My first post was not about this case. It was about whether the IRS could hold the lack of sidewalks etc. as a lack of capital improvement.
These are all expenditures that would constitute legitimate deductions against an HOA's gross income when they file their tax returns.
On the other hand, the contributors could not deduct their contributions, and there's the rub. Yet major charitable foundations make similar improvements to habitat and their owners obtain those deductions.
The fact that the "contributors" (actually homeowners paying their HOA assessments) couldn't deduct their contributions is what should have been the warning flag in the first place. There's a reason why these assessments are not tax-deductible for homeowners in HOAs. If I own a detached home and I pay several thousand dollars to resurface my driveway, that repair is not tax deductible for me. Similarly, if I'm a homeowner in an HOA and I pay a tiny fraction of the cost of resurfacing a parking lot that is a common area of the HOA, then that "contribution" is not tax deductible, either.
As confusing as it may seem, the U.S. tax code is actually very consistent (from an accounting standpoint) when it comes to these things.