PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
OCEAN PINES ASSOCIATION, INC.,
Petitioner-Appellant,
v.
No. 11-1029
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.
Appeal from the United States Tax Court.
(Tax Ct. No. 08-5127)
Argued: January 25, 2012
Decided: March 2, 2012
Before MOTZ, Circuit Judge, Thomas D. SCHROEDER,
United States District Judge for the Middle District of
North Carolina, sitting by designation, and
J. Michelle CHILDS, United States District Judge
for the District of South Carolina,
sitting by designation.
Affirmed by published opinion. Judge Motz wrote the opin-
ion, in which Judge Schroeder and Judge Childs joined.
2 OCEAN PINES v. CIR
COUNSEL
ARGUED: Jerrold A. Thrope, GORDON, FEINBLATT,
ROTHMAN, HOFFBERGER & HOLLANDER, Baltimore,
Maryland, for Appellant. Teresa Thomas Milton, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C.,
for Appellee. ON BRIEF: Steven M. Gevarter, GORDON,
FEINBLATT, ROTHMAN, HOFFBERGER & HOL-
LANDER, Baltimore, Maryland, for Appellant. Gilbert S.
Rothenberg, Acting Deputy Assistant Attorney General,
Bruce R. Ellisen, Tax Division, UNITED STATES DEPART-
MENT OF JUSTICE, Washington, D.C., for Appellee.
OPINION
DIANA GRIBBON MOTZ, Circuit Judge:
The Tax Court determined that the net income from two
parking lots and a beach club owned by a tax-exempt associa-
tion constitutes "unrelated business taxable income." The
association appeals. Because the income derived from the
parking lots and beach club is not "substantially related" to
the association’s tax-exempt purpose, we affirm.
I.
Before the Tax Court, the parties stipulated to the facts. We
recite only those facts relevant to the legal issues before us.
Ocean Pines Association, Inc. (the "Association") is a non-
stock corporation organized and incorporated in Maryland. It
oversees a subdivision of more than thirty-five hundred acres
in Berlin, Maryland, known as Ocean Pines. The Association
is exempt from federal income taxation as an organization
"not organized for profit but operated exclusively for the pro-
motion of social welfare" pursuant to 26 U.S.C.
§ 501(c)(4)(A).
OCEAN PINES v. CIR 3
The owners of residential property within Ocean Pines
comprise the membership of the Association. The 2000 Cen-
sus lists the population of Ocean Pines as 10,496. The Associ-
ation enforces zoning restrictions and maintains bulkheads,
roadways, and parking lots in Ocean Pines. The Association
also provides within the subdivision two volunteer fire sta-
tions and a police force, and operates recreational facilities,
including five swimming pools, an 18-hole golf course, two
marinas, a yacht club, tennis courts, a soccer field, and other
parks and trails. In addition, the Association provides within
Ocean Pines various seminars, camps, sporting leagues, and
aquatic programs. All of these facilities and programs are
open to members and nonmembers, though some are only
available for a fee. Parking within Ocean Pines is free and
open to members and nonmembers alike.
The Association also owns and maintains two parking lots
and an ocean-front beach club approximately eight miles from
the Ocean Pines subdivision, in Ocean City, Maryland. The
Association operates these facilities in the seasonal summer
months, i.e., between Memorial Day weekend and Labor Day
weekend. During the day, the Association makes the parking
lots — which contain approximately three hundred parking
spaces—available only to members of the Association. Mem-
bers wishing to take advantage of the parking lots must pur-
chase week-long or season-long permits for an additional fee.
Nonmembers cannot purchase permits. The Association
leases the parking lots to third-parties during the non-seasonal
months and after 4 p.m. during the summer months. The
beach club, known as the Ocean Pines Beach Club, has rest-
rooms and food and beverage services that are open to the
general public. But, its swimming pool, lockers, and showers
are only available to Association members and their guests.
In tax years 2003 and 2004, the Association’s revenue from
the parking lots totaled $232,089 and $266,487, respectively.
These amounts include third-party payments of $61,024 in
2003 and $64,692 in 2004 to lease the parking lots in the eve-
4 OCEAN PINES v. CIR
ning hours and during the off-season. The Association
incurred expenses related to the operation of the parking lots
totaling $39,092 in 2003 and $21,939 in 2004. The Associa-
tion incurred net losses from its beach club of $20,486 in
2003 and $1,741 in 2004. Thus, the Association’s net income
from the parking lots and beach club, excluding income
received from leases to third parties,1 totaled $111,487 in
2003 and $178,115 in 2004.
