Rancho Santa Fe Association v. United States

Rancho Santa Fe Association, Inc. (the association) (plaintiff) was a homeowners’ association with approximately 3,000 members who owned property in Rancho Santa Fe, a large, self-contained housing community near San Diego. The association directed the governance of property within the development by enforcing protective covenants and by organizing various boards, including planning, park, health, library, and recreation boards. The association was incorporated as a nonprofit cooperative association in 1927 and in 1942 was granted exempt status under the predecessor to § 501(c)(4) of the Internal Revenue Code, which provided exemption from income taxation for, among other things, civic leagues and other nonprofit organizations operated exclusively for the promotion of social welfare. Although there was no intervening change in the association’s operations or the statutory language, the Internal Revenue Service (IRS) (defendant) revoked the association’s exempt status in 1979. The IRS had determined the association was not operated exclusively for the promotion of social welfare because the common areas it owned and maintained were not all open for the use and enjoyment of the general public. The association owned 600 of the approximately 6,100 acres in the development. Half of the association’s property was dedicated to parkland and open space, and 165 acres were improved as playgrounds, athletic fields, a public parking lot, a community clubhouse, and hiking and bridle trails. The remaining 135 acres comprised a golf course and tennis courts, which the public could use only as guests of members. Other than the golf course and tennis courts, the association’s property was open to the public. The association paid taxes under protest and sued for a refund and declaration of its exempt status under § 501(c)(4). The parties filed cross-motions for summary judgment.