Determination Letter 1039042 Released October 1, 2010 Revocation Transcribed from scan

IRS determination 1039042: Down payment assistance program found to serve private interests

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This page covers one taxpayer's ruling from 2010, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.

About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.

Transcribed from a scanned original: the IRS released this determination as an image-only PDF. The full text below is a machine transcription, proofread against the scan. Check the original PDF before quoting exact language.

View official IRS release (PDF)

Plain-English summary

The IRS revoked an organization’s IRC § 501(c)(3) exemption after concluding that its down payment assistance program primarily furthered the business interests of home sellers and other real-estate participants. The examination report states that seller funding created a circular flow of funds, that the program lacked meaningful income or participation limits, and that the organization did not provide sufficient charitable safeguards or documentation. The IRS found that private benefits were more than incidental and that the program operated like a commercial real-estate transaction service rather than exclusively for exempt purposes. Contributions were no longer deductible under IRC § 170, and the organization was required to file Form 1120.

Ruling snapshot

Question: Did the organization’s down payment assistance program operate exclusively for exempt purposes under IRC § 501(c)(3)?
Outcome: Revocation
Key authorities: IRC §§ 170, 501(c)(3), 6104(c), and 7428; Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Appeals Office

1000 South Pine Island Road Person to Contact:

Suite 350

Plantation, FL 33324 Employee ID Number: 0316042
Release Number: 201039042
Release Date: 10/1/10

Refer Reply to:

Date: March 5, 2009

UIL Code: 7428.00-00
In Re:

A = Taxpayer Name
Employer Identification Number:

B = Taxpayer Address
Form Required to be Filed:

Tax Period(s) Ended:
December 31, 20XX
Last Day to File a Petition with the

United States Tax Court: JUN 03 2009

Certified Mail

Dear

This is a final adverse determination as to your exempt status under section 501(c)(3) of
the Internal Revenue Code (IRC). It is determined that you do not qualify as exempt
from Federal income tax under IRC Section 501(c)(3) effective January 1, 20XxX.

primarily to further your insiders’ business interests. Therefore, you are operated for a
substantial nonexempt purpose. In addition, your operations further the private interests
of the persons that finance your activities. Accordingly, you are not operated

exclusively for exempt purposes described in section 501(c)(3).

Contributions to your organization are not deductible under Code section 170.

of any taxes due will not be delayed because you have filed a petition for declaratory
judgment under Code section 7428.

If you decide to contest this determination under the declaratory judgment provisions of
Code section 7428, a petition to the United States Tax Court, the United States Court of
Claims, or the district court of the United States for the District of Columbia must be filed
within 90 days from the date this determination was mailed to you. Contact the clerk of
the appropriate court for rules for filing petitions for declaratory judgment. To secure a
petition form from the United States Tax Court, write to the United States Tax Court,
400 Second Street, N.W., Washington, D.C. 20217.

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 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,

CHARLES FISHER
TEAM MANAGER

Internal Revenue Service Department of the Treasury
Appeals Office

1000 South Pine Island Road Person to Contact:
Suite 350 George Poskitt
Plantation, FL 33324 Employee ID Number: 0316042

Tel: 954-423-7936
Fax: 954-693-4008
Date: MAR 05 2009 Refer Reply to:
AP:Area 4:Team 5:GP
In Re:
A = Taxpayer Name EO Revocation
Employer Identification Number:
B = Taxpayer Address C=EIN
Form Required to be Filed:
1120
Tax Period(s) Ended:
December 31, 20XX
Last Day to File a Petition with the
United States Tax Court: YUN 9 4 2009

Certified Mail
Dear

Our adverse determination was made for the following reason(s): A substantial part of
your activities consists of providing down payment assistance to home buyers. To
finance the assistance, you rely on home sellers and other real-estate related
businesses that stand to benefit from these down payment assistance transactions.
Your receipt of a payment from the home seller corresponds to the amount of the down
payment assistance provided in substantially all of your down payment assistance
transactions. The manner in which you operate demonstrates you are operated
primarily to further your insiders’ business interests. Therefore, you are operated for a
substantial nonexempt purpose. In addition, your operations further the private interests
of the persons that finance your activities. Accordingly, you are not operated
exclusively for exempt purposes described in section 501(c)(3).

Contributions to your organization are not deductible under Code section 170.

You are required to file Federal income tax returns on the form indicated above. You
should file these returns within 30 days from the date of this letter, unless a request for
an extension of time is granted. File the returns in accordance with their instructions,
and do not send them to this office. Processing of income tax returns and assessment

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE: E/O Examinations

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
1100 Commerce Street
Dallas TX 75242

Taxpayer Identification Number:

ORG Form:

ADDRESS
Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Certified Mail - Return Receipt Requested

Dear SIR

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 (04-2002)
Catalog Number 34809F

lf 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:

lf 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, E/O Examinations

Enclosures:

Letter 3618 (04-2002)
Catalog Number 34809F

Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit

om 886A
Explanation of Items

| Year/Period Ended

Name of Taxpayer: |
December 31, 20XX

ORG EIN:
LEGEND
ORG = Organization name XX = Date XYZ = State President = president Secretary =
secretary Donor-1 = 1° donor website = website HS-1 thru HS-5 = 1°% thru 5°" Home
sellers IND-1 thru IND-20 = 18 thru 20° Individual CO-1 thru CO-40 = 1°* thru 40
Companies HB-1 thru HB-131 = 1°° thru 131°° home buyers
ISSUES

1) Whether ORG (ORG) exempt status under Internal Revenue Code § 501(c)(3) should be revoked because it
has not established that it qualifies for tax exempt status and that it is operated exclusively for tax exempt
purposes.

2) Whether ORG has failed to establish that it is operated exclusively for one or more exempt purposes and

whether it is operated for the benefit of private interests such as the creator or his family, shareholders of the

organization, or persons controlled, directly or indirectly, by such private interests.

FACTS
Organizing Documents:
° E/O was requested but did not provide a copy of its Form 1023, Application for

Recognition of Exemption available for inspection by the general public as

required by IRC § 6104.
E/O provided a copy of its Determination Letter dated February 24, 20XX,

recognizing ORG as a tax exempt Private Foundation described in § 501 (c)(3) of

the Internal Revenue Code.
° E/O provided State of XYZ Articles of Incorporation dated September 9, 19XX.
The articles stated ORG was organized as a Not-For-Profit Corporation under the

non profit laws of the State of XYZ.

Articles of Incorporation:
ORG articles of incorporation were filed with XYZ’s Secretary of State on September 9, 19XX #N.

General Purpose:

ORG is a non profit X YZ Corporation organized as a Private Operating Foundation solely for educational,
religious, scientific, and general charitable and eleemosynary purposes.

° as provided under the provisions of § 617 of the XYZ Statutes and all acts
amendatory thereto.
° within the meaning of § 170(c)(2) and § 501(c)(3) of the Internal Revenue Code of

19XX, as amended (hereinafter referred to a the “Code”) or the corresponding
provision of any future United States Internal Revenue Law.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

tia 886A | Department of the Treasury - Internal Revenue Service ] Schedule No. or Exhibit
| Explanation of Items

|
Year/Period Ended

December 31, 20XX

Name of Taxpayer:

ORG EIN:

Specific Purpose:
To support the local church through grants, gifts and ministry participation.

To minister to missionaries and pastors in their retirement years.
To actively assist other ministries in development and execution of fundraising

e
campaigns, and the professional administration of their resources.
° To minister to college students through scholarships.
° To minister to migrant students through educational assistance.
e To minister to children through preschool programs.
° To minister throughout the world through mission projects.

Officers/Incorporators:
Incorporators, Relationship per Articles:

President
Secretary, spouse of President

Officers, Relationship per Form 990PF, Return of Private Foundation:

President, President
Secretary, Secretary, spouse of President

Board Minutes:
Minutes of board meetings were in support of the organizations exempt purposes. Minutes also reflected the

board’s awareness of changing ORG’s sources of support, character, purpose and methods of operation.

Activities

Overview:

Form 1023:
On December 21, !9XX, ORG submitted Form 1023, Application for Recognition of Exemption, requesting

exemption from Federal income tax under § 501(c)(3) of the Internal Revenue Code. The application was signed
by President, president. The Form 1023 application was received by the Service in December, 19XX.

In Part I], Activities and Operational Information, ORG described its past, present, and planned activities as
follows:
To support the local church through grants, gifts and ministry participation.

To minister to missionaries and pastors in their retirement years.

To actively assist other ministries in development and execution of fundraising
campaigns, and the professional administration of their resources.

e To minister to college students through scholarships.
° To minister to migrant students through educational assistance.
e To minister to children through preschool programs.
° To minister throughout the world through mission projects.
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page: -2-

Department of the ‘Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items |
| Year/Period Ended

December 31, 20XX

Form 886-A

Name of Taxpayer:
ORG EIN:

Part Il, Question 2 the foundation described ORG’s primary sources of support would be from contributions from
its board of directors. President was classified as a disqualified person in Question 4d because he was a
substantial contributor. In the audited year, President held positions within the foundation as president and

director.

