Determination 1025081: IRS revoked a down-payment-assistance organization's section 501(c)(3) exemption

View official IRS release (PDF)

Plain-English summary

The IRS revoked an organization's exemption under IRC § 501(c)(3), effective January 1 of a redacted year. The organization operated a down-payment-assistance program for home buyers, but it did not screen applicants by income or target areas experiencing neighborhood deterioration or tensions. The IRS concluded that the program primarily brokered home-sale transactions, provided substantial private benefit to sellers and related businesses, and was funded by seller payments tied to the assistance provided. The release includes the final adverse determination, a proposed revocation letter, and the examination report.

Ruling snapshot

• Question: Did the organization operate exclusively for exempt purposes under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 102, 170, 501(a), 501(c)(3), 6104(c), and 7428; Treas. Reg. §§ 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(c)(2), 1.501(c)(3)-1(d)(1)(ii), 1.501(c)(3)-1(d)(2), 1.501(c)(3)-1(d)(3)(i), and 1.501(c)(3)-1(e); Rev. Rul. 2006-27

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

501.03-00

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: June 22, 2009

Release Number: 201025081
Release Date: 6/25/10
LEGEND
ORG = Organization name
XX = date Address = address

Taxpayer Identification Number:
Person to Contact:
Employee Identification Number:
Employee Telephone Number:
(Phone)
(Fax)
ORG

LAST DATE TO FILE A PETITION
IN TAX COURT: September 21, 20XX

CERTIFIED MAIL — RETURN RECEIPT
Dear

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the
Internal Revenue Code (the Code). Our favorable determination letter to you dated August 22,
19XX is hereby revoked and you are no longer exempt under section 501(a) of the Code effective
January 1, 20XX.

The revocation of your exempt status was made for the following reason(s):

Organizations described in IRC 501(c)(3) and exempt under section 501(a) must be both organized
and operated exclusively for exempt purposes. You are not operated exclusively for exempt
purposes because you operate a program that does not exclusively serve an exempt purpose
described in IRC 501(c)(3), and you provide substantial private benefit to persons who do not
belong to a charitable class. You provide down payment assistance to individuals and families for
the purchase of a home.

You do not screen the applicants for your downpayment assistance program. The buyer and
seller have negotiated the sale before an application is made to you. Your downpayment
assistance program activities do not target neighborhoods in need of rehabilitation or other relief
such as lessening neighborhood tensions or eliminating prejudice and discrimination. The home
sale transactions were for homes located all over the area.

Your primary activity was brokering transactions to facilitate the selling of homes. You do not
engage in any counseling or other activities that further charitable purposes. Because your
primary activity is not conducted in a manner designed to further IRC 501(c)(3) purposes, you are
not operated exclusively for exempt purposes within the meaning of IRC 501(c)(3).

Contributions to your organization are no longer deductible under IRC §170 after January 1, 20XX.

You are required to file income tax returns on Form 1120. These returns should be filed with the
appropriate Service Center for the tax year ending December 31, 20XX, and for all tax years
thereafter in accordance with the instructions of the return.

Processing of income tax returns and assessments of any taxes due will not be delayed should a
petition for declaratory judgment be filed under section 7428 of the Internal Revenue Code.

If you decide to contest this determination under the declaratory judgment provisions of section
7428 of the Code, a petition to the United States Tax Court, the United States Claims Court, or the
district court of the United States for the District of Columbia must be filed before the 91st Day
after the date this determination was mailed to you. Please contact the clerk of the appropriate
court for rules regarding filing petitions for declaratory judgments by referring to the enclosed
Publication 892. You may write to the United States Tax Court at the following address:

You also have the right to contact the Office of the Taxpayer Advocate. Taxpayer Advocate
assistance is not a substitute for established IRS procedures, such as the formal Appeals process.
The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed
by law that you have to file a petition in a United States court. The Taxpayer Advocate can,
however, see that a tax matter that may not have been resolved through normal channels gets
prompt and proper handling. You may call toll-free, 1-877-777-4778, and ask for Taxpayer
Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

See the enclosed Notice 1546, Taxpayer Advocate Service - Your Voice at the IRS, for Taxpayer
Advocate telephone numbers and addresses.

We will notify the appropriate State Officials of this action, as required by Code section 6104(c).
You should contact your State officials if you have any questions about how this final
determination may affect your State responsibilities and requirements.