In 2007, the Commissioner issued a notice of deficiency to
the Association, determining that the Association owed taxes
on this net income. The Association petitioned for a redeter-
mination of the deficiencies. The parties stipulated to facts
and settled issues. Thus, they presented only two questions to
the Tax Court: (1) whether the Association’s operation of the
parking lots and beach club was substantially related to the
Association’s tax-exempt purpose, and (2) whether the reve-
nue received from Association members for parking on the
lots was exempt from the unrelated business income tax as
rent from real property. The Tax Court ruled in favor of the
Commissioner on both questions. The Tax Court concluded
that "the operation of the beach club and the parking lots does
not promote community welfare because they are not accessi-
ble to nonmembers[,] that is, the general public"; and that the
revenue from the parking passes sold to Association members
was not rent from real property. On appeal, the Association
challenges only the first determination—that net income from
the parking lots and beach club was taxable as trade or busi-
ness income unrelated to the Association’s tax-exempt pur-
pose.
1
Prior to the Tax Court’s decision in this case, the Commissioner con-
ceded that "the revenue received by the Association from the leasing of its
Ocean City parking lots to third parties in the evening hours and during
the off-season is excepted from [26 U.S.C.] § 511 unrelated business tax-
able income because it satisfies the § 512(b) exception to unrelated busi-
ness income for the rent from real property."
OCEAN PINES v. CIR 5
"We review decisions of the United States Tax Court on the
same basis as decisions in civil bench trials in United States
district courts." Waterman v. Comm’r, 179 F.3d 123, 126 (4th
Cir. 1999). Because the Tax Court decision rests on stipulated
facts, "we are only presented with disputed legal issues" and,
therefore, review the case de novo. Pfister v. Comm’r, 359
F.3d 352, 353 (4th Cir. 2004).
II.
We first outline the controlling legal principles governing
this dispute.
An organization generally exempt from income taxes under
§ 501(c)(4), like the Association, must pay income tax on its
"unrelated business taxable income." 26 U.S.C. § 511(a)(1).
"Unrelated business taxable income" is "the gross income
derived by any organization from any unrelated trade or busi-
ness . . . regularly carried on by it," subject to certain allow-
able deductions. Id. § 512(a)(1).
The Internal Revenue Code defines an "unrelated trade or
business" as any trade or business that is not "substantially
related . . . to the exercise or performance by such organiza-
tion of its charitable, educational, or other purpose or function
constituting the basis for its exemption under section 501." Id.
§ 513(a). The Code thus establishes a three-part test to deter-
mine whether income from an activity of a nonprofit organi-
zation is taxable as unrelated trade or business income: the
activity is taxable if it is (1) a trade or business, (2) regularly
carried on, and (3) not substantially related to the organiza-
tion’s tax-exempt purpose. See United States v. Am. Bar
Endowment, 477 U.S. 105, 109-10 (1986); 26 C.F.R. § 1.513-
1(a).
The Association stipulated that the parking lots and beach
club are (1) a trade or business (2) that is regularly carried on.
Thus, only the third prong is at issue in this case. With respect
6 OCEAN PINES v. CIR
to that prong, Treasury regulations explain that a "substan-
tially related" trade or business "has causal relationship to the
achievement of exempt purposes" and "must contribute
importantly to the accomplishment of those purposes." Id.
§ 1.513-1(d)(2).
The taxation of income unrelated to an organization’s tax-
exempt purpose dates back to the Revenue Act of 1950. Con-
gress enacted those provisions "in response to perceived
abuses of the tax laws by tax-exempt organizations that
engaged in profit-making activities." United States v. Am.
Coll. of Physicians, 475 U.S. 834, 837 (1986). Rather than
"forc[ing] exempt organizations to abandon all commercial
ventures," id. at 838, Congress imposed a tax on "unrelated
business taxable income" that is not "substantially related" to
the organization’s tax-exempt purpose, 26 U.S.C. § 511(a)(1);
id. § 513(a); Am. Coll. of Physicians, 475 U.S. at 838. Thus,
while a tax-exempt organization may in certain circumstances
operate a trade or business that does not contribute to its tax-
exempt purpose, the benefits of its "tax exemption is limited
by other Code provisions . . . that impose a tax on the ‘unre-
lated business taxable income’ of [that] otherwise tax-exempt
organization[]." La. Credit Union League v. United States,
693 F.2d 525, 529 (5th Cir. 1982).
The parties have pointed to no case that has addressed the
scope of the unrelated business income tax in the context of
an association tax-exempt pursuant to § 501(c)(4), and we
have found none. But the plain language of the statute states
that the taxation of a tax-exempt entity’s business income
clearly depends on whether that business is "substantially
related" to the entity’s tax-exempt purpose. See 26 U.S.C.