Determination Letter
On February 24, 20XX, based on the information ORG provided in its application for exemption it was

recognized a tax exempt organization as described in § 501(c)(3) of the Internal Revenue Code.

Form 990PF:
On April 12, 20XX ORG was notified by the Internal Revenue Service of its receipt of their Form 990 for tax

year ending December 31, 20XX. The letter stated ORG was classified as a “private foundation” and as such
should file a Form 990PF each year. In October, 20XX “TEGE” secured copy of ORG’s 20XX Form 990 PF.
The amounts originally reported on ORG, Inc. 20XX Form 990 corresponded to amounts reported on their 20XX

Form 990PF.

Income Statement:

Revenue:
Contribution, Gifts, Grants $$
Interest on savings/temp investments $
Total Revenue: $$
Expenses:
Grants and allocations $$
Professional Fees — Accounting $
Other Professional Fees — Financial $
Taxes $
Travel & Conferences $
Printing & Publications $
Other Expenses $
$$!

Total Expenses:
Excess or (deficit) $ §
' An error in addition amounting to $$ was noted on Form 990PF, page I, line 26, “Total

Disbursements and Expenses”.

Balance Sheet: (Book Value) Assets:
Cash $ $
Savings

Form 886-A (Rev. 4-68)) Department of the Treasury - Internal Revenue Service

Page: -3-

Department of the Preasury - Internal Revenue Service
| Explanation of Items
}
Year/Period Ended

December 31, 20XX

rm 886A | Schedule No. or Exhibit

Name of Taxpayer:

ORG EIN:

Grants Receivable $
Investments (FMV $) $
Total Assets $ $
Liabilities: $ 0.00
Equity:
Unrestricted $ §$
Total Net Assets or Fund Balances $ §$
$ §$

Total liabilities and Net Assets/Fund Balances

Checks Written to Other Organization’s:
In 20XX, ORG disbursed approximately $$ in checks to other organizations. CO-1 an organization established

by President received $$.00 in 20XX. During the determination process, however, the organization did not
respond to additional information requests by the Internal Revenue Service and as a result it was not granted
exempt status.

Checks were also written to CO-2 for $$; the CO-3 received $$; CO-4 received a check in the amount of $$; CO-
5 received $1,$; CO-6 received $$; CO-7 received a check for $$; CO-8, $$; CO-9 received $$; CO-10 received
$$; CO-I1 received a check for $$; CO-12 was given a check for $$; CO-13 received $$.

Website:
ORG ts also known as Organization. The organization’s websites, website and website support for-profit and

commercial interests. Information contained on copies of web pages provided by President follows. In order to
receive gift-funds homebuyers must:

¢ Be able to qualify for a mortgage loan that allows alternate sources of down payment.
Purchase a property where the seller agrees to enroll their home with Organization, because the
requirement enables the subject property to be purchased by homebuyers utilizing gift funds from

participating charitable organizations.

The Lenders Page advertises that gift funds are available to ANY homebuyer where the home purchase consists

of the following:

e The mortgage loan used to purchase the home allows the homebuyer gift funds as a minimum cash

investment.
Sellers voluntarily contribute a portion of the proceeds of the sale to our program to replenish gift funds

for future gifts.

The Gift Fund Letter includes a statement that, the gift funds were not made available to the donor(s) from
any person or entity with an interest in the sale of the property including the seller, real estate agent, or
broker, builder, loan officer, or any entity associated with them.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -4-

Department of the ‘Treasury + Internal Revenue Service Schedule No. ot Exhibit

Form 886-A :
Explanation of Items

‘Name of ‘Taxpayer: | Year/Period Ended
° |

ORG EIN: | December 31, 20XX

The Real Estate Professionals Page advertises:

e Realtors can sell homes faster and at the full price when the seller assists the buyer with the down payment and
closing costs.

e Your sellers benefit because their home sells faster, and for the full asking price.

e Realtors sell more homes, and they earn larger commissions

e Additionally, you can advertise your homes as having a “FREE Down Payment Grant”.

The Home-sellers Page advertises:

e As sellers you can determine the amount of down payment assistance you want a homebuyer to be able
to use to purchase your property.

¢ Most sellers choose to allow 3%-5% of the purchase price.

e¢ You will be asked to add a small administrative fee to your donation.

e The home-seller donation pledged shows an administrative fee of $$.

The Brochure:

Organization — Feeling Left Out
The brochure states donations to the E/O are tax deductible; everybody qualifies; combined support from Sellers,
Realtors, Lenders or Builders make their program possible; Organization’s team helps you qualify to buy a home.
Gilt funds come from a pre-existing pool of funds in the form of tax deductible contributions from corporations,
individuals, government and other charities.
The brochure defines the qualification process where the homebuyer:

e Selects a participating home.

e Submits financial information to a participating mortgage lender.

e Upon approval of the mortgage loan, the mortgage lender will submit their Organization Gift

Application to the E/O.

The brochure further states if the homebuyer qualifies for the loan, they will qualify for ORG’s gift funds.

Down Payment Assistance Program Overview:

ORG began its down payment assistance program in September 20XX. The organization provides down
payment assistance to individuals who would like to become homeowners. President, president, stated that
homeowners are referred to mobile home dealers for home purchases. The mobile home dealers provide all the
funds used tn the organization’s down payment assistance program and the donations are reported on their Form
990PF. The program does not have any I time homebuyer restrictions, income restrictions or housing
restrictions. According to President, if a homebuyer qualifies for a loan and if the lender permits the use of down
payment assistance funds for down payment or for closing costs, the property and homebuyer qualify for their
DPA program. President also stated that funds are provided by donors and not by participating home-sellers;
donations are voluntary and their program does not use funds from home-sellers specifically to purchase their

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

Department of the ‘Preasury - Internal Revenue Service Schedule No. or Exhibit

Form 886-A
Explanation of Items

| Year/Period Ended
| December 31, 20XX

Name of Taxpayer:

ORG EIN:
|

home: home-sellers voluntarily participate in his program; there are no contractual relationships between home-
sellers and ORG; and that the organization’s down payment assistance program is not seller funded.

Audit Scope Defined:
Our audit included reviewing ORG’s detailed general ledger, the use of a website database known as Accurint to

help us tn our research to identify organization donors participating as home-sellers, when organization books
and records were inadequate or unclear. We also used official title company closing statements (HUD -1) to
further identify organization donors participating as home-sellers and to determine ORG’s non-compliance with
Revenue Ruling 20XX-27. ORG provided their detailed general ledger and title company documents to the
TEGE division, at our request, during the course of our audit. The website used for our research is also available

to the general public.
Internal Controls: Review of Books & Records & HUD-I Closing Statements:

The HUD-1 closing statements show that ORG’s books and records omitted significant amounts of information
about their DPA program’s activities including:

e the method and timing of donations received

e donations base on home sales

e substantial related party transactions between donors and home-sellers.

e circular flow of funds

e seller funding
ORG’s DPA program's reliance on seller funding and its creation of a circular flow of funds has adversely

impacted its basis for continued exemption under § 501(c)(3) of the Internal Revenue Code. Insufficient internal
controls contributed to the organization’s inability to document and identify DPA program transactions more

clearly in their books and records. See Treas. Reg. 1.6033-2.

Book and Records Detailed General Ledger

On March 12'" 20XX the TEGE Division received a copy of ORG’s detailed general ledger providing
information about its down payment assistance program. The document, consisting of 5 pages, provided the
following information:

e transaction dates

e organization donors

e amounts of donation

e home-sellers (including mobile home dealers)

e methods of payment ( EFT transfer, check etc)

e grant recipients

e amounts of DPA grants

e grant recipient’s social security numbers

¢ property addresses, city & state

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -6-

Department of the ‘Treasury = Internal Revenue Service | Schedule No. or Exhibit
Explanation of Items |
|
| Year/Period Ended

| December 31, 20XX

Name of Taxpayer:

ORG EIN:

Overview: Down Payment Assistance Transactions:

The following transactions identify organization donors participating as home-sellers within ORG’s DPA
program. Our examination shows the E/O’s DPA program being seller funded, supporting a circular flow of

funds based on home sales, and one where private interests and not public interests are served.
Our review of HUD -1 closing statements shows donations were based on successful home sales. Each document

identifies an organization donor also participating as a home-seller. Gift funds are paid from a pre-existing pool
of funds for homebuyer closing costs. The document also identifies donations returned from the home-seller’s
closing proceeds replenishing ORG’s existing pool of funds and thus supporting a circular flow of funds.
Additionally the HUD -1 closing statements also show that amounts returned to ORG, from each home closing,
exceed homebuyer gift funds by an average of $. The HUD -1 statements identify ORG’s 20XX DPA Program
as non-compliant with Revenue Ruling 20XX-27 for the reasons cited above.

Donor Facts:
Organization documents show CO-14 donated $ to ORG in the audited year. According to President, the monies

were voluntary donations, from unrelated parties.
ORG’s books and records show IND-1, apparently an individual home-seller and an unrelated party, selling three

homes to three different DPA grant recipients. The transactions appear to be independent and unrelated to

Further analysis using independent web-based research, however, identifies IND-1 as a manager employed by
CO-14. Asa result, the same transactions are actually related party transactions because CO-14 is an
organization donor as well as a home-seller.

