IRS denies section 501(c)(3) exemption to a foreclosure home purchase program

Plain-English summary

The IRS denied tax-exempt recognition to an organization that bought homes from homeowners facing foreclosure and resold them to the original owners through land sale contracts. The IRS concluded that the program was operated for a substantial commercial purpose because it bought and sold real estate, competed with commercial businesses, and was not limited to a class of poor or distressed people. The IRS also found that the organization's structure could provide private benefits to board members and their related businesses through real estate commissions, loans, legal work, and referrals. Contributions to the organization were not deductible under section 170, and the organization was required to file federal income tax returns.

Ruling snapshot

• Question: Did the organization qualify for recognition of exemption under IRC § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC §§ 501(a), 501(c)(3), 170, and 7428; Treas. Reg. §§ 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(1)(ii), and 1.501(c)(3)-1(d)(2)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Appeals Office

2525 Capitol Street, Suite 201, MS 55204 Taxpayer Identification Number:
Fresno, CA 93721

Release Number: 201307014 Person to Contact:

Release Date: 2/15/2013
Date: November 19, 2012

Tax Period(s) Ended:
A December 31, 2010

° VIL: 501.32-00, 501.33-00

Dear

We considered your appeal of the adverse action proposed by the Director, Exempt Organizations,
Rulings and Agreements. This is our final determination that you do not qualify for exemption from
Federal income tax under Internal Revenue Code (the “Code”) section 501(a) as an organization
described in section 501(c)(3) of the Code.

Our adverse determination was made for the following reason(s):

You have not demonstrated that you are operated exclusively for exempt purposes within
the meaning of Internal Revenue Code § 501(c)(3) and Treasury Regulations §
1.501(c)(3)-1(d). You do not engage primarily in activities that accomplish one or more of
the exempt purposes specified in Internal Revenue Code § 501(c)(3). Your primary
activity is the operation of a commercial business, which does not have an exempt
purpose. You do not lessen the burdens of government.

Your net earnings inure to the benefit of private shareholders and individuals, which is
prohibited by Internal Revenue Code § 501(c)(3).

You are operated for a substantial private purpose rather than a public purpose, which is
prohibited by Internal Revenue Code § 501(c)(3) and Treasury Regulations § 1.501(c)(3)-

1(d)(1)(ii).

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

You are required to file Federal income tax returns on Forms 1120 for the tax periods stated in the
heading of this letter and for all tax years thereafter. File your return with the appropriate Internal
Revenue Service Center per the instructions of the return. For further instructions, forms, and information
please visit www.irs.gov.

You are required to file Federal income tax returns on Forms 1120 for the tax periods stated in the
heading of this letter and for all tax years thereafter. File your return with the appropriate Internal
Revenue Service Center per the instructions of the return. For further instructions, forms, and information
please visit www.irs.gov.

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

Please show your employer identification number on all returns you file and in all correspondence with
Internal Revenue Service.

You also have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is
not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have
to file a petition in a United States Court. The Taxpayer Advocate can however, see that a tax matters
that may not have been resolved through normal channels get prompt and proper handling. If you want
Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this
letter. You may call toll-free, 1-877-777-4778, for the Taxpayer Advocate or visit www.irs.gov/advocate
for more information.

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

Sincerely Yours,

Appeals Team Manager
Karen A. Skinder

Enclosure: Publication 892

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Date: Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:

Legend: UILs:

B= date 501.32-00

E= state 501.33-00

F= county 501.36-01

J = individual 501.45-00

K= individual 534.00-00

L = individual

M = individual

N = individual

Dear

We have considered your application for recognition of exemption from federal income tax
under section 501(a) of the Internal Revenue Code (“Code”). Based on the information
provided, we have concluded that you do not qualify for exemption under section
501(c)(3) of the Code. The basis for our conclusion is set forth below.

Issue
Do you qualify for recognition of tax exemption under section 501(c)(3) of the Code? No,
for the reasons stated below.