If you have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely,

Sunita Lough
Director, EO Examinations

Enclosures:
Publication 892
Publication 1546

Internal Revenue Service Department of the Treasury
TE/GE Exempt Organizations Examinations

915 Second Avenue M/S W540
Seattle, Washington 98174

Taxpayer Identification Number:

Date: June 19, 2008
Form:
ORG

Tax Year(s) Ended:
ADDRESS

Person to Contact/ID Number:

Contact Numbers:
Telephone:

Fax:

Certified Mail - Return Receipt Requested
Dear

We have enclosed a copy of our report of examination explaining why we believe revocation of your exempt
status under section 501(c)(3) of the Internal Revenue Code (Code) is necessary.

If you accept our findings, take no further action. We will issue a final revocation letter.

If you do not agree with our proposed revocation, you must submit to us a written request for Appeals Office
consideration within 30 days from the date of this letter to protest our decision. Your protest should include a
statement of the facts, the applicable law, and arguments in support of your position.

An Appeals officer will review your case. The Appeals office is independent of the Director, EO Examinations.
The Appeals Office resolves most disputes informally and promptly. The enclosed Publication 3498, The
Examination Process, and Publication 892, Exempt Organizations Appeal Procedures for Unagreed Issues,
explain how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information
on your rights as a taxpayer and the IRS collection process.

You may also request that we refer this matter for technical advice as explained in Publication 892. If we issue
a determination letter to you based on technical advice, no further administrative appeal is available to you
within the IRS regarding the issue that was the subject of the technical advice.

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F

If we do not hear from you within 30 days from the date of this letter, we will process your case based on the
recommendations shown in the report of examination. If you do not protest this proposed determination within
30 days from the date of this letter, the IRS will consider it to be a failure to exhaust your available
administrative remedies. Section 7428(b)(2) of the Code provides, in part: "A declaratory judgment or decree
under this section shall not be issued in any proceeding unless the Tax Court, the Claims Court, or the District
Court of the United States for the District of Columbia determines that the organization involved has exhausted
its administrative remedies within the Internal Revenue Service." We will then issue a final revocation letter.
We will also notify the appropriate state officials of the revocation in accordance with section 6104(c) of the
Code.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot
reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a
United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been
resolved through normal channels gets prompt and proper handling. You may call toll-free 1-877-777-4778 and
ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number shown in the heading of this
letter. If you write, please provide a telephone number and the most convenient time to call if we need to
contact you.

Thank you for your cooperation.

Sincerely,

Marsha A. Ramirez
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX
LEGEND
ORG = Organization name XX = Date Address = address City = city
State = State DIR-1 = 1st Director CO-1 = 1st Company

ISSUE:

Whether ORG operated exclusively for exempt purposes within the meaning of Internal
Revenue Code §501(c)(3)?

FACTS:
Overview

ORG ("ORG") is a State State Non-Profit Corporation which filed its articles of incorporation
on August 15, . The address of ORG is Address, City, State.

ORG applied to the Internal Revenue Service ("IRS") for exemption from income tax on
June 2, 19XX. The letter of determination was issued on August 22, 19XX establishing ORG as
an organization exempt from tax under Internal Revenue Code §501(c)(3).

In 20XX and 20XX ORG promoted and operated a down payment assistance ("DPA")
program for home buyers under which it provided funds to the buyers to use as their down
payment or for closing costs and collects the same amount, plus an additional fee, from the home
sellers.

Application for Recognition of Tax Exempt Status

Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the
Internal Revenue Code, was filed by ORG with the IRS on June 2,19XX. The organization's
purpose as stated on their Form 1023 is to

“provide access to affordable housing principally to low-income and very low income
families and individuals in the City- metropolitan area. ORG was organized in response to the
chronic shortage of safe, quality housing that is affordable to low income and very low income
families, who are first time home buyers.

ORG will purchase the homes and rental units sold and leased to the charitable
beneficiaries principally through its participation in Department of Housing and Urban
Development Affordable Housing Program. As needed, ORG will engage the services of general
contractors to renovate the homes and/or rental units prior to their sale or rental.

To ensure that the initial and continuing costs of home ownership are affordable to low-
income and very low-income residents, ORG will assist the charitable beneficiaries in securing
loans and making down payments and will provide closing costs. To ensure that it rental housing

Form 886-A (1-1994) Catalog Number 20810W Page 1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX

is affordable to the charitable beneficiaries, ORG will limit the tenant’s portion of the rent charged,
to between 80% to 85% of the fair market value for such rental housing.

ORG will also provide, at no charge, counseling, training, and resource referral to assist the
charitable beneficiaries in the transition to first time home ownership and to ensure that its
participant families and individuals reap the many benefits of home ownership and contribute to
the building of strong communities.

Program assistance and training will be provided in English and Spanish, as necessary.
Training and program services will be offered at the principal office of ORG, Address, City, State,
and at the City Department of Social Services Food Assistance Program Site, Address, City,
State.

