Posted:
This is from the IRS guide:
Homeowners' associations. A membership organization formed by a real estate developer to own and maintain common green areas, streets, and sidewalks and to enforce covenants to preserve the appearance of the development should show that it is operated for the benefit of all the residents of the community. The term community generally refers to a geographical unit recognizable as a governmental subdivision, unit, or district thereof. Whether a particular association meets the requirement of benefiting a community depends on the facts and circumstances of each case. Even if an area represented by an association is not a community, the association can still qualify for exemption if its activities benefit a community.
The association should submit evidence that areas such as roadways and park land that it owns and maintains are open to the general public and not just its own members. It also must show that it does not engage in exterior maintenance of private homes.
A homeowners' association that is not exempt under section 501(c)(4) and that is a condominium management association, a residential real estate management association, or a timeshare association generally may elect under the provisions of section 528 to receive certain tax benefits that, in effect, permit it to exclude its exempt function income from its gross income.
Link: http://www.irs.gov/publications/p557/ix01.html
Don't ask where I "borrowed" the following from, suffice it to say the author probably handles the audits and taxes of more condo and HOA's and has been doing it longer, than just about anyone I know:
"TRUE TAX EXEMPTION
In terms of tax exemption, Section 528 is a start. But, because it exempts only assessment income, it doesn't confer true nonprofit status. The distinctions can be confusing, especially when you factor in the difference between not-for-profit and nonprofit organizations. Again, all associations are organized as not-for-profit entities. That is, they exist to collect assessments from their members and to use those assessments to provide management, maintenance, and other services--but they don't have a profit motive. A nonprofit organization, on the other hand, has gone the extra step and qualified as such under IRC Section 501(c).
Who gets nonprofit, tax-exempt, 501(c) status? Have any associations qualified for it? If so, how? How do they maintain their tax-exempt status once they have it? And, finally, the most important question of all, is it worth having?
IRC Section 501(c) specifically identifies the various organizations that are eligible for tax-exempt status. The most obvious and well known are religious, educational, and charitable groups. Other candidates include chambers of commerce, professional associations, and social clubs.
Certain homeowner associations are eligible for 501(c) status, and many around the country have gotten it. Generally, these are large-scale communities that have been around for decades. They were created 30 or more years ago, during a more idealistic time, when master-planned "new towns" were more open and less restrictive than later, smaller associations; from their inception they were seen as true nonprofit organizations.
Both historically and today, associations have tended to achieve tax exemption under IRC Section 501(c)(4), which applies to civic leagues and other not-for-profit organizations operated for the promotion of social welfare. Does this mean you have to show your community serves everyone everywhere? In a manner of speaking. In order to qualify as a 501(c)(4) organization, your association must demonstrate that it is operated for the public good. Thus, you must submit evidence to the IRS that the green space, roads, sidewalks, parks, and recreational facilities you own and maintain are open to the general public and not just to your own members. The IRS also requires you to show that your association does not engage in exterior maintenance of private homes. As a result, condominiums cannot qualify for 501(c) status.
To obtain 501(c)(4) status, your association must complete IRS Form 1024 and pay a user fee--$150 for associations with gross receipts averaging less than $10,000 during the preceding four years, and $500 for gross receipts of more than $10,000. Twenty pages long and jammed with questions, Form 1024 requires a lot of minutely detailed information. Ideally, your manager, accountant, attorney, and certain knowledgeable board members will work together to supply the following:
Status. Select the specific 501(c) status you're requesting. For most associations, this means 501(c)(4).
General information. Give your association's location, outline its physical characteristics, and explain its organizational structure.
Narrative. This is the meat of Form 1024. You must provide an account of your organizational activities and how they further your tax-exempt purpose.
Financial support. Delineate your revenue sources, which, most likely, are primarily member assessments and various fees.
Qualifying questions. Like the narrative, this is a crucial section, made up of page after page of questions about the nature of your organization. (See "Information Please.") Many of them can be answered with a simple "No," but others require much greater detail.
Two of the questions are specifically related to homeowner associations. The first one asks: "Does the organization perform or plan to perform (for members, shareholders, or others) services, such as maintaining the common areas of a condominium; buying food or other items on a cooperative basis; or providing recreational facilities, transportation services, job placement, or other similar undertakings? If 'Yes,' explain the activities in detail, including income realized and expenses incurred. Also, explain in detail the nature of the benefits to the general public from these activities." The second question is: "If the organization is claiming exemption as a homeowners' association, is access to any property or facilities it owns or maintains restricted in any way? If 'Yes,' explain."
In many ways, how you answer these two questions will be the key to obtaining tax-exempt status for your association. Your approach should be as much art as science. Think carefully about how you portray your association's activities to the IRS. If your community is seen as too exclusive, that could jeopardize your case.
Financial statements. Provide four years of financial statements and year-end balance sheets.
Along with Form 1024 and the user fee, your association must submit a "conformed" copy of its organizing instrument, which is a version that agrees with the original declaration and all amendments; it must be obtained directly from the state. Then, the IRS will review your application and either approve it, deny it, or request additional information. If you're denied, you can appeal the decision. If you're approved, the recognition will be retroactive to the date of your association's formation, and you can apply for refunds for up to three previous years. The nonprofit status will continue as long as your association functions within the framework that led to its tax exemption."