Facts

You incorporated on B under the non-profit laws of the state of E. Your Articles of
Incorporation (“Articles”) state you are organized and operated exclusively for section
501(c)(3) purposes. Your Articles also state that the specific purpose for which you are
organized is to support homeowners in F, E who have fallen on hard times and are in
need of financial assistance.

You exclusively engage in purchasing houses from homeowners who have become
delinquent on their mortgage and selling the purchased house back to the homeowner via
a land sale contract (hereafter, "Program"). You solicit applications from homeowners
who face foreclosure and want to keep their house. Solicitations are conducted via

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mailing campaigns and local news media. You interview potential candidates and check
references of each potential candidate. You did not detail the contents of the interviews
and reference checks. You select the homeowners for your Program on a case-by-case
basis. It may be a loss of work due to no fault of the homeowner, a medical condition that
has consumed finances, a death in the family, accident or fraud, or any other unforeseen
circumstance that has caused the individual and his/her family to be victimized and faced
with not being able to pay their mortgage and lose their home.

However, regardless of the causes, a candidate must meet the following defined
requirements in order to be eligible for Program:

e The applicant is a U.S. citizen, 18 years of age or older, and a resident of F.

e The applicant does not own any other form of real estate and does have other
types of assets that could be sold to help their situation.

e The applicant is financially in trouble.
e The house is a primary residence.

There is no income or asset limit to be eligible for Program. The Program is available to
any homeowner who cannot afford to pay their mortgage but can afford to pay for food,
medical bills, automobile payment, utility bills.and so forth. You expect the range of the
house purchase price to be between $120,000 and $150,000. You will not initially
purchase houses where the homeowner could sell the home with a profit after paying the
mortgage, closing costs, realtor fees, and other expenses related to the sale of the home.
The homeowner must attempt to sell on their own before becoming eligible. You require
all candidates to first work with their mortgage company on the appropriate payment
extensions or monthly reductions and local governments for assistance before you
finalize your selection.

Upon selection of a homeowner into your Program, they will obtain payoff information
from their lender to work with a real estate agent or appraiser to determine the equity in
the home. If the house can be sold without cost to the homeowner, they must try an open
market sale first. If you decide to initiate buying the house, you first negotiate a sales
price with the lender, essentially short selling the home to get the best possible price on
the home. The negotiated short sale price is the amount that you pay for the house. All
payments are in cash, raised through fund raising and donations - you do not mortgage
the house you purchase. Once you purchase the home, you then turn around and sell the
home back to the original homeowner via a land sale contract. The price of the house
when sold back via the contract is the lower of the original payoff amount or the appraised
value of the house. You stated that the purpose of the land contract is to provide the
homeowner with an option to buy their home back at the amount of the payoff on their
original mortgage. The proceeds incurred by the lower payoff amount as a result of your
negotiation with the lender are used for operating expenses. The terms of the land
contract will vary from client to client; however, you intend to make the installment
payments significantly less than their previous mortgage payments in order to allow them

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time to get back on their feet. Payments will be reflective of market conditions and given
interest rates. The payments made by clients are held in what you define as a custodial
account - for application to their particular account. The sample copy of the land sale
contract includes a section for interest charged on the unpaid balance. You did not
provide the rate of interest you charge, but scenarios you outlined show interest rates
between %andadownpayment at % of purchase price. You will work closely with
a local network of charitable organizations for referrals, and to help your clients with other
needs, including assistance with utilities, food, clothing and counseling. You also will
market this Program through announcements, local press releases and networking. You
aim to get as much free press through local newspapers and television as possible.

If your client does not want to exercise his/her right to fulfill the land contract, you sell the
house on the open market and the homeowner has 30 days to vacate the property. In
case your client cannot fulfill the land sale contract, you evaluate the client's situation and
the contract again, and you may give an extension of time to the family. You did not
provide information regarding how you evaluate the client's situation and the contract or
when the extension is due. In the event that the client still cannot fulfill the contract after
the reevaluation and extension, you sell the house at the market price and return any
client's payments held in their custodial account.