ORG has modeled its first time home ownership program in part on examples provided in
Revenue Procedure 96-32, 1996-1 C.B. 717, which outlines a safe harbor and a facts and
circumstances test for determining whether an organization that provides low-income housing
relieves the poor and distressed. The facts and circumstances that demonstrate that ORG will in
fact relieve the poor and distressed include the following:

1. Limited deviation from the safe harbor percentages set forth in Revenue Procedure 96-32.
2. ORG will make the initial and continuing costs of purchasing a home affordable to low and
   very low income residents by assisting such residents in securing loans and making down

payments and by providing closing costs.

3. ORG will ensure that its rental housing is affordable by limiting the tenant’s portion to the
   rent charged to between 80% and 85% for the fair market value for such rental housing.

4. ORG will participate in the Department of Housing and Urban Development's Affordable
   Housing Program, designed to provide affordable housing.

5. ORG will provide additional social services to the poor residents at no charge, including
   counseling, training, and resource referral; such services will be provided in both English
   and Spanish, as needed.”

Federal Returns

ORG filed Form 990-PF for the tax periods ended December 31, 20XX, and December 31,
20XX. Per IRS records, ORG was not required to file and did not file Form 990-T. ORG also filed
Forms 941 for the tax periods ended March 31, 20XX, through December 31, 20XX.

In 20XX and 20XX the primary activity of the organization was administering its down
payment assistance program as described in more detail below.

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX

In 20XX and 20XX ORG received $ and $ respectively, in gross revenue from amounts paid
to it by sellers participating in ORG’s DPA program. ORG did not report the seller's payments as
contributions. Instead, ORG reported these payments as other income. ORG reported the total
amount of contributions and gifts it received, from all sources, as zero. ORG also reported that it
distributed $ and $ respectively, in down payment assistance to homebuyers for use as down
payments and/or to pay for closing costs.

Down Payment Assistance Program Description.

ORG provided documentation on how their down payment assistance program was set up.
The first document they provide to prospective clients is titled “Obtaining Down Payment
Assistance”.

The document states that ORG makes it easy to complete all of the necessary steps to
obtain down payment assistance. All parties involved in the real estate transaction should follow
these steps.

Step 1 The real estate contract is negotiated between the buyer and the seller.

Step 2 The contract must then be forwarded to the title company. The closing agent will
ensure that the amounts stated on the Down Payment Assistance Application are correct.

Step 3 The lender should then fill out the Down Payment Assistance Application and fax to
ORG. The application serves as the sign up form for every individual in the transaction.

Step 4 The gift letter (required by underwriting) for the buyer is prepared by ORG and faxed
to the lender.

Step 5 48 hours prior to closing; ORG contacts the title company and lender to confirm the
closing. Closing instructions are delivered to the title company along with the down payment
assistance funds,

ORG also provided a document titled “Program Summary”. The document outlines five
aspects of the down payment assistance program of the organization for the individuals
participating in the program.

1. Total Seller Costs (above Replenishment amount) $.

2. Contribution to ORG: Replenishment amount

ORG is the source nonprofit for the Down Payment assistance Program in which 100% of
the contribution made to the charitable organization go to providing homeownership assistance,
education and the organization’s other charitable endeavors.

3. Replenishment amount: Exact amount of gift funds.

The Replenishment amount is the amount needed to replenish the down payment

assistance pool after gift funds have been provided to the buyer. This can be the exact amount of
gift funds needed or a percentage up to 6% of contract sales price. (Typically 3% of contract sales

Form 886-A (1-1994) Catalog Number 20810W Page 3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX

price)

4. Tax Deductible: Home sellers can not deduct the contribution from their taxes.

Contributions are not tax deductible because the sellers expect something in return, that is
the ability to sell their home and therefore lack the requisite “Donative Intent”.

5. Processing Fee: $
   $ - paid directly to CO-1, the processing company providing processing services to ORG.

At the closing of the sale ORG provides a document titled “Transaction Summary Seller
Participation Acknowledgement and Disclosure Form”. This document is included with the closing
documents.

The documents lists the names of the buyer and the seller, the address of the property, the
amount of the gift funds to the buyer, the name of the closing/title office, the contribution amount to
ORG and the amount of the processing fee to CO-1.

The document also lists the disclosures and seller acknowledgements. There are five listed
on the form, they are:

1. The amount appearing as Contribution to ORG is the amount that Seller has agreed to pay
   to ORG out of sales proceeds. No goods or services were provided to the Seller in
   consideration for this contribution. Payment of this contribution is NOT required if the Buyer
   does not purchase the Subject Property.

2. The amount appearing as Processing Fee is the amount that the seller has agreed to pay
   to CO-1 out of sales proceeds. This payment is made in consideration for processing
   services provided in conjunction with Seller's participation in the Down Payment Assistance
   program.