Donor Grouping: Factual Presentation of Down Payment Assistance Program Transactions:
As the table below shows ORG’s down payment assistance program is seller funded and based on successful
homes sales. The program supports a circular flow of funds and is non-compliant with Revenue Ruling 20XX-

27,

CO-14 Work Paper #ORG-|]

4/16/20XX IND-] Manager, related party HB-] $$
4/20/20XX CO-14 $$
§/28/20XX IND- | Manager, related party HB-2 $$
6/1/20XX | CO-14 | $$ |
7/8/20XX | CO-14 | $$ See Hud #1 |
7/28/20XX IND-1 | Manager, related party | HB-3 | | $$ |
Form 886-Arev.4-68) Department of the Treasury - Internal Revenue Service

Page: -7-

Deparuncat of the ‘Treasury - Internal Revenue Service

Explanation of Items

Schedule No. or Exhibit

Name of Taxpayer:

ORG EIN:

Year/Period Ended
December 31, 20XX

8/3/20XX CO-14 $$
9/29/20XX CO-14 $$
| 10/7/20XX 1 co-14 | HB-4 $$
| 11/23/20XX CO-14 $$ See Hud #1
| Totals $$ $$
IND-2
Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
| 4/14/20XX IND-2 HB-5 $$
4/15/20XX IND-2 $$
Totals $$ $$
CO-15:
Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
1/13/20XX CO-15 $$
9/1/20XX CO-15 HB-6 $$
8/27/20XX CO-15 HB-7 $$
8/30/20X X CO-15 $$
| Totals $$ $$
CO-16 Work-Paper #JM-2
Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
5/27/20XX | IND-3 Manager, related party HB-131 $$
6/2/20XX CO-16 $$
8/3/20XX CO-16 HB-9 $$
8/23/20XX CO-16 $$
11/24/20XX CO-16 MHB-10 $$
12/3/20XX CO-16 $$
Totals $$ $$
IND-4
Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
3/10/20XX IND-4 HB-11 $$
3/16/20XX IND-4 $$
Totals $$ $$

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page: -8-

Departament of the ‘Treasury -

Explanation of Items

Internal Revenue Service

Schedule No. or Exhibit

Name of Taxpayer:

ORG EIN:

Year/Period Ended
December 31, 20XX

ImM&
eed Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
5/11/20XX IND-5 HB-12 $$
3/13/20XX IND-5 $

Totals $ $$
CO-17 Work Paper ORG-4
Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
6/10/20XN IND-6 President HB-13 $$
6/14/20XX CO-17 $$

Totals $$ $$
CO-18 Work Paper ORG-5

| Trans Date | Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
4/6/20XX IND-7 Manager HB-14 $$
4/9/20XX CO-18 $$

| Totals $$ $$
CO-19 Work Paper ORG-6
Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
1/21/20XN IND-8 Related party HB-1I5 $$
1/27/20XX CO-19 $$

Totals $$ $$

_CO-20
Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
1/26/20XX CO-20 HB-16 $3
1/29/20XX CO-20 HB-17 $$
1/30/20XX CO-20 $$
3/30/20XX CO-20 HB-18 Unrecorded $$
3/3 1/20XX CO-20 $$ Unrecorded
4/19/20XX CO-20 HB-19 $$
4/21/20XX CO-20 HB-19 $$
4/23/20XX CO-20s CO-20 $$
7/7/20XX CO-20 HB-20 $$

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page: -9-

Schedule No. or Exhibit

Department of the Treasury - Internal Revenue Service

Explanation of Items

orm 886A

Year/Period Ended
December 31, 20XX

Name of Taxpayer:

ORG EIN:
| 7/7/20XX | CO-20s CO-20 $$
10/5/20XX CO-20 HB-21 $$
10/6/20XX CO-20 HB-22 $$
10/19/20XX CO-20 HB-23 $$
10/20/20XX CO-20 $$
10/28/20XX CO-20s CO-20 $$

Totals $$ $$
IND-9
Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
§/28/20XX IND-9 HB-24 $$
6/8/20XX IND-9 $$
Totals $$ $$
CO-21 Work Paper ORG-7
Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
5/1 1/20XX CO-21 President HB-25 $$
3/27/20XX CO-2 | $$
8/9/20XX CO-21 HB-26 $$
8/11/20XX CO-21 $$
9/29/20XX CO-21 HB-27 $$
10/6/20XX CO-21 HB-28 $$
10/22/20XX CO-21 $$
12/17/20XX CO-21 Director HB-29 $$
12/28/20XX CO-21 $$
Totals $$ $$
CO-22
Trans Date Donor/Home-seller | Related Party Homebuyer Donation Amt DPA Grant
3/5/20XX CO-22 HB-30 $$
3/12/20XX CO-22 HB-31 $$
3/16/20XX CO-22 $$
Totals $$ $

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page: -10-

Form 886-A

Depariment of the Preasury = Intcraal Revenue Serice

Explanation of Items

Schedule No. or Exhibit

Name of Taxpayer:

ORG EIN:

Yearc/Period Ended
December 31, 20XX

Work Paper ORG-8

trans Deve Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
| 1/29/20XX IND-10 President HB-32

2/11/20XX IND-11 Related Party

3/26/20XX CO-24 HB-33

3/30/20XX CO-25

4/5/20XX IND-10 President HB-34

4/15/20XX IND-10 President HB-35

4/20/20XX CO-23

6/23/20XX CO-24 HB-36

6/29/20XX CO-23

Totals
CO-25 Work Paper ORG-9
Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
/30/20XX IND-12 Chairman HB-37

2/4/20XX CO-25s

6/9/20XX IND-13 Related Party HB-38

6/10/20XX CO-25s

8/9/20XX IND-12 Chairman HB-39

8/14/20XX CO-25s

Totals
CO-26 Work Paper ORG-10

Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant

2/19/20XX IND-14 President HB-40

2/20/20XX CO-26

5/6/20XX IND-14 President HB-41
| S/11/20XX IND-14 President HB-42

5/13/20XX CO-26

6/1 8/20XX IND-14 President HB-43

6/18/20XX IND-14 President HB-44

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page: -11-

lorm 886A | Department of the Treasury - Intermal Revenue Service | Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer: Year/Period Ended
ORG EIN: December 31, 20XX
| 6/21/20XX CO-26
7/29/20XX IND-14 President HB-45
7/29/20XX IND-14 President HB-46
8/9/20X.X CO-26
8/20/20XX IND-14 President HB-47
12/20/20XX IND-14 President HB-48
[2/28/20XX CO-26
Totals
CO-27 Work Paper ORG-11
Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
| 3/24/20XX IND-15 Finance Manager HB-49
3/24/20XX IND-15 Finance Manager HB-50
3/29/20XX CO-27
4/14/20XX IND-15 OER ELC HB-S]
4/16/20XX CO-27
4/29/20XX IND-15 Finance Manager HB-52
5/4/20XX CO-27
5/25/20XX IND-15 Finance Manager HB-53
5/26/20XX CO-27
8/3 1/20XX IND-15 Finance Manager HB-54
9/15/20XX CO-27
Totals
CO-28
Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
2/2/20X X CO-28 HB-55
2/6/20XX COs
3/10/20XX Cones HB-56
3/15/20XX Soret
4/2/20X X COrz8 HB-57
4/14/20XX cee HB-58
4/14/20XX CO+28
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page: -12-

Department of the ‘freasury - Internal Revenue Service Schedule No. or Exhibit

borm 886A .
Explanation of Items

Year/Period Ended
December 31, 20XX

Name of Taxpayer:

ORG EIN:
5/19/20XX deci . HB-59
$/25/20XX ea
6/10/20XX ali HB-60
6/11/20XX CO-28
6/30/20XX Corse HB-61
7/7/20XX CO-28
7/21/20XX CO-28 HB-62
7/23/20XX CO-26 HB-63
8/4/20XX oe
8/9/20XX COs
8/18/20XX CO-28 HB-64
8/23/20XX CO:2
8/24/20XX saiiigan HB-65
8/25/20XX coz
9/29/20XX CO-28 HB-66
10/6/20XX eee HB-67
10/11/20XX CO:28 HB-68
10/12/20XX resins
10/22/20XX Cons HB-69
10/24/20XX COs HB-70
10/26/20XX sa
11/15/20XX CO-28 HB-71
12/2/20XX rie
12/8/20XX CO-26 HB-72
12/27/20XX CO=28 HB-73
12/29/20XX coe

Total
CO-29
Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
3/30/20XX Con? HB-74
4/8/20XX OG HB-75
4/9/20XX CO-29
Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -13-

Porm 886A Departmentol the Preasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items

|
Year/Period Ended

December 31, 20XX

Name of Taxpayer:

ORG EIN:
4/26/20XX Con? HB-76
5/3/20XX acne
5/28/20XX COs HB-77
5/28/20XX sain HB-78
6/3/20XX Cor?
6/14/20XX inl HB-79
6/16/20XX “ee
6/30/20XX Co? HB-80
7/2/20XX oii
716/20XX co HB-81
UT2OXX iia
7/23/20XX Chee HB-82
7/29/20XX linia HB-83
7/30/20XX ied
$/6/20XNX nies HB-84
8/258/20XX via HB-85
8/26/20XX O23?
9/20/20XX CO:22 HB-86
10/1/20XX C029
11/1/20XX CO 2e HB-87
1 1/5/20XX esis
12/14/20XX C0-29 HB-88
12/16/20XX Con29
12/22/20XX CoH HB-89
12/29/20XX CO?