You have five board members, J, K, L, M, and N. Your president, J, is a licensed realtor in
the state of F, and is married to K. He will act as a listing agent for you allowing him to
control the commission paid for the sale of the property, as well as ensuring exposure for
a quick sale and keeping costs down. You state that he may reduce expenses through an
adjustable commission rate as the selling or buying agent. N is a loan officer with a
mortgage company, he may work with your clients when they are ready to fulfill their land
contract and purchase the house back. You state that he is able to qualify them for the
best available loan package and keep their costs to a minimum. M is a lawyer at a law
firm. You will use her practice for your legal and real estate issues and you will refer your
clients to her. We asked you to provide your board minutes from inception to the current
time; however, you provided only one set of board minutes dated around one year after
you formed. The board discussed your website, bank account, and fundraising in the
meeting. The board minutes do not show who participated.

Law
Section 501(a) of the Code provides that an organization described in section 501(c)(3)
shall be exempt from taxation.

Section 501(c)(3) of the Code provides that corporations may be exempted from tax if
they are organized and operated exclusively for charitable or educational purposes and
no part of their net earnings inures to the benefit of any private shareholder or individual.

Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be
regarded as “operated exclusively” for one or more exempt purposes only if it engages
primarily in activities that accomplish one or more such exempt purposes specified in

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section 501(c)(3) of the Code. An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose.

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides an applicant organization must
establish it serves a public rather than a private interest and specifically that it is not
organized or operated for the benefit of private interests, such as designated individuals,
the creator or his family, shareholders of the organization, or persons controlled, directly
or indirectly, by such private interests.

Section 1.501(c)(3)-1(d)(2) of the regulations provides that the term “charitable,” is used
in section 501(c)(3) in its generally accepted legal sense and includes the relief of the
poor and distressed or of the underprivileged.

In Rev. Rul. 69-441, 1969-2 C.B. 115, the Service found that a non-profit organization
formed to help reduce personal bankruptcy by informing the public on personal money
management and aiding low-income individuals and families with financial problems was
exempt under section 501(c)(3) of the Code. Its board of directors was comprised of
representatives from religious organizations, civic groups, labor unions, business groups,
and educational institutions.

The organization provided information to the public on budgeting, buying practices, and
the sound use of consumer credit with films, speakers, and publications. It aided low-
income individuals and families who have financial problems by providing them with
individual counseling and, if necessary, by establishing budget plans. Under the budget
plan, the debtor voluntarily made fixed payments to the organization, holding the funds in
a trust account and disbursing the funds on a partial payment basis to the creditors. The
organization neither charged fees for counseling services nor prorated their services. The
debtor received full credit against his debts for all amounts paid. The organization did not
make loans to debtors or negotiate loans on their behalf. Finally, the organization relied
upon contributions, primarily from the creditors participating in the organization's budget
plans, for its support. Creditors were not required to make such contributions as a
condition of participation.

The Service found that, by aiding low-income individuals and families who have financial
problems and by providing, without charge, counseling and a means for the orderly
discharge of indebtedness, the organization was relieving the poor and distressed.
Moreover, by providing the public with information on budgeting, buying practices, and the
sound use of consumer credit, the organization was instructing the public on subjects
useful to the individual and beneficial to the community. Thus, the organization was
exempt from federal income tax under section 501(c)(3) of the Code.

In Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279, 283, 66 S. Ct. 112,
90 L. Ed. 67 (1945), the Supreme Court held that 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.”

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In Leon A. Beeghly v. Commissioner, 35 T.C. 490 (1960), the court provided that where
an exempt organization engages in a transaction with a related interest, and there is a
purpose to benefit the private interest rather than the organization, exemption may be lost
even though the transaction ultimately proves profitable for the exempt organization. The
test is not ultimate profit or loss but whether, at every stage of the transaction, those
controlling the organization guarded its interests and dealt with related parties at arm’s-
length.