3. Seller understands that the Contribution is used to provide down payment or closing costs
   assistance to Buyer, and that gift funds are derived from pre-existing ORG funds.

4. Seller agrees to instruct and authorize the Settlement/Closing Agent to return ORG gift
   funds to ORG if the Buyer is unsuccessful in obtaining a loan or the loan does not close
   within five (5) business days after ORG gift funds are deposited to settlement or with the
   closing agent.

5. Seller instructs the Settlement/Closing Agent to retain and forward the contribution to ORG
   and Processing Fee to CO-1, upon the successful completion of settlement/closing in
   accordance with the Closing Instructions provided through the Down Payment Assistance
   program.

Form 886-A (1-1994) Catalog Number 20810W Page 4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX

The bottom of the form lists spaces for the seller/sellers, name, social security number and
date.

CO-1

CO-1 was the processing agent for the DPA transactions of ORG. A $ fee was paid directly
to CO-1 for its part in processing the paperwork of the sale. There is a relationship between CO-1
and ORG in that DIR-1 is a principal participant of both organizations. There were four DPA
transactions for 20XX and six transactions for 20XX. This would have resulted in $ and $ in fees
respectively for each year.

Law:

Section 501(a) of the Code provides for the exemption from federal income taxation of
corporations described in section 501(c)(3) of the Code. To be described in section 501(c)(3), an
organization must be organized and operated exclusively for charitable, educational or other
exempt purposes and may not permit any of its net earnings to inure to the benefit of any private
shareholder or individual.

Section 1.501(c)(3)-1(c)(1) of the Income Tax Regulations provides that an organization
operates exclusively for exempt purposes only if it engages primarily in activities that accomplish
exempt purposes specified in section 501(c)(3) of the Code. An organization must not engage in

Form 886-A (1-1994) Catalog Number 20810W Page 5 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX

exempt purposes specified in section 501(c)(3) of the Code. An organization must not engage in
substantial activities that fail to further an exempt purpose.

Income Tax Regulation §1.501(c)(3)-1(c)(2) provides that an organization is not operated
exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the
benefit of private shareholders or individuals.

Income Tax Regulation §1.501(c)(3)-1(d)(1)(ii) provides that an organization is not
organized or operated exclusively for exempt purposes unless it serves a public rather than a
private interest. To meet this requirement it is necessary for an organization to establish that it is
not organized or operated for the benefit of private interests.

Income Tax Regulation §1.501(c)(3)-1(d)(2) defines the term "charitable" as used in section
501(c)(3) of the Code as including the relief of the poor and distressed or of the underprivileged,
advancement of education, combating community deterioration and lessening the burdens of
government.

Income Tax Regulation §1.501(c)(3)-1(d)(3)(i) provides, in part, that the term “educational”
as used in section 501(c)(3) of the Code relates to the instruction of the public on subjects useful
to the individual and beneficial to the community.

Form 886-A (1-1994) Catalog Number 20810W Page 6 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX

Income Tax Regulation §1.501(c)(3)-1(e) provides that an organization that operates a
trade or business as a substantial part of its activities may meet the requirements of section
501(c)(3) of the Code if the trade or business furthers an exempt purpose, and provided the
organization's primary purpose does not consist of carrying on an unrelated trade or business.

In Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279, 283 (1945), the
Supreme Court held that the “presence of a single . . . [nonexempt] purpose, if substantial in
nature, will destroy the exemption regardless of the number or importance of truly . . . [exempt]
purposes.” If a substantial part of an organization’s activities furthers non-charitable purposes, the
organization is not operated exclusively for charitable purposes even though its other activities
further charitable purposes. See Old Dominion Box Co., Inc. v. U.S., 477 F.2d 340 (4th Cir. 1973),
cert. denied, 413 U.S. 910 (1973).

In Easter House v. U.S., 12 Cl. Ct. 476, 486 (1987), aff'd, 846 F.2d 78 (Fed. Cir.) cert.
denied, 488 U.S. 907 (1988), the court held that an organization that operated an adoption agency
was not exempt under section 501(c)(3) of the Code because a substantial purpose of the agency
was a nonexempt commercial purpose. The court concluded that the organization did not qualify
for exemption under section 501(c)(3) because its primary activity was placing children for
adoption in a manner indistinguishable from that of a commercial adoption agency. The court
rejected the organization's argument that the adoption services merely complemented the health
related services to unwed mothers and their children. Rather, the court found that the health-
related services were merely incident to the organization's operation of an adoption service, which,
in and of itself, did not serve an exempt purpose. The organization's sole source of support was
the fees it charged adoptive parents, rather than contributions from the public. The court also
found that the organization competed with for-profit adoption agencies, engaged in substantial
advertising, and accumulated substantial profits. Accordingly, the court found that the "business
purpose, and not the advancement of educational and charitable activities purpose, of plaintiff's
adoption service is its primary goal" and held that the organization was not operated exclusively
for purposes described in section 501(c)(3). Easter House, 12 Cl. Ct. at 485-486.