Totals
CO-30
Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
1/30/20XX | CO-30 HB-90
2/4/20XX Cors0
2/20/20XX CO-30 HB-91
Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page: -14-

Form 886-A

Department of the Treasury - Internal Revenue Service
Explanation of Items

Schedule No. or Exhibit

Name of Taxpayer:

ORG EIN:

Year/Period Ended

December 31, 20XX

2/25/20XX CO-30
2/27/20XX CO-30 HB-92
3/2/20XX CO-30
3/11/20XX CO-30 HB-93
3/11/20XX CO-30 HB-94
3/16/20XX CO-30
3/29/20XX CO-30 HB-95
3/31/20XX CO-30
4/20/20XX CO-30 HB-96
4/23/20XX CO-30
7/2/20XX CO-30 HB-97
7/16/20XX CO-30
8/20/20XX CO-30 HB-98
8/24/20XX CO-30
10/25/20XX CO-30 HB-99
11/5/20XX CO-30 HB-100
11/23/20XX CO-30
Totals

IND-16

Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt Grant Amt
5/24/20XX IND-16 HB-101
5/26/20XX IND-16 Homeowner
Totals

IND-17

Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt Grant Amt
2/24/20XX IND-17 HB-102
2/26/20XX IND-17 Homeowner
Totals

CO-31 Work Paper #ORG-12

Trans Date Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
2/18/20XX IND-18 President HB-103

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service Page: -15-

Department of the Preasury - Internal Revenue Service

Explanation of Items

| Schedule No. or Exhibit

Name of Taxpayer:

Year/Period Ended
December 31, 20XX

ORG EIN:
] ]
2/20/20XX | CO-31
President
4/14/20XX IND-18 HB-104
| 4/19/20XX CO-31
5/18/20XN IND-19 DiiRestes HB-105
5/20/20XX CO-31
5/28/20XX | IND-18 Presielent HB-106
5/28/20XX “IND-19 Dinsstion HB-107
6/3/20XX CO-3|
8/4/20XX IND-19 Piinetsier HB-108
8/4/20XX IND-19 DIneeio HB-109
8/9/20XX CO-31
8/26/20XX IND-19 DIRESOs HB-110
8/30/20XX CO-31
10/1/20XX IND-19 Diesel HB-111
10/4/20XX CO-3 |
10/14/20XX IND-19 Diesish HB-112
10/19/20XX IND-19 Piss HB-113
10/22/20XX CO-31
Totals
IND-20
Trans Date | Donor/Home-seller Related Party Homebuyer Donation Amt DPA Grant
7/30/20XX IND-20 HB-114
8/4/20XX IND-20
Totals

Summary of Down Payment Assistance Program Transactions:
In our initial interview, President stated that donations received and down payment assistance grants disbursed

were unrelated transactions. He indicated that donations were received throughout the year and in no way
directly related to the down payment assistance program. President further stated that donations were not based
on successful home sale closings and their DPA program was not seller funded. Our independent research differs

with President’s statements and our findings identify ORG’s DPA program as one:
¢ consisting of substantial related party transactions

e relying ona seller funded program

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page: -16-

Deparonentolthe Treasury - Incermal Revenue Service Schedule No. or Exhibit
Explanation of Items
_ Year/Period Ended

December 31, 20XX

vm 886A

Name of Taxpayer:

ORG EIN:

creating a circular flow of funds

HUD #1 Settlement Statements: Overview:

On July 23. 20XX we requested that the E/O send twenty-seven (27) selected HUD-1 settlement statements. The
request was based on homebuyer information provided earlier by ORG. On October 12, 20XX the TEGE
Division received from ORG the twenty-seven (27) requested copies of the HUD-1 settlement statements. The
closing statements were requested in order to gain more insight into the organization’s down payment assistance
program and to determine ORG’s level of non-compliance with Revenue Ruling 20XX-27.

The settlement statements we obtained show acceptance of both written and verbal contractual agreements made
between the homebuyer and home-seller. On the settlement date the title company conducted a final review of
the agreements. If both agreed, the documents were signed and title was transferred. The title company was
authorized upon closing to disburse funds. Normally the settlement and disbursement dates occured on the same
date.

The settlement statements also showed information about gift funds provided to home buyers by ORG as well as
home-seller donations returned to ORG from closing proceeds. All closing statements showed that home-seller’s
donations returned to ORG exceeded homebuyer gift funds disbursed by ORG by several hundred dollars.

The settlement statements include the following information:

° The name of the home-seller, address, city, state and zip code

° The lender’s name, address, city state and zip code

e The property address, city state and zip code

° The settlements agent’s name, TIN#, address, city state and zip code

e The settlement date

° The disbursement date

° The homebuyer and home-seller settlement costs, respectively

° The amount of down payment assistance provided to each homebuyer by ORG
e The amount of each home-seller’s donation returned to ORG

Comparative Presentation:
HUD #1 Settlement Statements & E/O’s Books & Records

Overview:
The following presentation identifies and compares the same transactions recorded in the organization’s books

and records with information recorded on the HUD #1 closing statements. In each document we compare
information about the homebuyer, the home-seller, the donor-home-seller relationship, DPA grant amount, date
E/O provided DPA funds, the settlement date, the disbursement date and home-seller donations to ORG from
closing proceeds. All documents were provided to the TEGE division by ORG.

Comparative Presentation:

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page: -17-

orm 886A

Department of the ‘Treasury - laternal Revenue Service

Explanation of Items

Schedule No. or Exhibit

Name of Taxpayer:

ORG EIN:

Year/Period Ended
December 31, 20XX

HUD-1! Settlement Statements & ORG’s Detailed General Ledger:

HS-1
Homebuyer/Home-Seller Info. Detailed General Ledger HUD -1 Settlement Statement
Homebuver HB-115 HB-115
Home-seller HS-1 HS-1
is Home Seller a ORG Donor? No Yes
Date E/O Wired Gift Funds 3/4/20XX 3/4/20XX
DPA Grant Amount
HUD #1 Sttlmnt/Dsbursemnt Date Not Recorded 3/4/20XX
Donation To ORG
Supports Circular Flow Of Funds No Yes
CO-32

Homebuver/Home-Seller Info. Detailed General Ledger HUD-1 Settlement Statement
Homebuyer HB-116 HB-116
Home-seller HS-2? CO-32
Is Home Seller a ORG Donor? No Yes
Date E/O Wired Gift Funds 11/23/20XX 11/22/20XX
DPA Grant Amount
HUD #1 Stthnnt/Dsbursemnt Date Not Recorded 11/22/20XX
Donation To ORG Not Recorded

| Supports Circular Flow Of Funds No Yes

CO-33

| Homebuyer/Home-Seller Info. Detailed General Ledger HUD-1 Settlement Statement
Homebuyer HB-117 HB-117
Home-seller CO-33 CO-32
Is Home Seller a ORG Donor? No Yes
Date E/O Wired Gift Funds 3/4/20XX 3/5/20XX
DPA Grant Amount
HUD #1 Sttlmnt/Dsbursemnt Date Not Recorded 3/5/20XX
Donation To ORG Not Recorded
Supports Circular Flow Of Funds No Yes

CO-15

HUD-1 Settlement Statement

Homebuyer/Home-Seller Info. Detailed General Ledger

Homebuyer HB-118 HB-118
Home-seller Not Recorded CO-15

Is Home Seller a ORG Donor? No Yes

Date E/O Wired Gift Funds 8/27/20XX 8/27/20XX

- xk

° HS-2 was not the home-seller but the title company closing this transaction.