In American Institute for Economic Research v. United States, 302 F. 2d 934 (Ct. Cl.
1962), the Court considered an organization that provided analyses of securities and
industries and of the economic climate in general. It sold subscriptions to various
periodicals and services providing advice for purchases of individual! securities. The court
noted that education is a broad concept, and assumed arguendo that the organization
had an educational purpose. However, the totality of the organization’s activities, which
included the sale of many publications as well as the sale of advice for a fee to
individuals, was indicative of a business. Therefore, the court held that the organization
had a significant non-exempt commercial purpose that was not incidental to the
educational purpose, and was not entitled to be regarded as exempt.

In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the Tax Court found that a
corporation formed to provide consulting services did not satisfy the operational test
under section 501(c)(3) of the Code because its activities constituted the conduct of a
trade or business that is ordinarily carried on by commercial ventures organized for profit.
Its primary purpose was not charitable, educational, or scientific, but rather commercial.
In addition, the court found that the organization's financing did not resemble that of the
typical section 501(c)(3) organizations. It had not solicited, nor had it received, voluntary
contributions from the public. Its only source of income was fees from services, and those
fees were set high enough to recoup all projected costs and to produce a profit.
Moreover, it did not appear that the corporation ever planned to charge a fee less than
“cost.” Finally, the corporation did not limit its clientele to organizations that were section
501(c)(3) exempt organizations.

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, 109 S. Ct. 257, 102 L. Ed. 2d 246 (1988), the Claims Court found
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 non-exempt
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

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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 International Postgraduate Medical Foundation v. Commissioner, TCM 1989-36 (1989),
the Tax Court considered the qualification for exemption under section 501(c)(3) of the
Code of a non-profit corporation that conducted continuing medical education tours. The
petitioner had three trustees. Mr. Helin, who was a shareholder and the president of H &
C Tours, a for-profit travel agency. Mr. Regan, an attorney, and a third director who was ill
and did not participate. Mr. Helin served as executive director. The petitioner shared
offices with H & C Tours. The petitioner used H & C Tours exclusively for all travel
arrangements. The petitioner's contract with H & C Tours permitted it to acquire
competitive bids, but provided that H & C Tours would always get the bid if it was within
2.5%. There is no evidence that the petitioner ever sought a competitive bid. The Court
found that a substantial purpose of the petitioner was benefiting the for-profit travel
agency. It concluded that:

When a for-profit organization benefits substantially from the manner in
which the activities of a related organization are carried on, the latter
organization is not operated exclusively for exempt purposes within the
meaning of section 501(c)(3) even if it furthers other exempt purposes.

We find that a substantial purpose of petitioner's operations was to increase
the income of H & C Tours. H & C Tours benefits from the distribution and
production of brochures which solicit customers for tours arranged by H & C
Tours. Approximately 90 percent of petitioner's total revenue for 1977 was
expended on production and distribution of brochures. The terms of the
Travel Service and Administrative Support Agreement further insured that H
& C Tours would substantially benefit from petitioner's operations.
Petitioner did not solicit competitive bids from any travel agency other than
H & C Tours.

In Living Faith, Inc. v. Commissioner, 950 F.2d 365 (1991), the Court of Appeals upheld a
Tax Court decision that an organization operating restaurants and health food stores in a
manner consistent with the doctrines of the Seventh Day Adventist Church did not qualify
for exemption under section 501(c)(3) of the Code because the organization was
operated for a substantial non-exempt commercial purpose. The court found that the
organization's activities were "presumptively commercial" because the organization was
in competition with other restaurants, engaged in marketing, and generally operated in a
manner similar to commercial businesses.

In KJ's Fund Raisers, Inc. v. Commissioner, T.C. Memo 1997-424 (1997), affirmed 82
AFTR 2d 7092 (1998), the Tax Court found that a gaming organization was not exempt.