§ 513(a). Thus, in determining whether the business income
is "substantially related" to the Association’s tax-exempt pur-
poses, a court must first determine what that tax-exempt pur-
pose is. See 26 C.F.R. § 1.513-1(d)(1) (noting that the
"substantially related" requirement "necessitates an examina-
tion of the relationship between the business activities which
OCEAN PINES v. CIR 7
generate the particular income in question . . . and the accom-
plishment of the organization’s exempt purposes").
Section 501(c)(4) provides a tax exemption for "[c]ivic
leagues or organizations not organized for profit but operated
exclusively for the promotion of social welfare." 26 U.S.C.
§ 501(c)(4)(A). Treasury regulations clarify that "[a]n organi-
zation is operated exclusively for the promotion of social wel-
fare if it is primarily engaged in promoting in some way the
common good and general welfare of the people of the com-
munity." 26 C.F.R. § 1.501(c)(4)-1(a)(2)(i). The regulations
add that such an organization is "operated primarily for the
purpose of bringing about civic betterments and social
improvements." Id.
Accordingly, we have affirmed denial of a § 501(c)(4)
exemption to a private subdivision that limited use of its facil-
ities to individuals who owned property within the develop-
ment and their guests. Flat Top Lake Ass’n v. United States,
868 F.2d 108, 109-10 (4th Cir. 1989). We reasoned that "an
organization that operates for the exclusive benefit of its
members does not serve a ‘community’ as that term relates to
the broader concept of social welfare." Id. at 111. Because
"Congress believed that an organization cannot serve social
welfare if it denies its benefits to the general public," we held
that "a true ‘community’ functions within a broader national
fabric." Id. at 111-12. Similarly, we have reversed the judg-
ment of the Tax Court that an organization operating a low-
income housing development only for veterans was entitled to
tax exemption as a social welfare organization. Comm’r v.
Lake Forest, Inc., 305 F.2d 814, 816 (4th Cir. 1962) (constru-
ing § 101(8) of the Internal Revenue Code, the predecessor to
§ 501(c)(4)). We so held because the organization did not
benefit the "public at large" nor was its contribution "of a
public character." Id. at 818.
In sum, to avoid taxation on income derived from a trade
or business, a § 501(c)(4) organization must demonstrate that
8 OCEAN PINES v. CIR
its trade or business is "substantially related"—that is, "caus-
al[ly]" advances and "contributes importantly"—to the organi-
zation’s promotion of "social welfare." 26 U.S.C.
§ 501(c)(4)(A); id. § 513(a); 26 C.F.R. § 1.513-1(d)(2). An
organization promotes "social welfare" when it promotes "the
common good and general welfare of the people of the com-
munity," a phrase we have held refers to the "general public."
Flat Top, 868 F.2d at 111; see 26 C.F.R. § 1.501(c)(4)-
1(a)(2)(i).2 Therefore, to be exempt from taxation, the trade or
business undertaken by a tax-exempt 501(c)(4) organization
must itself causally advance or contribute importantly to the
organization’s promotion of the common good and welfare of
the general public.
With these principles in mind, we turn to the case at hand.
III.
The Association’s parking lots—which are open during
summer days only to Association members—and its beach
club—which permits public access only to restrooms and food
services—do not contribute to the social welfare of the gen-
eral public. Rather, the parking lots and beach club serve only
2
Although Revenue Rulings receive "considerably less deference" than
"properly promulgated regulations," Dominion Res., Inc. v. United States,
219 F.3d 359, 366 (4th Cir. 2000), we note that the IRS has taken the same
position in its Revenue Rulings. Interpreting § 501(c)(4) in the context of
homeowners’ associations, the IRS has concluded that "the common areas
or facilities [that a homeowners’ association] owns and maintains must be
for the use and enjoyment of the general public" in order to qualify for tax
exemption. Rev. Rul. 74-99, 1974-1 C.B. 131. Thus, a homeowners’ asso-
ciation derives its tax exemption, inter alia, from its "ownership and main-
tenance . . . of such areas as roadways and parklands, sidewalks and street
lights, access to, or the use and enjoyment of which is extended to mem-
bers of the general public, as distinguished from controlled use or access
restricted to the members of the homeowners’ association." Id.; see also
Rev. Rul. 80-63, 1980-1 C.B. 116 (emphasizing that serving a community
requires a homeowners’ association to maintain common areas and facili-
ties "for the use and enjoyment of the general public").