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page: -18-

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No. or Exhibit

Name of Taxpayer:

Year/Period Ended
December 31, 20XX

ORG EIN:
DPA Grant Amount $$ $$
HUD #1 Stumnt/Dsbursemnt Date Not Recorded 8/27/20XX
Donation To ORG Not Recorded $$
Supports Circular Flow Of Funds |_No Yes

CO-34
Homebuyer/Home-Seller Info. Detailed General Ledger HUD-1 Settlement Statement
Homebuyer HB -119 HB -119
| Home-seller HS-3 CO-34
Is Home Seller a ORG Donor? No Yes
Date E/O Wired Gift Funds 7/29/20XX 7/30/20XX
DPA Grant Amount
HUD #1 Sttimnt/Dsbursemnt Date Not Recorded 7/30/20XX
Donation To ORG Not Recorded
Supports Circular Flow Of Funds No Yes
CO-34
Homebuyer/Home-Seller Info, Detailed General Ledger HUD-I Settlement Statement
Homebuyer HB-1]20 HB-120.
Home-seller CO-34 CO-34
Is Home Seller a ORG Donor? Yes Yes
Date E/O Wired Gift Funds 12/17/20XX 12/15/20XX
DPA Grant Amount
HUD #1 Stthmnt/Dsbursemnt Date 12/28/20XX 12/15/20XX
| Donation To ORG
| Supports Circular Flow Of Funds Yes Yes
CO-34

HUD-1 Settlement Statement
| Homebuyer/Home-Seller Info. Detailed Gencral Ledger
Homebuyer HB-121 HB-12]
Home-seller CO-34 CO-34
Is Home Seller a ORG Donor? Yes Yes
Date E/O Wired Gift Funds 8/11/20XX 8/11/20XX
DPA Grant Amount
HUD #1 Sttlmnt/Dsbursemnt Date 8/17/20XX 8/11/20XX
Donation To ORG
Supports Circular Flow Of Funds Yes Yes

CO-34

HUD- 1 Settlement Statement

Homebuyer/Home-Seller Info. Detailed General Ledger

Homebuyer HB-122 HB-122
Home-seller CO-34 CO-34

Is Home Seller a ORG Donor? Yes Yes

Date E/O Wired Gift Funds 6/23/20XX 6/23/20XX
DPA Grant Amount

HUD #1 Sttlmnt/Dsbursemnt Date Not Recorded 6/23/20XX

Form 886-A(Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -19-

Form 886-A

Department of the Preasury - Internal Revenue Service

Explanation of Items

Schedule No. or Exhibit

Name of Taxpayer:

ORG EIN:

Year/Period Ended
December 31, 20XX

|
3

Donation To ORG

Not Recorded

Yes

Supports Circular Flow Of Funds

CO-34

Homebuver/IHome-Seller Info.

Detailed General Ledger

HUD #1 Settlement Statement

HB-123

Homebuyer HB-123

Home-seller CO-34 CO-34

Is Home Seller a ORG Donor? Yes Yes

Date E/O Wired Gift Funds 12/30/20XX 12/28/20XX
DPA Grant Amount

HUD #1 Sttlmnt/Dsbursemnt Date 12/30/20XX 12/28/20XX
Donation To ORG

Supports Circular Flow Of Funds Yes Yes

CO-20/CO-20s

Hlomebuyer/Home-Seller Info.

Detailed General Ledger

HUD #1 Settlement Statement

HB-124

Homebuyer HB-124
tHome-seller CO-20/CO-20 CO-20
Is Home Seller a ORG Donor? Yes Yes
Date E/O Wired Gift Funds 10/6/20XX 10/6/20XX
DPA Grant Amount $$ $$
HUD #1 Stimnt/Dsbursemnt Date Not Shown 10/6/20XX
Donation To ORG Not Shown $
| Supports Circular Flow Of Funds No Yes

CO-20/CO-20s,

Homebuyer/Home-Seller Info.

Detailed General Ledger

HUD #1 Settlement Statement

HB-23

Homebuyer HB-23

Home-seller CO-20 Inc/CO-20 CO-20s Inc
Is Home Seller a ORG Donor? Yes Yes

Date E/O Wired Gift Funds 10/20/20XX 10/20/20XX
DPA Grant Amount $$ $$

HUD #1 Sttlnint/Dsbursemnt Date 10/28/20XX 10/20/20XX
Donation To ORG $$ $$

Supports Circular Flow Of Funds Yes Yes

CO-35
Homebuver/Home-Seller Info. Detailed General Ledger HUD #1 Settlement Statement
Homebuyer HB-125 HB-125
Home-seller CO-35 CO-35
Is Home Seller a ORG Donor? No Yes
Date E/O Wired Gift Funds 4/23/20XX 4/26/20XX
DPA Grant Amount $$ $$
HUD #1 Sttlmnt/Dsbursemnt Date Not Recorded 4/26/20XX
Donation To ORG Not Recorded $$
Supports Circular Flow Of Funds No | Yes

Form 886-A(Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -20-

Deputment of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No. or Exhubit

Name of Taxpayer:

ORG EIN:

Year/Period Ended
December 31, 20XX

CO-36

Detailed General Ledger

HUD #1 Settlement Statement

Homebuyer/Home-Seller Into.

HB-126

Homebuyer HB-126
Home-selier CO-33 CO-36
Is Home Sellera ORG Donor? No Yes
Date E/O Wired Gift Funds 3/24/20XN 3/25/20XX
DPA Grant Amount
HUD #1 Sttlmnt/Dsbursemnt Date Not Recorded 3/25/20XX
Donation To ORG Not Recorded
Supports Circular Flow Of Funds No Yes
14, CO-36

Homebuyer/Home-Seller Info. Detailed General Ledger HUD #1 Settlement Statement
Homebuyer HB-127 HB-127
Home-seller CO-33 CO-36
Is Home Seller a ORG Donor? No Yes

' Date E/O Wired Gift Funds $/28/20XX 5/28/20XX
DPA Grant Amount
HUD 41 Sttimnt/Dsbursemnt Date Not Recorded 5/28/20XX
Donation To ORG Not Recorded
Supports Circular Flow Of Funds No Yes

CO-36

Homebuyer/Home-Seller Info. Detailed General Ledger HUD #1 Settlement Statement
Homebuyer HB-128 HB-128

Home-seller CO-33 CO-36

Is Home Seller a ORG Donor? No Yes

Date E/O Wired Gift Funds 12/27/20XX 12/27/20XX

DPA Grant Amount

HUD #1 Sttlmnt/Dsbursemnt Date Not Recorded 12/27/20XX

Donation To ORG Not Recorded

Supports Circular Flow Of Funds No Yes

CO-37

Homebuyer/IHome-Seller Info. Detailed General Ledger HUD #1 Settlement Statement
Homebuyer HB-129 HB-129

Home-seller HS-4 CO-37

Is Home Seller a ORG Donor? No Yes

Date E/O Wired Gift Funds 6/8/20XX 6/9/20XX

DPA Grant Amount

HUD #1 Stthnnt/Dsbursemnt Date Not Recorded 6/9/20XX

Donation To ORG Not Recorded

Supports Circular Flow Of Funds No Yes

CO-38

Form 886-A(Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -21-

borm 886A

Department ot the Treasury - Internal Revenue Service

Explanation of Items

Schedule No. or Exhibit

Name of Taxpayer:

ORG

EIN:

Year/Period Ended
December 31, 20XX

HUD #1 Settlement Statement

Homebuyer/Home-Seller Info. Detailed General Ledger
Homebuver | HB-130 HB-130
l-lome-seller CO-38 CO-38
{s Home Seller a ORG Donor? Yes Yes
Date E/O Wired Gift Funds 4/14/20XX 4/13/20XX
DPA Grant Amount
HUD 4@1 Sttlmnt/Dsbursemnt Date Not Recorded 4/13/20XX
Donation To ORG Not Recorded
Supports Circular Flow Of Funds No Yes

CO-38

Homebuvyer/Home-Seller Info. Detailed General Ledger HUD #1 Settlement Statement
Homebuyer HB-62 HB-62
-ome-seller CO-38 CO-38
Is Home Seller a ORG Donor? Yes Yes
Date E/O Wired Gift Funds 7/21/20XX 7/22/20XX
DPA Grant Amount
HUD #1 Stthmnt/Dsbursemnt Date 8/4/20XX 7/22/20XX
Donation To ORG
Supports Circular Flow Of Funds Yes Yes

19, CO-38

HUD #1 Settlement Statement

Homebuyer/Home-Seller Info. Detailed General Ledger

Homebuyer HB-66 HB-66
Home-seller CO-38 CO-38

Is Home Seller a ORG Donor? Yes Yes

Date E/O Wired Gift Funds 9/29/20XX 9/29/20XX
DPA Grant Amount

HUD #1 Sttlmnt/Dsbursemnt Date 10/12/20XX 9/29/20XX
Donation To ORG

Supports Circular Flow Of Funds Yes Yes

CO-38

HUD #1 Settlement Statement

| Homebuyer/Home-Seller Info. Detailed General Ledger
Homebuyer HB-68 HB-68
Home-seller CO-38 CO-38
ts Home Seller a ORG Donor? Yes Yes
Date E/O Wired Gift Funds 10/11/20XX 10/8/20XX
DPA Grant Amount
HUD #1 Stthmnt/Dsbursemnt Date Not Recorded 10/8/20XX
Donation To ORG Not Recorded
Supports Circular Flow Of Funds No Yes

CO-38

Homebuver/Home-Seller Info.

Detailed General Ledger

HUD #1 Settlement Statement

omebuver

HB-69

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page: -22-

Form 886-A

Department of the ‘Treasury - Internal Revenue Service

Explanation of Items

Schedule No. or Exhibit

Name of Taxpayer:

Year/Period Ended
December 31, 20XX

ORG EIN:
Home-seller CO-38 CO-38
Is Home Seller a ORG Donor? Yes Yes
Date E/O Wired Gift Funds 10/22/20XX 10/22/20XX
DPA Grant Amount
HUD #1 Sttlmnt/Dsbursemnt Date Not Recorded 10/22/20XX
Donation To ORG Not Recorded
Supports Circular Flow Of Funds No Yes

CO-39
Homebuyer/Home-Seller Info. Detailed General Ledger HUD #1 Settlement Statement
Homebuyer HB-49 HB-50
Home-seller IND-15 CO-39
Is Home Seller a ORG Donor? No Yes
Date E/O Wired Gift Funds 3/24/20XX 3/25/20XX
DPA Grant Amount
HUD #1 Sttlmnt/Dsbursemnt Date 3/29/20XX 3/25/20XX
Donation To ORG
Supports Circular Flow Of Funds No Yes
CO-40

Homebuyer/Home-Seller Info.