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While the organization raised money for charitable purposes, it also operated for the
substantial benefit of private interests. The organization's founders, Kristine Hurd and
James Gould, were the sole owners of a bar, KJ's Place. The organization, through the
owners and employees of KJ's Place, sold lottery tickets exclusively at KJ's Place during
regular business hours. While in KJ's Place, the lottery ticket purchasers were sold
beverages. The initial directors were Hurd, Gould, and a related individual. The initial
board was replaced several times until Hurd and Gould were no longer on the board. At
all times Hurd and Gould were the organization's officers. Salaries had been paid to Hurd
and Gould and rent had been paid to KJ's Place. The organization maintained that the
fact that salaries and rent were no longer paid in this fashion indicated the independence
of the board. The Court took another view: "Although those practices ceased and are not
an issue here, the current board of directors is composed of at least the majority of the
same members who allowed those amounts to be paid." This strongly suggests that Hurd
and Gould are free to set policy for their own benefit without objection from the board.
Nothing in the record since July 1, 1994, indicates otherwise.

In Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C., 2003), the District
Court relied on the “commerciality’ doctrine in applying the operational test. Because of
the commercial manner in which this organization ran its conference center, the court
found that it was operated for a non-exempt commercial purpose, rather than for a tax-
exempt purpose. As the court stated: "Among 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, among other things, whether the organization uses
commercial promotional methods (e.g., advertising) and the extent to which the
organization receives charitable donations."

Application of Law

Based on the information you provided in your application and supporting documentation,
we conclude that you are not operated for exempt purposes under section 501(c)(3) of
the Code. You are organized for a substantial commercial purpose; operate in a
commercial manner and for the benefit of private interests. Further details for this
conclusion are set forth below.

Operational Test —_
To satisfy the operational test, an organization must establish that it is operated

exclusively for one or more exempt purposes by engaging primarily in activities specified
in section 501(c)(3) of the Code and Section 1.501(c)(3)-1(c)(1) of the regulations. The
purpose, not the nature of the activities themselves, is ultimately dispositive of the
organization’s right to be classified as a section 501(c)(3) organization. See B.S.W.
Group, Inc. v. Commissioner, above. Your activities are not directed toward one or more
exempt purposes. Your activities primarily further the substantial non-exempt purpose of
conducting real estate business evidenced by your buying and selling activities, including
those on the open market. Thus, you have failed to establish that you are operated
exclusively for one or more exempt purposes.

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You Are Not Operated Exclusively for Charitable Purposes
You failed to show that your activity is charitable since you do not limit your Program to

the poor, distressed or under privileged. See Section 1.501(c)(3)-1(d)(2) of the
regulations. Rather, your target clientele is a homeowner who faces foreclosure and has a
mortgage payoff balance between $120,000 and $150,000. Thus, you are unlike the
organizations described in Rev. Rul. 69-441, above, which aided low-income individuals
and families who have financial problems, and relieved the poor and distressed.
Purchasing a home from the lender in a short sale and then either reselling the house
back to the original homeowners in a land sale contract or selling the home on the open
market does not provide relief to the poor and distressed within the meaning of section
1.501(c)(3)-1(d)(2) of the regulations or serve any other purpose recognized as
charitable.

You Have a Substantial Non-exempt Purpose
Your primary purpose is conducting a real estate business. You exclusively engage in

purchasing houses then reselling them back to original homeowners under different
terms. You do not operate exclusively for exempt purposes. See section 1.501(c)(3)-
1(c)(1) of the regulations.

Your Form 1023 application and additional information demonstrate that you operate for
the substantial non-exempt purpose of buying potentially foreclosed houses and reselling
them to the original owners or to the public, which is similar to the commercial real estate
business. See, Better Business Bureau_of Washington D.C., Inc. v. United States, 326
U.S. 279 (1945), in which the Supreme Court held that 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. In your case, you devote almost all of
your time and money to conducting the Program. While your Program may provide an
alternative to the homeowners who face foreclosure, you perform essentially the same
functions as a commercial real estate agency for the following reasons:

1. You buy and sell houses for profit - the difference between the negotiated short
   selling price’ and ‘the ‘original homeowners mortgage payoff amount’;