In American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), the court held that
an organization that operated a school to train individuals for careers as political campaign
professionals, but that could not establish that it operated on a nonpartisan basis, did not
exclusively serve purposes described in section 501(c)(3) of the Code because it also served
private interests more than incidentally. The court found that the organization was created and
funded by persons affiliated with entities of a particular political party and that most of the
organization's graduates worked in campaigns for the party's candidates. Consequently, the court
concluded that the organization conducted its educational activities with the objective of benefiting
the party’s candidates and entities. Although the candidates and entities benefited were not
organization "insiders," the court stated that the conferral of benefits on disinterested persons who
are not members of a charitable class may cause an organization to serve a private interest within
the meaning of section 1.501(c)(3)-1(d)(1)(ii) of the regulations. The court concluded by stating
that even if the political party’s candidates and entities did "comprise a charitable class, [the

Form 886-A (1-1994) Catalog Number 20810W Page 7 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A

“Name of taxpayer | Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX

organization] would bear the burden of proving that its activities benefited members of the class in
a non-select manner."

In Aid to Artisans, Inc. v. Commissioner, 71 T.C. 202 (1978), the court held that an
organization that marketed handicrafts made by disadvantaged artisans through museums and
other nonprofit organizations and shops was operated for exclusively charitable purposes within
the meaning of section 501(c)(3) of the Code. The organization, in cooperation with national craft
agencies, selected the handicrafts it would market from craft cooperatives in communities
identified as disadvantaged based on objective evidence by the Bureau of Indian Affairs or other
government agencies. The organization marketed only handicrafts it purchased in bulk from these
communities of craftsmen. It did not select individual craftsmen based on the needs of the
purchasers. The court concluded that the overall purpose of the activity was to benefit
disadvantaged communities. The organization’s commercial activity was not an end in itself but
merely the means through which the organization pursued its charitable purposes. The method it
used to achieve its purpose did not cause it to serve primarily private interests because the
disadvantaged artisans directly benefited by the activity constituted a charitable class and the
organization showed no selectivity with regard to benefiting specific artisans. Therefore, the court
held that the organization operated exclusively for exempt purposes.

In Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C., 2003), the court relied
on the "commerciality" doctrine in applying the operational test to an organization that operated a
conference center as its primary activity and derived most of its revenues from user fees.
Because of the commercial manner in which this organization conducted its activities, the court
found that it was operated for a non-exempt commercial purpose, rather than for a tax-exempt
purpose. In reaching this conclusion, the court stated that "[a]mong the major factors courts have
considered in assessing commerciality are competition with for profit commercial entities; extent
and degree of below cost services provided; pricing policies; and reasonableness of financial
reserves. Additional factors include, inter alia, whether the organization uses commercial
promotional methods (e.g. advertising) and the extent to which the organization receives charitable
donations."

Revenue Ruling 67-138, 1967-1 C.B. 129, held that helping low income persons obtain
adequate and affordable housing is a "charitable" activity because it relieves the poor and
distressed or underprivileged. The organization carried on several activities directed to assisting
low-income families obtain improved housing, including (1) coordinating and supervising joint
construction projects, (2) purchasing home sites for resale at cost, and (3) helped low income
people obtain home construction loans.

Revenue Ruling 70-585, 1970-2 C.B. 115, discussed four situations of organizations
providing housing and whether each qualified as charitable within the meaning of section 501(c)(3)
of the Code. Situation 1 described an organization formed to construct new homes and renovate
existing homes for sale to low-income families who could not obtain financing through
conventional channels. The organization also provided financial aid to eligible families who do not
have the necessary down payment. When possible, the organization recovered the cost of the
homes through very small periodic payments, but its operating funds were obtained from federal

Form 886-A (1-1994) Catalog Number 20810W Page 8 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX

loans and contributions from the general public. The revenue ruling held that by providing homes
for low-income families who otherwise could not afford them, the organization relieved the poor
and distressed.

Situation 2 described an organization formed to ameliorate the housing needs of minority
groups by building housing units for sale to persons of low and moderate income on an open-
occupancy basis. The housing was made available to members of minority groups who were
unable to obtain adequate housing because of local discrimination. The housing units were
located to help reduce racial and ethnic imbalances in the community. As the activities were
designed to eliminate prejudice and discrimination and to lessen neighborhood tensions, the
revenue ruling held that the organization was engaged in charitable activities within the meaning
of section 501(c)(3) of the Code.