Detailed General Ledger

HUD #1 Settlement Statement

HB-130

| Homebuyer HB-130
Home-seller HS-5 CO-40
Is Home Seller a ORG Donor? No Yes
Date E/O Wired Gift Funds 8/25/20XX 8/25/20XX
DPA Grant Amount
HUD #1 Sttlmnt/Dsbursemnt Date 8/30/20XX 8/25/20XX
Donation To ORG
Supports Circular Flow Of Funds No Yes |

CO-29

Homebuyer/Home-Seller Info.

Detailed General Ledger

HUD 41 Settlement Statement

HB-74

Homebuyer HB-74

Home-seller CO-29 CO-29

is Home Seller a ORG Donor? Yes Yes

Date E/O Wired Gift Funds 3/30/20XX 3/31/20XX
DPA Grant Amount $$ $$

HUD #1 Sttlmnt/Dsbursemnt Date Not Recorded 3/31/20XX
Supports Circular Flow Of Funds Not Recorded

Circular Flow Of Funds No Yes

CO-29
Homebuyer/Home-Seller Info. Detailed General Ledger HUD #1 Settlement Statement
Homebuyer HB-80 HB-80
Home-seller CO-29 CO-29
Is Home Sellera ORG Donor Yes Yes

Form 886-A (Rev. 4-68)

Department of the Treasury - Internal Revenue Service

Page: -23-

Porm 886A

Department of the Preasury - Enrernal Revenue Service

Explanation of Items

| Schedule No. or Exhibit

Name of Taxpayer:

Year/Period Ended
December 31, 20XX

ORG EIN:

| Date E/O Wired Gift Funds 6/30/20XX | 6/28/20XX
DPA Grant Amount =
HUD #1 SttImn/Dsbursemnt Date 7/2/20XX 6/28/20XX
Donation To ORG
Supports Circular Flow Of Funds Yes | Yes

CO-29

Homebuyer/Home-Seller Info. Detailed General Ledger HUD #1 Settlement Statement
Homebuyer HB-83 HB-83
Home-seller CO-29 CO-29
Is Home Seller a ORG Donor? Yes Yes
Date E/O Wired Gift Funds 7/29/20XX 7/30/20XX
DPA Grant Amount
HUD 41 Sttlmnt/Dsbursemnt Date Not Shown 7/30/20XX
Donation To ORG Not Shown
Supports Circular Flow Of Funds No Yes

CO-30
Detailed General Ledger

HUD #1 Settlement Statement

Homebuyer/Home-Seller Info.
Homebuyer HB-100 HB-100
Home-seller CO-30 CO-30
Is Home Seller a ORG Donor? Yes Yes
Date E/O Wired Gift Funds 11/5/20XX 11/5/004
DPA Grant Amount
HUD #1 Sttlmnt/Dsbursemnt Date Not Recorded 11/5/20XX
Donation To ORG Not Recorded

| Supports Circular Flow Of Funds No | Yes

Summary of Comparative Presentation:

Our review of HUD-1 closing statements shows significant differences between information recorded in the
organizations books and records. The HUD-1 documents describe transactions between homebuyers, home-
sellers and ORG. In each HUD-1 closing statement the homebuyer receives gift funds paid by ORG toward their
closing costs. The HUD-| documents further show ORG receiving donations from home-sellers for amounts
greater than the gifted funds provided, which average $. In comparing information recorded in the HUD-|
closing statements with information recorded in ORG’s books and records, we noted in all closing statements that
the organization’s 20XX down payment assistance program was non-compliant with Revenue Ruling 20XX-27

because ORG’s DPA program:

e fs seller funded.

e Receives donations based on home sales.
e Supports a circular flow of funds.

Form 886-A(Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -24-

Schedule No. or Exhibit

Department of the ‘Treasury - Internal Revenue Service

vn 886A | .
Explanation of Items

|
Year/Period Ended

December 31, 20XX

Name of Taxpayer:

ORG EIN:

The following HUD-1 closing statement comparisons highlight some of the many discrepancies found in the
organization's books and records. For example:

HS-1 HUD-1 closing statement #1:

ORG’s general ledger shows HS-1 as a home seller and DONOR-1 a donor. According to the
information recorded in ORG’s books and records there is an independent relationship between HS-1,
home-seller and DONOR-1 an organization donor. The same transactions in the HUD-1 closing
statements identify HS-1 as both home seller and ORG donors as part of a related party transaction. The
HUD-1 document clearly identifies this transaction as related party, seller funded and part of a circular
flow of funds. ORG’s books and records are ambiguous, unclear and incomplete and offered no

additional explanation for the differences noted.

CO-32 HUD-I closing statement #2:

ORG’s general ledger shows HS-2 as a home-seller and does not identify a donor. According to the HUD-1
closing statement HS-2 was the name of the settlement agent. CO-32 was both the home-seller and
organization donor. Again, ORG’s books and records were ambiguous, unclear and incomplete. The HUD-1!
document clearly identifies this transaction as related party, seller funded and part of a circular flow of funds

ORG’s books and records did not provide any further explanation.

Our review of HUD-I documents show that within the organization’s DPA program, ORG donors substantially
participated as home-sellers, resulting in the creation of a circular flow of funds and a program that relied
substantially on seller funding. The HUD-1] documents show that significant facts relating to ORG’s DPA
program were omitted from the organization’s books and records questioning their transactional integrity.

As a result of the discrepancies noted above, President was contacted on October 17, 20XX and asked to provide
the remaining copies of the HUD-1 settlement statements. Our information document request (IDR-5) was faxed
to President's dedicated fax line on October 17, 20XX and resent on October 20, 20XX at his request.

To date President has not responded to our subsequent telephone messages asking that he send the documents
requested and that he contact us. As yet, the documents have not been received.

REVENUE RULING 20XX-27

Situation |
X is a non-profit corporation that helps low-income individuals and families purchase decent, safe and sanitary

homes throughout the metropolitan area in which X is located. As a substantial part of its activities, X makes
assistance available exclusively to low-income individuals and families to provide part or all of the funds they
need to make a down payment on the purchase of a home. X uses standards set by Federal housing statutes and
administered by the Department of Housing and Urban Development to determine who is a low-income

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page: -25-

Department of the Treasury - Internal Revenue Service | Schedule No. or Exhibit

Form 886-A .
Explanation of Items

Year/Period Ended
December 31, 20XX

Name of Taxpayer:

ORG EIN:

individual. Individuals are eligible to receive assistance from X's program if they are low-income individuals,
have the employment history and financial history necessary to qualify for a mortgage, and would so qualify but
for the lack of a down payment. X also offers financial counseling seminars and conducts other educational
activities to help prepare potential low-income home buyers for the responsibility of home ownership.

X will consider applications for assistance in connection with an applicant’s purchase of any home that meets X’s
standards for habitability. Before making a grant of down payment assistance, X requires a home inspection
report for the property that the applicant intends to buy to ensure that the house will be habitable.

To fund its down payment assistance program and other activities, X conducts a broad based fundraising program
that attracts gifts, grants and contributions from several foundations, businesses and the general public.

X's grantmaking process is structured to ensure that X’s staff awarding grants on behalf of X does not know the
identity of the party selling the home to the grant applicant or the identities of any other parties, such as real
estate agents or developers, who may receive a financial benefit from the sale. The staff also does not know
whether any of the interested parties to the transaction have been solicited for contributions to X or have made
pledges or actual contributions to X. Further, X does not accept any contributions contingent on the sale of a

particular property or properties.

Situation 2
Y is a nonprofit corporation that is like X in all respects as set forth in Situation 1, except as follows. Under Y’s

grantmaking procedures, Y’s 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 rea! estate agents
and developers, who may receive a financial benefit from the sale. Moreover, in substantially all of the cases in
which Y provides down payment assistance to a home buyer, Y receives a payment from the home seller.
Further, there is a direct correlation between the amount of the down payment assistance provided by Y in
connection with each of these transactions and the amount of the home seller’s payment to Y. Finally, Y does not
conduct a broad based fundraising campaign to attract financial support. Rather, most of Y’s support comes from
home sellers and real estate-related businesses that may benefit from the sale of homes to buyers who receive Y’s

down payment assistance.