2. Your land sale contract does not guarantee affordable payments for the original
   homeowners.

3. Your Program is not equally accessible to the public because your selection
   criteria and process are such that you select the homeowners

While you offer features that may help homeowners facing foreclosure, such as lower
installment payments and the option for homeowners to buy back their houses at the
price of their original mortgage payoff, selling a home back to the original homeowner,
does not distinguish you from a commercial business. Rather, it puts you in a better
position to compete with commercial businesses, as you will have a low-price advantage
over your competitors. Through these activities, you directly compete with commercial

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real estate business. The court found that an organization that conducts a commercial
business and competes with commercial companies does not qualify for exemption under
501(c)(3) in Easter House v. U.S. and Living Faith, Inc. v. Commissioner, above
regardless of the organizations' doctrines.

The commerciality doctrine has been relied upon many times by the courts. The classic
cases on the commerciality are found in B.S.W. Group, Inc. v. Commissioner and Airlie
Foundation v. Commissioner, above. The court concluded in each case that running a
consulting service or a conference center was not an exempt activity based upon the
commerciality doctrine. The same doctrine is applicable to your Program in terms of profit
generation from the operation, pricing methodology and competition with commercial
entities. The court in American Institute for Economic Research v. United States, above,
applied an even more stringent interpretation. The court held that an educational
organization was not entitled to exemption because it conducted the sale of many
publications as well as the sale of advice to individuals. You are similar to this
organization because you are buying and selling houses to the public, which constitutes a
normal trade or business. You are also similar in that your Program has a significant
commercial, non-exempt purpose, not incidental to any charitable or educational
purposes.

Private Benefits/Inurement

A fundamental requirement for an organization that seeks exemption from federal income
taxes is that it benefits the public rather than its creator, shareholders, or persons having
a personal or private interest in the activities of the organization. (See section 1.501(c)(3)-
1(c)(2) of the regulations.) You have not demonstrated that your structure and manner of
operation do not result in private benefit and inurement to J, K, M, and N, as well as their
related for-profit businesses in the form of compensation, payments for services and
business referrals in accordance with section 1.501(c)(3)-1(d)(1)(ii) of the regulations. L is
the only board member who does not receive benefits from your operation; however, your
board meeting minutes do not indicate that L exercised her rights in any important
decisions such as related party transactions. In fact, you failed to provide any board
meeting minutes that show how your board members were initially elected. Regardless,
even if L attempted to exercise checks and balances on matters involving a conflict of
interest, it would not have been possible because L is an absolute minority on your board
in compensation matters. Similar to the organization described in_KJ's Fund Raisers, Inc.
v. Commissioner, above, even though you have bylaws and a conflict of interest policy,
your board members are free to use their own business without objection from the Board.

In International Post Graduate Medical Foundation, above, the Tax Court considered the
relationship between another exempt organization and a related for-profit travel agency.
The contract was written so as to exclusively favor the for-profit H & C Tours. The
relationship created a captive market for the travel agency in the business generated by
the exempt organization. Because of this substantial benefit, exemption was denied.
Despite your claim that your governing members will provide better services at lower cost,
you failed to provide any evidence that your services are better or lower priced. You also

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failed to show that you made reasonable efforts for competitive bids or searched for better
services and prices. You operate in a similar manner in that contracts with members
create captive markets for member businesses and serve to expand the profits of the
private businesses owned by those members.

Analogous to the organization described in Leon A. Beeghly Fund v. Commissioner,
above, you are formed for the financial gain of your governing members; therefore,
inurement occurs because all but one of your board members benefit from the activities
that you conduct, regardless of the profitability.

Applicant's Position

You are established to be a last resort opportunity for families in need of charitable
assistance. You consider the following steps and eligibility in choosing the candidates for
your Program:

'e Candidates must exhaust all of the following potential remedies for their financial
situation: their township assistance, a mortgage modification with their lenders, and
assistance from their family and friends.

e Candidates must attempt to sell their house for at least six months if the value of the
house is not less than the outstanding mortgage and selling costs.

e You run an extensive financial and background check on your applicants to ensure
that they are not financially capable of making mortgage payments. In addition,
candidates must certify that they have less than $2,000 in cash and cash equivalents,
are not entitled to inheritance or injury claim, and own vehicles valued over $5,000.

e Candidates' household income must not have current income in excess of 10 percent
above the Census Bureau Median Family Income by Family Size in E.

e You shall not approve any applicants who are related to your board members.