OCEAN PINES v. CIR 9
the private interests of the Association members. Unlike the
roadways and bulkheads within the Ocean Pines community,
which provide needed quasi-governmental services and civic
betterments to anyone passing through Ocean Pines, the park-
ing lots and beach club benefit only those who own property
in the Ocean Pines community and their guests. In sum, the
parking lots and beach club provide "a private refuge for
those who would live apart," rather than "a community within
the contemplation of section 501(c)(4)." Flat Top, 868 F.2d at
113.
Indeed, the Association’s excellent counsel conceded at
oral argument that the parking lots and beach club "obvi-
ously" do not benefit the general public. The Association
insists, however, that income derived from these facilities
nevertheless should escape taxation as income "substantially
related" to the Association’s tax-exempt purpose. The Associ-
ation offers three arguments in support of this contention; we
address each in turn.
A.
First, the Association argues that the legal standard for
determining whether trade or business income is taxed as an
unrelated business under 26 U.S.C. §§ 511-513 differs from
the standard for determining whether an organization is enti-
tled to § 501(c)(4) tax exemption. Thus, it contends that even
if the parking lots and beach club would not be entitled to
§ 501(c)(4) tax-exempt status themselves, these facilities are
nonetheless "substantially related" to the Association’s
§ 501(c)(4) tax-exempt purpose and are therefore not taxable
under § 511.
The fundamental difficulty with this argument is that, to be
"substantially related," the parking lots and beach club must
have a "causal relationship" and "contribute importantly to the
accomplishment" of the tax-exempt purpose of the Associa-
tion. 26 C.F.R. § 1.513-1(d)(2). As we explained in Flat Top
10 OCEAN PINES v. CIR
and Lake Forest, facilities that do not permit access to the
general public—like the parking lots and beach club—simply
do not promote "social welfare." Thus, if the parking lots and
beach club do not promote "social welfare," then surely these
facilities do not contribute importantly or causally advance
the Association’s accomplishment of that purpose. See Prof’l
Ins. Agents of Mich. v. Comm’r, 78 T.C. 246, 267 (1982),
aff’d, 726 F.2d 1097 (6th Cir. 1984).
B.
Second, the Association contends that "social welfare"
must be interpreted through the lens of the Association’s char-
ter, which aims to promote the community welfare of the
Association’s members rather than that of the general public.
Appellant’s Br. at 29; Reply Br. at 1-5.3 The Association
argues that the parking lots and beach club advance "the
Association’s purpose ‘to further and promote the community
3
For this argument, the Association relies not on § 501(c)(4) cases, but
on those involving § 501(c)(5) and § 501(c)(6). See Nat’l League of Post-
masters of the U.S. v. Comm’r, 86 F.3d 59, 62 (4th Cir. 1996); Prof’l Ins.
Agents of Mich. v. Comm’r, 726 F.2d 1097, 1101 (6th Cir. 1984). While
§ 501(c)(4) provides tax exemption for organizations, like the Association,
that promote "social welfare," § 501(c)(5) and § 501(c)(6) provide tax
exemption for organizations that benefit, inter alia, specific labor and agri-
cultural organizations, business leagues, chambers of commerce, and pro-
fessional football leagues. In the latter cases, it makes sense to look to an
organization’s charter to determine the particular group that the organiza-
tion intends to benefit. For instance, in Postmasters, it was appropriate for
the court to look to the organization’s articles of incorporation because the
Code and Treasury regulations do not define the exempt purposes of a
labor organization. 86 F.3d at 62 (citing Am. Postal Workers Union v.