Situation 3 described an organization formed to formulate plans for the renewal and
rehabilitation of a particular area in a city as a residential community. The median income level in
the area was lower than in other sections of the city and the housing in the area was generally old
and badly deteriorated. The organization developed an overall plan for the rehabilitation of the
area; it sponsored a renewal project; and involved residents in the area renewal plan. The
organization also purchased apartment buildings that it rehabilitated and rented at cost to low and
moderate income families with a preference given to residents of the area. The revenue ruling
held that the organization is described in section 501(c)(3) of the Code because its purposes and
activities combated community deterioration.

Situation 4 described an organization formed to alleviate a shortage of housing for
moderate-income families in a particular community. The organization planned to build housing to
be rented at cost to moderate-income families. The revenue ruling held that the organization failed
to qualify for exemption under section 501(c)(3) of the Code because the organization's program
was not designed to provide relief to the poor or further any other charitable purpose within the
meaning of section 501(c)(3) and the regulations

Revenue Ruling 2006-27, 2006-21 I.R.B. 915, sets forth standards for determining when an
organization that provides funds to homebuyers for down payment or closing costs qualifies for
exemption from Federal income tax under section 501(c)(3). In Situation 2, an organization
provides down payment assistance to low-income individuals and families. It offers financial
counseling seminars and conducts other educational activities to help prepare potential low-
income homebuyers for the responsibility of home ownership. Under the organization’s grant
making procedures, the staff considering a particular applicant’s application knows the identity of
the party selling the home to the grant applicant and may also know the identities of other parties,
such as real estate agents and developers, who may receive a financial benefit from the sale.
Moreover, in substantially all of the cases in which the organization provides down payment
assistance to a homebuyer, the organization receives a payment from the home seller. Further,
there is a direct correlation between the amount of the down payment assistance provided by the
organization to the homebuyer and the amount of the home seller's payment to the organization.
Finally, the organization does not conduct a broad based fundraising campaign to attract financial
support. Rather, most of the organization’s support comes from home sellers and real estate-

Form 886-A (1-1994) Catalog Number 20810W Page 9 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX

related businesses that may benefit from the sale of homes to buyers who receive the
organization’s down payment assistance.

The revenue ruling holds that the organization described in Situation 2 is not exempt from
Federal income tax under section 501(c)(1) because it finances its down payment assistance
activities with contributions from sellers and individuals that stand to benefit from the transactions
that the organization facilitates. The fact that the organization relies on seller's payments for most
of its funding and in substantially all of the transactions the payment from a home seller
corresponds to the amount that the organization gives to a homebuyer indicate that the benefit to
the home seller is a critical aspect of an organization’s operations. Rev. Rul. 2006-27, also holds
that the payments to homebuyers in Situation 2 are not gifts, but rebates or purchase price
reductions because sellers make the payments not out of detached and disinterested generosity,
but in response to an anticipated economic benefit, namely the sale of their home at a higher price
and in less time.

Revenue Ruling 2006-27, Situations 1 and 3 describe organizations that provide down
payment and closing costs to qualified homebuyers, in the manner that could qualify for exemption
from Federal income tax under section 501(c)(3). In Situation 1, the organization’s purposes and
activities relieve the poor, distressed and underprivileged by enabling low-income individuals and
families to obtain decent, safe and sanitary homes. In Situation 3, the organization’s purposes
and activities combat community deterioration in a specific, economically depressed area that has
suffered a major loss of population and jobs. Importantly, these organizations conduct broad
based fundraising programs to attract gifts, grants, and contributions from several foundations,
businesses, the general public, and receive funding from government agencies. See Rev. Rul.
2006-27. Their policies and procedures prevent the grant making staff from knowing identities of
the parties involved in the transaction and whether anyone related to the transaction had made or
agreed to make or made a contribution to the organization.

TAXPAYER’S POSITION:

ORG's position with respect to the issues, facts, applicable law and government's position
as discussed in this report is unknown. ORG will be allowed 30 days to review this report and
respond with a rebuttal if considered necessary.

GOVERNMENT’S POSITION:

ORG does not qualify as an organization described in Internal Revenue Code §501(c)(3)
because it operates a program that (1) does not exclusively serve an exempt purpose described in
§501(c)(3), (2) provides substantial private benefit to persons who do not belong to a charitable
class, and (3) results in inurement a part of ORG’s income to the benefit of an officer of the
organization.