Situation 3
Z is a nonprofit corporation formed to combat community deterioration in an economically depressed area that

has suffered a major loss of population and jobs. Studies have shown that the average income in the area is below
the median level for the State. Z cooperates with government agencies and community groups to develop an
overall plan to attract new businesses to the area and to provide stable sources of decent, safe and sanitary
housing for the area residents without relocating them outside the area. As part of the renewal project, Z receives
funding from government agencies to build affordable housing units for sale to low and moderate-income
families. As a substantial part of its activities, Z makes down payment assistance available to eligible home
buyers who wish to purchase the newly-constructed units from Z. Z also offers financial counseling seminars and
conducts other educational activities to help prepare potential low and moderate-income home buyers for the

responsibility of home ownership.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -26-

| Department of the Preasury = Internal Revenue Service | Schedule No. or Exhibit

orm 886A | ;
Explanation of Items

Year/Period Ended
December 31, 20XX

Name of Taxpayer:

ORG EIN:

To fund its down payment assistance program and other activities, Z conducts a broad based fundraising program
that attracts gifts, grants and contributions from several foundations, businesses and the general public.

Down Payment Assistance Program’s Non-Compliance with Revenue Ruling 20XX-27:
Situation #2, as defined within Internal Revenue Bulletin 20XX-21, May 22, 20XX, Revenue Ruling 20XX-27,

most closely identifies ORG’s 20XX down payment assistance program.

Situation #2
Under Y’s grant making procedures, }"s 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 Y provides down payment assistance to a home buyer, Y receives a payment from the home

seller. Further, there is a direct correlation between the amount of the down payment assistance provided by Y in
connection with each of these transactions and the amount of the home seller’s payment to Y. Finally, Y does not
conduct a broad based fundraising campaign to attract financial support. Rather, most of Y's support comes from
home sellers and real estate-related businesses that may benefit from the sale of homes to buyers who receive Y’s

down payment assistance.

LEGAL PRINCIPLES:

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)-I(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 substantial activities that fail to further an exempt
purpose. 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.” Ifa 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

(4" Cir. 1973), cert. denied, 413 U.S. 910 (1973).

Section 1.501(c)(3)-1(c)(2) of the regulations 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.

Section 1.501(c)(3)-1(d)(1 )(ii) of the regulations 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.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -27-

] Department of the Ereasury - Internal Revenue Service ] Schedule No. or Exhibit
Explanation of Items

Form 886-A

Year/Period Ended
December 31, 20XX

Name of Taxpayer:

ORG EIN:

Section 1.501(c)(3)-1(d)(2) of the regulations 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.

Section 1.501(c)(3)-1(d)(3)(i) of the regulations 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.

Section 1.501(c)(3)-I(e) of the regulations 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.

Rev. Rul. 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
grantmaking 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-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.

Rev. Rul. 2006-27, Situations | 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

Form 886-Arev.4-68) Department of the Treasury - Internal Revenue Service
Page: -28-

Deparunent of the Preasury - Internal Revenue Service Schedule No. or Exhibit

Explanation of Items

Form 886-A

Year/Period Ended
December 31, 20XX

Name of Taxpayer:

ORG EIN:

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.

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)(i1) of the regulations. The court
concluded by stating that even if the political party’s candidates and entities did "comprise a charitable class, [the
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, 7] 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

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -29-

Department of the Treasury = Internal Revenue Service ] Schedule No. or Exhibit

orm 886A .
Explanation of Items

|
Year/Period Ended

December 31, 20XX

Name of Taxpayer:
ORG EIN:

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, infer alia, whether the organization uses commercial promotional methods (e.g. advertising) and the

extent to which the organization receives charitable donations."

Rev. Rul. 67-138, 1967-1 C.B. 129, held that helping low income persons obtain adequate and affordable housing
isa "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.

Rev. Rul. 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 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

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -30-

Department of the Vreasury - [nrernal Revenue Service ] Schedule No. or Exhibit

borm 886A |
Explanation of Items

Year/Period Ended
December 31, 20XX

Name of Taxpayer:

ORG EIN:

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.

Rev. Rul. 85-1, 1985-1 C.B. 177, holds that an activity is a burden of government only if there is an objective
mantfestation by a governmental unit that it considers the activity to be its burden. The ruling also provides that
little weight should be given to government officials that merely praise or express approval of an organization and
its activities. Instead, the government must formally recognize the organization and its operations as relieving its
burdens. Several factors set forth in the revenue ruling bear on whether the governmental unit has made an
objective manifestation. These factors are:

e A statute specifically creates the organization and clearly defines the organization’s structure and purposes.

e The activity is an integral part of a larger governmental program, or is acted jointly with a governmental unit.

e The governmental unit controls the activities of the organization, for example by appointing the board
members.

e The organization pays governmental expenses.
e Regular government funding of the organization’s activities through grants or general obligation bonds backed

with the full faith and credit of the governmental (as opposed to general revenue bond financing).
e The governmental unit ts not prohibited from performing the particular activity.

Rev. Rul. 85-2, 1985-1C.B. 178, holds that an organization lessens the burden of government if it engages in
activities that a governmental unit considers to be its burden and such activities actually lessen such governmental
burden. An organization must demonstrate through all the relevant facts and circumstances that a governmental
unit considers the organization to be acting on its behalf, thereby freeing up the government assets that would

otherwise be devoted to the particular activity.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -31-

Depariment of the ‘reasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items
_ Year/Period Ended

December 31, 20XX

m 886A

Name of Taxpayer:

ORG EIN:

In Columbia Park and Recreational Association, Inc. v. Commissioner, 88 T.C. | (1987), aff'd without published

opinion 838 F. 2d 465 (4"" Cir. 1988), the court provided that expending funds for services and items similar to
those in the budget of a municipal government is insufficient to establish that a governmental unit accepted the

activities as its responsibility.

In Public Industries. Inc. v. Commissioner, T.C. Memo 1991-3, the court stated that even if a governmental unit
considers an activity to be a proper governmental function, an organization must establish that it has a solid
relationship with the governmental unit to support a finding that the organization was acting on the governmental
unit’s behalf. On the issue of whether the organization’s activities actually lessen the burdens of government, the
court noted that showing that an organization’s activities might improve general economic conditions or might
reduce the negative consequences if the activities are not conducted ts not enough to demonstrate that

organization's activities actually lessen the government’s burden.

In Quality Auditing Company, Inc. v. Commissioner, 114 T.C. 498 (2000), an organization that developed a
certification program for safe construction claimed that it was lessening the burdens of government.

Governmental agencies were among those that requested that the organization develop the certification program.
The court held that the government’s concern with obtaining high quality work in public construction projects falls
short of establishing that the government considers the certification program to be its own responsibility and that
the organization was acting on its behalf. In addition, the court stated that even if the certification program
lessened the burdens of government, because it also conferred benefit on private owners and developers, it
furthered a substantial nonexempt purpose by lessening the burdens on private parties.

Even if an organization's activities serve a charitable class or are otherwise charitable within the meaning of
section 501(c)(3), to qualify for exemption from Federal income tax under section 501 (a) as on organization
described in section 501(c)(3), the organization must demonstrate that its activities serve a public rather than a
private interest within the meaning of Reg. Section 1.501(c)(3)-1(d)(1). Rev. Rul. 72-147, 1972-1 C.B. 147, held
that an organization that provided housing to low income families did not qualify for exemption under section
501(c)(3) of the Code because it gave preference to employees of a business operated by the individual who also
controlled the organization. The ruling reasoned that, although providing housing for low income families furthers
charitable purposes, doing so in a manner that gives preference to employees of the founder's business primarily

serves the private interest of the founder rather than a public interest.

In KJ's Fund Raisers v. Commissioner, T.C. Memo 1997-424 (1997), aff'd, 1998 U.S. App. LEXIS 27982 (2d Cir.
1998), the Tax Court held that an organization formed to raise funds for distribution to charitable causes did not
qualify for exemption under section 501(c)(3) because the primary purpose of its activities was to attract
customers to its founders’ private business. The founders of the organization were the sole owners of KJ's Place, a
lounge at which alcoholic beverages were served. The founders served as officers of the organization and, at
times, also controlled the organization’s board. The Tax Court found that the founders exercised substantial
influence over the affairs of the organization. The organization’s business consisted of selling "Lucky 7" or
similar instant win lottery tickets exclusively to patrons of KJ's Place. The lottery tickets were sold during regular

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Depariment of the Treasury - Internal Revenue Service | Schedule No. or Exhibit
Explanation of Items |
4 >
| Year/Period Ended

December 31, 20XX

Name of Taxpayer:
ORG EIN:

business hours by the owners of the lounge and their employees. The organization derived most of its funds from
its lottery ticket sales. The organization solicited no public donations. From the proceeds of the sales of the
lottery tickets, the organization made grants to a variety of charitable organizations. Although supporting
charitable organizations may be a charitable activity, the Tax Court nevertheless upheld the Commissioner's denial
of exemption to the organization on the ground that the organization’s operation resulted in more than incidental
private benefit to KJ’s Place and, indirectly, its owners. The Second Circuit affirmed.

