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Should a residential neighborhood association, whose membership is established by deed restrictions but whose dues are not mandatory, establish a 501(c)(3) tax-exempt organization as a means to attract grants from state and local government, and tax-deductible contributions from businesses and private individuals, to support the operations of the association for the benefit of the community?

It is very unlikely that you would be able to obtain a 501(c)(3) status for an organization organized for the support of a relatively small number of readily identifiable individuals in a homeowners’ association.  Homeowners’ associations and similar neighborhood associations are exempt under Section 528 of the Code and don’t have to pay income tax on income raised from the members.  But they are not charities and do not give deductibility to contributions.

The IRS objected to a charitable designation for the Columbia (MD) Park and Recreation Association in the late 1980s on the basis of private benefit to the members and the courts agreed, even though the Association ran public parks and recreation facilities for the entire town of Columbia, MD.

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