Charitable purposes include relief of the poor and distressed. See §1.501(c)(3)-1(d)(2) of
the regulations. ORG’s down payment assistance program does not operate in a manner that

Form 886-A (1-1994) Catalog Number 20810W Page 10 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX

establishes that its primary purpose is to address the needs of low-income people by enabling
low-income individuals and families to obtain decent, safe housing. See Revenue Ruling 70-585,
Situation 1. The down payment assistance program did not serve exclusively low-income
persons. Despite the representations in its application for exemption, ORG does not have any
income limitations for participation in its DPA program. ORG did not screen applicants for down
payment assistance based on income. ORG’s records do not include data on the buyers’
incomes.

Instead, the program is open to anyone, without any income limitations, who otherwise
qualified for these loans. ORG’s DPA program does not limit assistance to certain geographic
areas or target those areas experiencing deterioration or neighborhood tensions. See Revenue
Ruling 70-585, Situation 4. Down payment assistance is available for any property that is
otherwise able to qualify for a mortgage. Arranging or facilitating the purchase of homes in a
broadly defined geographic area does not combat community deterioration or serve other social
welfare objectives within the meaning of §501(c)(3) of the Code.

Only an insubstantial portion of the activity of an exempt organization may further a
nonexempt purpose. As the Supreme Court held in Better Business Bureau of Washington D.C.,
Inc. v. United States, 326 U.S. 279, 283 (1945), the presence of a single non-exempt purpose, if
substantial in nature, will destroy the exemption regardless of the number or importance of truly
exempt purposes. Even if ORG’s DPA program were directed to exclusively low-income
individuals or disadvantaged communities, ORG’s total reliance for financing its DPA activities on
home sellers or other real-estate related businesses standing to benefit from the transactions
demonstrates that the program is operated for the substantial purpose of benefiting private parties.

Form 886-A (1-1994) Catalog Number 20810W Page 11 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX

Like the organization considered in American Campaign Academy v. Commissioner, 92
T.C. 1053 (1989), ORG is structured and operated to assist the private parties who fund it and
give it business. Sellers who participate in ORG’s DPA program benefit from achieving access to
a wider pool of buyers, thereby decreasing their risk and the length of time the home is on the
market. They also benefit by being able to sell their home at the home’s full listed price or by
being able to reduce the amount of the negotiated discount on their homes. Also, the fees paid to
CO-1 benefit the owners of that business. It is evident from the foregoing that ORG’s DPA
program provides ample private benefit to the various parties in each home sale.

As can be seen from the information in the documents utilized in ORG’s DPA program,
buyers receive a “gift” of the funds that they use for the down payment. A house buyer was
eligible to participate in ORG’s DPA program only if the buyer purchased a house from a seller
that agreed to ORG’s contractual terms. ORG and sellers entered into agreements that required
sellers to pay ORG an amount equal to the down payment “gift” that the buyer received under
ORG’s DPA program. ORG claimed that the seller's payment was not provided directly to the
buyer, but instead it was used to “replenish” the pool of funds that was used to provide “gifts” to
subsequent buyers. In addition to requiring the seller to pay an amount equal the amount of the
“gift” provided to the house buyer, ORG required sellers to pay an “administrative fee of $ to CO-1.

Form 886-A (1-1994) Catalog Number 20810W Page 12 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX

In addition, ORG documents explicitly state that the down payment “gift” to a buyer comes
from preexisting ORG funds rather than from the seller’s “contribution” in the transaction.
However, ORG did not solicit outside public contributions or have any other source of funds other
than “contributions” from sellers and related fees. Because the amount of the “contribution” is
always equal to the amount of the down payment assistance provided to the buyer plus the
service fee, the actual source of the down payment assistance is in fact the seller's “contribution.”

In essence, these transactions result in a circular flow of the money. The sellers make
payments to ORG. ORG provides the funds to the buyers, who use the funds to make the down
payment necessary to purchase the seller’s home.

On its contract with each seller ORG in error labeled the seller's payment to ORG as both a
“gift” and a replenishment amount. These contracts obligate the seller, in consideration for
participating in ORG’s program, to pay ORG an amount equal to the amount of the DPA received
by the buyer. The contract, which was required to be signed by each participating seller, stated: “.
Payment of this contribution is NOT required if the Buyer does not purchase the Subject Property."

The manner in which ORG operated its DPA program shows that the private benefit to the
various participants in ORG’s activities was the intended outcome of ORG’s operations rather than
a mere incident of such operations. ORG’s down payment assistance procedures are designed to
channel funds in a circular manner from the sellers to the buyers and back to the sellers in the
form of increased home prices. To finance its down payment assistance activities, ORG relies
exclusively on sellers that stand to benefit from the transactions it facilitates. ORG neither solicits
nor receives funds from other sources.

