Why the term “community” in IRS material does not mean the same as “general public” and should not be confused:
First, the IRS establishes what a community is for the purposes of granting exemption, and this term is specific to exemption under 501(c)(4).
Second, once the association is established to serve a community and exemption is granted under IRC 501(c)(4), and if the association offers recreational facilities services those facilities have to be open and available for the use of the general public.
We know Sunriver received specific instruction that the general public access has to be made available at a nominal fee or “substantially below cost”. (PLR 9539005). http://501c4taxexempt.com/docs/PLR_9539005.pdf
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“Revenue Ruling 74-99, 1974-1 C.B. 131, modified Rev. Rul. 72-102 and held that a homeowners association, in order to qualify for exemption under Section 501(c)(4) of the Code, must, in addition to otherwise qualifying for exemption under Section 501(c)(4), satisfy the following requirements: (1) It must engage in activities that confer benefit on a community comprising a geographical unit which bears a reasonably recognizable relationship to an area ordinarily identified as a governmental subdivision or a unit or district thereof; (2) It must not conduct activities directed to the exterior maintenance of private residences; and (3) It owns and maintains only common areas or facilities 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 and is not restricted to members of the homeowners' association.
Revenue Ruling 80-63, 1980-1 CB 116, to clarify Revenue Ruling 74-99, describes specific questions that have been raised and their answers are as follows:
The first question asks does Rev. Rul. 74-99 contemplate that the term "community" for purposes of section 501(c)(4) of the Code embraces a minimum area or a certain number of homeowners.
The answer is no because Rev. Rul. 74-99 states that it was not possible to formulate a precise definition of the term "community". The ruling merely indicates what the term is generally understood to mean. Whether a particular homeowners' association meets the requirements of conferring benefit on a community must be determined according to the facts and circumstances of the individual case. Thus, although the area represented by an association may not be a community within the meaning of that term as contemplated by Rev. Rul. 74-99, if the association's activities benefit a community, it may still qualify for exemption. For instance, if the association owns and maintains common areas and facilities for the use and enjoyment of the general public as distinguished from areas and facilities whose use and enjoyment is controlled and restricted to members of the association then it may satisfy the requirement of serving a community.
The second question asks may a homeowners' association, which represents an area that is not a community, qualify for exemption under Section 501(c)(4) of the Code if it restricts the use of its recreational facilities, such as swimming pools, tennis courts, and picnic areas, to members of the association?
The answer is no because Rev. Rul. 74-99 points out that the use and enjoyment of the common areas owned and maintained by a homeowners' association must be extended to members of the general public, as distinguished from controlled use or access restricted to the members of the association. For purposes of Rev. Rul. 74-99, recreational facilities are included in the definition of "common areas”.