operations or relevant statutory language from prior recognitions of exemption.

## Decision

- The court granted the Association’s motion for summary judgment and denied the United States’ motion.
- The court held the Association was operated exclusively for the promotion of social welfare within the meaning of I.R.C. § 501(c)(4).
- The court ordered a refund of the corporate income taxes paid under protest for the relevant years.

## Legal Principles

- Under I.R.C. § 501(c)(4) and implementing regulations, an organization qualifies if it is not organized for profit and is primarily engaged in promoting the common good and general welfare of a community.
- The relevant “community” for § 501(c)(4) purposes may be a defined geographic community; it need not be the public at large.
- Exemption does not require that every facility be open to the general public when the organization’s primary activities provide community-wide benefits and any private benefits are incidental.
- Longstanding administrative recognition, coupled with no material change in operations or governing law, may weigh against an IRS reversal of exempt status where the organization’s functions remain civic in character.

## Conclusion

The court ruled that the Association’s community-wide governance and maintenance functions for a defined residential community satisfied § 501(c)(4)’s social-welfare standard, and that limited access to certain recreational facilities did not justify revocation of exemption or denial of a tax refund.


Rancho Santa Fe Ass’n v. United States, 589 F. Supp. 54 (S.D. Cal. 1984)