Before providing down payment assistance, ORG’s grantmaking staff takes into account
whether there is a home seller willing to make a payment to cover the down payment assistance
the applicant has requested. ORG requires the home seller to reimburse it, dollar-for-dollar, for the
amount of funds expended to provide down payment assistance on the seller's home, plus an
administrative fee of several hundred dollars per home sale. ORG secures an agreement from the
seller stipulating to this arrangement prior to the closing.

No DPA assistance transactions take place unless ORG is assured that the amount of the down
payment plus the fee is or will be paid by the seller upon closing. ORG’s instructions to title and
escrow companies provide that at the close of escrow the seller's contribution, along with any ORG
fees, must be sent to ORG within 72 hours. Escrow companies that do not appropriately disburse
funds in a timely manner are prohibited from utilizing the ORG DPA program.

ORG’s receipt of a payment from the home seller corresponding to the amount of the down
payment assistance in virtually every transaction indicates that the benefit to the home seller (and
others involved in the transaction) is not a mere accident but rather an intended outcome of
ORG's operations. In this respect, ORG is like the organization considered in Easter House which
provided health care to indigent pregnant women, but only when a family willing to adopt a
woman's child sponsored the care financially.

Form 886-A (1-1994) Catalog Number 20810W Page 13 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX

Operating a trade or business of facilitating home sales is not an inherently charitable
activity. Unlike the trade or business in Aid to Artisans, Inc. v. Commissioner, 71 T.C. 202 (1978),
ORG’s trade or business was not utilized as a mere instrument of furthering charitable purposes
but was an end in itself. ORG provided services to home sellers for which it charged a market rate
fee. ORG did not market its services primarily to persons within a charitable class. ORG did not
solicit or receive any funds from parties that did not have interest in the down payment
transactions. Like the organizations considered in American Campaign Academy, supra, and
Easter House v. U.S., 12 Cl. Ct. 476, 486 (1987), aff'd, 846 F. 2d 78 (Fed. Cir.) a substantial part
of ORG’s activities furthered commercial rather than exempt purposes.

Based on the foregoing, ORG has not operated exclusively for exempt purposes, and,
accordingly, is not entitled to exemption under §501(c)(3).

The payments from the home sellers to ORG do not qualify as gifts under §102. The
payments from the home sellers do not proceed from detached and disinterested generosity but,
rather, in response to an anticipated economic benefit, namely facilitating the sale of the seller's
home. Under Commissioner v. Duberstein, 363 U.S. 278 (1960), such payments are not gifts for
purposes of §102.

The government proposes revoking ORG’s exemption. Furthermore, although ORG has
an educational module on its website, ORG did not obtain verification from buyers that they had
reviewed or completed the module. Revocation of a determination letter may be retroactive if the
organization operated in a manner materially different from that originally represented. Income
Tax Regulation §601.201(n)(6)(i), Revenue Procedure 20XX-4, §14.01. ORG’s operation of its
DPA activities in a manner materially different from that represented in its application for
exemption justifies retroactive revocation of ORG’s determination letter.

CONCLUSION:

In order to qualify for exemption under IRC §501(c)(3) an organization must be both
organized and operated to achieve a purpose that is described under that Code section. ORG's
DPA program is not operated in accordance with Internal Revenue Code §501(c)(3) and the
regulations thereunder governing qualification for tax exemption under Code. ORG provides down
payment assistance, purportedly in the form of a gift, to individuals and families for the purchase of
a home.

ORG does not screen the applicants for it's downpayment assistance program as the
organization is not involved in the process until step 3 of the process. The buyer and seller have
negotiated the sale before an application is made to ORG. ORG’s DPA activities do not target
neighborhoods in need of rehabilitations or other relief such as lessening neighborhood tensions
or eliminating prejudice and discrimination the home sale transactions were for homes located all
over the City area.

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 12/31/20XX,
12/31/20XX

ORG’s primary activity was brokering transactions to facilitate the selling of homes. ORG
does not engage in any counseling or other activities that further charitable purposes. Because
ORG's primary activity is not conducted in a manner designed to further §501(c)(3) purposes,
ORG is not operated exclusively for exempt purposes within the meaning of §501(c)(3).

All of this constitutes evidence that assets and/or earnings of ORG inured to ORG's
insiders in violation of the requirements of §501(c)(3).

For the foregoing reasons, revocation of exempt status is proposed. Because the facts
show that, in 20XX and 20XX, ORG operated a DPA program not in accordance with the correct
practices, it is proposed that ORG’s tax exempt status be revoked as of January 1, 20XX.

Form 886-A (1-1994) Catalog Number 20810W Page 13 publish.no.irs.gov Department of the Treasury-Internal Revenue Service