United States, 925 F.2d 480, 482 (D.C. Cir. 1991) ("[N]othing in the Trea-
sury Regulations or any other authoritative source defin[ed] the exempt
purposes of a labor organization.")). In contrast, the Treasury regulations
speak clearly to the "social welfare" purpose necessary for tax exemption
for § 501(c)(4) organizations, like the Association. The regulations require
that a § 501(c)(4) organization (regardless of any limits in its charter) pro-
mote "the common good and general welfare of the people of the commu-
nity." 26 C.F.R. § 1.501(c)(4)-1(a)(2)(i).
OCEAN PINES v. CIR 11
welfare of property owners’ in the Ocean Pines residential
community." Appellant’s Br. at 8.
The problem with this argument is that an Association’s
charter cannot trump the requirements of the Tax Code. The
plain language of § 513(a) defines an "unrelated trade or busi-
ness" as one not "substantially related . . . to the exercise or
performance by such organization of its . . . purpose or func-
tion constituting the basis for its exemption under section
501." 26 U.S.C. § 513(a) (emphasis added); see also 9 Mer-
tens Law of Fed. Income Tax’n § 34:138 ("The word ‘unre-
lated’ generally means unrelated to the exempt functions of
the organization." (emphasis added)).
Notwithstanding the Association’s charter, the purpose that
constitutes the basis of the Association’s exemption under
§ 501(c)(4) is its promotion of "social welfare" as defined by
the statute and regulations. An organization cannot obtain a
broader tax exemption than the Code permits by redefining
the basis for its exemption through its charter.4
C.
Third, the Association argues that Congress’s purpose in
enacting the unrelated business income tax was to avoid
unfair competition with private enterprise, and that a rule
requiring a business operated by a 501(c)(4) organization to
be open to the general public in order to avoid taxation would
frustrate that purpose. Appellant’s Br. at 23-24 (citing Am.
Bar Endowment, 477 U.S. at 114). The Association reasons
that facilities open to the general public are more likely to
4
The Association also suggests that its membership "is large enough to
be coextensive with the public," and therefore, "any activity open to mem-
bers . . . would be open to the equivalent of the general public." Reply Br.
at 8 n.5. That simply is not the case. The parking lots and beach club are
located in Ocean City, eight miles from Ocean Pines itself. Many thou-
sands of people flock to Ocean City beaches in the summer, considerably
outnumbering the 10,496 Ocean Pines residents and their guests.
12 OCEAN PINES v. CIR
compete with private enterprise than facilities limited only to
Association members. Id.
In Carolinas Farm & Power Equipment Dealers Ass’n v.
United States, we considered a similar argument in the con-
text of whether the income-generating activity of a tax-
exempt association was "a trade or business" for the purpose
of the unrelated business income tax. 699 F.2d 167, 169-70
(4th Cir. 1983). The association in that case argued that its
income-generating activity was not a trade or business
because it did not unfairly compete with taxpaying enter-
prises. Id. at 169. While we recognized that legislative history
indicated that "Congress’s primary intent in enacting [the
unrelated business income tax] was to avoid endowing tax-
exempt organizations with an unfair competitive advantage,"
we nevertheless rejected the association’s argument. Id. 169-
70. We held that there was "no need to look to legislative his-
tory where . . . the language of a statute [was] quite clear." Id.
at 170. Instead, we looked to "the plain language" of § 513(c),
which only required a trade or business to have a "profit
motive," without any mention of unfair competition with pri-
vate enterprise. Id.
The plain language of the statute and regulations speak
with equal clarity here. The Association has stipulated that the
only question before us is whether the parking lots and beach
club are "substantially related" to the Association’s tax-
exempt purpose. See 26 U.S.C. § 513(a). This inquiry is
entirely unrelated to the possible unfair competitive advantage
of the Association’s parking lots and beach club, and nothing
in the statute or regulations suggests that such an inquiry
would be appropriate in this context. Moreover, adopting the
Association’s argument would be especially inappropriate
here because it would contravene the purpose of § 501(c)(4),
which requires that an organization promote "the common
good and general welfare" of the general public. 26 C.F.R.
§ 1.501(c)(4)-1(a)(2)(i); see also Flat Top, 868 F.2d at 111.
OCEAN PINES v. CIR 13
***
In sum, the net income derived by the Association from its
parking lots and beach club benefits the private interests of
the Association members rather than the general public. That
income therefore is not "substantially related" to the Associa-
tion’s purpose of promoting social welfare, but rather is tax-
able as "unrelated business taxable income" under §§ 511-
513.
IV.
For the foregoing reasons, the judgment of the Tax Court
is
AFFIRMED.