TAXPAYER”S POSITION:

President has made several statements about his position and the organization’s down payment assistance
program. President's position in his May 15, 20XX letter to the Internal Revenue Service, referring to mobile
home dealers as donors and as home-sellers he stated:

“These home-sellers provide all the funds we use for this program and the amount

of their contributions are reported on Form 990PF.”
In his December 15, 20XX letter to the Internal Revenue Service regarding home-sellers, he
stated:

“no part of any down payment assistance using the home-seller’s funds, or was

provided by home-sellers or homebuilders or other interested parties in the form of

donations to ORG’s specifically to replenish funds if and only if their homes were

purchased through our down payment assistance program.”
In hts April 26, 20XX response to our April 7, 20XX preliminary findings report, President
stated:
“] don’t understand what you mean by seller driven funding. We accept donations
from sellers typically after they closed on the sale of their home. In 20XX, we
chose to use. % of the donations we received to help families buy homes.
President further asked the Internal Revenue Service to:

“reserve your decision until the court challenges of Revenue Ruling 20X X-27 are

decided. However it is decided, we will voluntarily comply, or discontinue the

program immediately.”
President also stated that his organization’s DPA Program is not impermissibly serving private interests,
explaining that donations are made by donors not participating as home-sellers. Home-seller donations received
at closing are unrelated to home sales and are not used to replenish a pool of funds. He also stated that a circular
flow of funds does not exist within his down payment assistance program because home-sellers and donors are

unrelated and that ORG’s DPA program is not seller funded.

GOVERNMENT POSITION:

The purpose of our audit focused strictly on Exempt Organization activities, specifically to determine if ORG’s
20XX DPA program was compliant with existing law.

Form 886-A(rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -33-

Department of the ‘Treasury - Laternal Revenue Service Schedule No. or Exhibit

Form 886-A .
Explanation of Items

Year/Period Ended
December 31, 20XX

Name of Taxpayer:

ORG EIN:

The fact that ORG’s home-sellers are not contractually obligated to the Ministry, does not diminish the fact that
the organization's DPA assistance program is non-compliant with Revenue Ruling 20XX-27 and with its IRC §
501(c)(3) exemption. Rather it shows an expansion of down payment assistance activities that include donors
and organizations having for-profit and commercial interests participating as home-sellers in their DPA program.
The for-profit organizations have acknowledged their commitment to ORG by providing funds from their closing
proceeds based on home-sales, to replenish the organization's existing pools of funds, as shown in the HUD-1

analysis.

In concluding our audit of the organization’s 20XX Form 990PF, its books and records, HUD -! closing
statements, as well as the TEGE division’s independent and qualitative research relative to donor/home-seller
participation, we found that ORG’s down payment assistance program was not compliant because it promoted
and served private interests resulting from the substantial level of participation between organization donors as
home-sellers. The public interest was not served. Their DPA program substantially relied on home-seller
funding to finance its activities and created a circular flow of funds. Donations received from home-sellers were
based on home sales. HUD -! documents show that home-seller proceeds exceeded DPA grants provided to
homebuyers by several hundred dollars per transaction. ORG’s down payment assistance to homebuyers ranged

from %to % ofthe home selling price. One transaction provided over $ in down payment assistance.

The law requires that an organization claiming exemption under IRC § 501(c)(3) also be operated exclusively for
prescribed exempt purposes. Under the operational test, an organization is regarded as operated “exclusively for’
exempt purposes only if it engages primarily in activities that accomplish one or more exempt purpose. ORG
must establish that it is organized and operated exclusively for exempt purposes, in order to qualify for tax-
exempt status under IRC § 501(c)(3). In this context, the term “operated exclusively for exempt purposes” is
interpreted as “engaged primarily in activities” in furtherance of one or more of the organization’s exempt

purposes. This is known as the primary purpose doctrine.

Our analysis of the organization’s books and records and of official U.S. Department of Housing & Urban
Development (HUD -1) documents demonstrates that ORG’s 20XX Down Payment Assistance Program

activities were not exclusively charitable.

Failure to provide relevant information is a sufficient basis for both the Service and the courts to refuse to
recognize an organization as exempt. This reduces the possibility that an organization may retreat into claims of
ignorance about its own operations. Simply stated, the organization must establish the factual basis for its
exemption. ORG failed to establish that it is operated in accordance with IRC § 501(c)(3) and compliant with

Revenue Ruling 20XX-27.
Based on our analysis and the facts stated above, ORG’s 501(c)(3) exempt status should be revoked because it
has failed to establish that its down payment assistance program was operated exclusively for prescribed exempt

purposes.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page: -34-

Department of the ‘treasury - Incernal Revenue Service ] Schedule No. or Exhibit

borm 886A
Explanation of Items

Year/Period Ended
December 31, 20XX

Name of Taxpayer:

ORG EIN:

To be operated exclusively for purposes described in section 501(c)(3), 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., supra, 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. ORG is not
operated exclusively for exempt purposes described in section 501(c)(3). It operates primarily for private benefit
of home sellers, other individuals, and entities that stand to benefit from the real estate transactions it facilitates.
The primary purpose served by ORG’s DPA program is a commercial one, overshadowing any educational or

charitable purposes the organization may have served.

Essentially, through its DPA program, ORG transfers cash from the participating home sellers or homebuilders to
homebuyers, thus enabling homebuyers to satisfy the down payment and closing cost payment requirements for

their home purchases.

ORG operates primarily for a non-exempt business purpose in a manner similar to a commercial enterprise
facilitating real estate transactions. See American Campaign Academy. supra, and Easter House v. U.S., 12 Cl.
Ct. 476, 486 (1987), aff'd, 846 F. 2d 78 (Fed. Cir. 1988). Facilitation of real estate transactions Is not a per se a
charitable activity. See Rev. Rul. 20XX-27. Generally, ORG does not solicit or receive contributions from the
general public to fund its DPA program. Almost all of ORG’s revenue is derived from home sellers.

ORG’s activities, promotional materials, and marketing strategies show that ORG operates for the benefit of
home sellers, home builders, lenders, real estate professionals, and homebuyers. Also, ORG’s total reliance for
financing of its DPA program on the participating home sellers and individuals connected to the real estate
transactions and their willingness to pay for the services demonstrate that ORG ’s DPA program provides
substantial benefit to private parties involved in the transactions. See Rev. Rul. 20XX-27, Situation 2. Sellers
who participate in ORG’s DPA program benefit from achieving access to a wider poo! of buyers, thus ORG
enables them to sell their homes faster and for a higher price. This private benefit to home sellers is substantial
even in the case where the homebuyer is poor and distressed or underprivileged or where the sale of the home
happens to combat community deterioration. Real estate professionals who participate in ORG’s DPA program,
from real estate brokers to escrow companies, benefit from increased sales volume and the attendant increase in

their compensation.

ORG does not qualify as an organization described in section 501(c)(3) because its primary activity, the
operation of a down payment assistance program, does not exclusively serve any exempt purpose described or
enumerated in section 501(c)(3) and the regulations. Charitable purposes include relief of the poor and distressed
or of the underprivileged. See section 1.501(c)(3)-1(d)(2) of the regulations. ORG’s DPA program does not
provide relief of the poor and distressed or of the underprivileged. ORG has no income or any other meaningful
limitations for participation in its DPA program. The program is open to anyone, without any income limitations,
who otherwise qualified for a mortgage, mostly an FHA insured mortgage. Although some down payments and
closing cost grants have been made to low income and very low income individuals, as defined by the HUD,

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -35-

“Form 886-A

Department of the Treasury - Internal Revenue Service | Schedule No. or Exhibit
| Explanation of Items |
Year/Period Ended

December 31, 20XX

Name of Taxpayer:
ORG EIN:

ORG does not pre-screen recipients’ income or other qualifications for assistance contemporaneously with the
making of the grants to the homebuyers.

By merely facilitating real estate transactions through transfer of cash from home sellers to homebuyers without
any meaningful limitations, educational instruction on homeownership and budgeting and without ensuring
homebuyer’s ability to afford the home; it can hardly be said that ORG relieved the needs of the poor and
distressed or of the underprivileged or that ORG operated in furtherance of its purported charitable goal of
expanding and maintaining the supply of safe, decent, and affordable housing for low and moderate income

persons.

CONCLUSION:

Based on the facts presented above, ORG has not demonstrated that it engages primarily in activities that
accomplish exempt purposes. The organization’s DPA program is non-compliant with Revenue Ruling 20XX-
27 because the program is seller funded and supports a circular flow of funds. Donations were substantially
received from donors participating as home-sellers and their donations were based on successful home sale
proceeds. Moreover, ORG serves private interests more than incidentally and, as such, fails to qualify as an
organization exempted from federal income tax under IRC § 501(c)(3). The proposed revocation of ORG’s tax

exempt status is effective beginning January 1, 20XX.

Form 1120 U.S. Income Tax Return should be filed for tax years ending December 31, 20XX; 20XX, 20XX and
20XX. Subsequent returns are due no later than the 15" day of the 3" month after the end of each tax year.

Returns should be sent to the following mailing address:

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page: -36-

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On this page

Document type

Determination Letter

IRS subject

Declaratory Judgments Relating to Status & Classification of Organizations Under Section 501(c)(3), etc.

Topics

Procedure, penalties, and administration

Code sections

§ 170, § 501, § 6104, § 7428

Ruling dated

March 5, 2009

Publicly released

October 1, 2010

View Official PDF