Flat Top Lake Association, Inc. v. United States

The Flat Top Lake Association, Inc. (association) (plaintiff) was formed to create an artificial lake and develop a subdivision surrounding it. The association acquired land, built the lake, subdivided surrounding property into lots, and built a small road across the development. The association limited its membership to property owners of the subdivided lots. The road was private and had a sign at its entrance indicating that the road and the development were the private property of the association and that only members were allowed entrance. The subdivision comprised enough lots and residents to incorporate as a small municipality, but the association elected not to incorporate. Nonetheless, the association performed some quasi-governmental functions for the development’s residents, such as garbage collection and limited law enforcement. The association was exempt from federal income tax under § 501(c)(4) (and that section’s predecessor) of the Internal Revenue Code (code) from 1952 until 1979, when the Internal Revenue Service (IRS) revoked the association’s status. The association began paying income taxes. However, the association took the position that it still qualified for § 501(c)(4) status and sued the government (defendant) for refunds. The district court found that the association was ineligible for § 501(c)(4) status because the association restricted the use of its facilities to its members. The association appealed.