Incorporation and Tax-Exempt Status

Incorporation and Tax-Exempt Status ...

This is the status of the effort to achieve incorporation and tax-exempt status for Monument Manor Neighborhood Association as of October 26, 2022.

Historical Background

In the fall of 2020, a nearby neighborhood association inquired of the Monument Manor Neighborhood Association (MMNA) about its formal tax status. As far as could be determined, the MMNA had always operated as an informal organization, with no official standing with respect to either the Internal Revenue Service (IRS) or the California Franchise Tax Board (FTB). An accountant was consulted concerning this issue; he advised, based on MMNA annual contributions (then about $10,000) that a formal status should be sought.

Current Status

MMNA is a California Mutual Benefit Corporation, entity number C4742649, effective April 19, 2021
MMNA is recognized by the Internal Revenue Service as a homeowners’ association, with EIN 87-1972862.
MMNA is NOT exempt from Federal taxes. However, it is very unlikely that MMNA will incur a Federal tax bill going forward. (MMNA filed a Federal return for 2021, on which no taxes were due.)
MMNA is formally exempt from California taxes, having been granted exemption October 14, 2022, retroactive to the date of incorporation April 19, 2021.
The California exemption is under section 23701t of the California Revenue and Taxation Code. MMNA was directed by the Franchise Tax Board to file for exempt status under this section after reviewing our financial records, which indicate that MMNA’s primary purpose is the maintenance of rural roads.
Retention of exempt status under this section requires the following: “Entities exempt under R&TC 23701t must receive at least 60 percent of its gross income from membership dues, fees, and assessments, while 90 percent or more of the expenditures must be for the acquisition, constriction, management, maintenance, and care of association property.”
Contributions to MMNA are NOT tax-deductible.

Filing requirements, going forward

Report income and expenses to the IRS annually, on form 1020H.
Report income and expenses to the FTB annually. There is an e-postcard form 199n for this that can be filed electronically.
Every other year beginning in 2023, file a SI-100 (Statement of Information) with the California Secretary of State. This can be done electronically.

Notes

An earlier version of this status report stated that Federal tax-exempt status under IRS section 501(c)4 had been applied for, and was pending approval. The IRS rejected that application, on the grounds that MMNA roads are open to public use.
Application to the IRS under section 501(c)7, as a social/recreational organization, was considered. That was not pursued because (a) enough time had elapsed since the date of state incorporation that MMNA might be in jeopardy of incurring a substantial cash penalty for late application, and (b) we have been advised by a tax preparer that MMNA is unlikely to ever have a Federal tax liability, even though it is not Federally exempt.
Application was made to the California FTB for exempt status as a social organization in May, 2022. That was rejected in September, 2022, and we were directed to amend our application to apply as a rural road maintenance organization. The amended application was accepted, as noted above.
The FTB official who notified us of the original state rejection suggested that we could apply for Federal exemption under IRS section 501(c)12, which had been unknown to us. Since we do not anticipate any Federal tax liability with the non-exempt status we have already achieved, we do not plan to pursue this.
Since exempt status in California was granted retroactive to the date of incorporation, there was no California tax liability for 2021.