Service's Response to Applicant's Position

While you have many requirements in order to be eligible for your home purchase
Program, none of your requirements limits your Program to the poor or distressed.
Further, your services and pricing are not charitable. As a result, you have failed to
establish that your Program is charitable within the meaning of 501(c)(3) and that your
Program does not provide private benefits to a non-charitable class. Finally, your activities
result in private benefit and inurement to the members of your board and certain Program
participants.

Conclusion

Based on the facts presented above, it is evident your Program is operated in a
commercial, rather than charitable, manner. You do not limit services to a poor or
distressed class and you did not demonstrate your pricing was below cost. You have not
shown how your operations do not result in inurement to your board as well as their

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related businesses. Accordingly, you do not qualify for exemption as an organization
described in section 501(c)(3) of the Code or under any other section of the Internal
Revenue Code, and you must file federal income tax returns.

You have the right to file a protest if you believe this determination is incorrect. To
protest, you must submit a statement of your views and fully explain your reasoning. You
must submit the statement, signed by one of your officers, within 30 days from the date of
this letter. We will consider your statement and decide if the information affects our
determination. If your statement does not provide a basis to reconsider our
determination, we will forward your case to our Appeals Office. You can find more
information about the role of the Appeals Office in Publication 892, Exempt Organization
Appeal Procedures for Unagreed Issues.

Types of information that should be included in your appeal can be found on page 2 of
Publication 892, under the heading “Regional Office Appeal”. These items include:

. The organization’s name, address, and employer identification number;
A statement that the organization wants to appeal the determination;
The date and symbols on the determination letter;
A statement of facts supporting the organization’s position in any contested factual
issue;
A statement outlining the law or other authority the organization is relying on; and
A statement as to whether a hearing is desired.

PON-a

Do

The statement of facts (item 4) must be declared true under penalties of perjury. This
may be done by adding to the appeal the following signed declaration:

“Under penalties of perjury, | declare that | have examined the statement of facts
presented in this appeal and in any accompanying schedules and statements and, to the
best of my knowledge and belief, they are true, correct, and complete.”

Your appeal will be considered incomplete without this statement.

lf an organization’s representative submits the appeal, a substitute declaration must be
included stating that the representative prepared the appeal and accompanying
documents; and whether the representative knows personally that the statements of facts
contained in the appeal and accompanying documents are true and correct.

An attorney, certified public accountant, or an individual enrolled to practice before the
Internal Revenue Service may represent you during the appeal process. If you want
representation during the appeal process, you must file a proper power of attorney, Form
2848, Power of Attorney and Declaration of Representative, if you have not already done
so. You can find more information about representation in Publication 947, Practice
Before the IRS and Power of Attorney. All forms and publications mentioned in this letter
can be found at www.irs.gov, Forms and Publications.

12

If you do not file a protest within 30 days, you will not be able to file a suit for declaratory
judgment in court because the Internal Revenue Service (IRS) will consider the failure to
appeal as a failure to exhaust available administrative remedies. Code section 7428(b)(2)
provides, in part, that a declaratory judgment or decree shall not be issued in any
proceeding unless the Tax Court, the United States Court of Federal Claims, or the
District Court of the United States for the District of Columbia determines that the
organization involved has exhausted all of the administrative remedies available to it
within the IRS.

If you do not intend to protest this determination, you do not need to take any further
action. If we do not hear from you within 30 days, we will issue a final adverse
determination letter. That letter will provide information about filing tax returns and other
matters.

Please send your protest statement, Form 2848, and any supporting documents to the
applicable address:

Mail to: Deliver to:
Internal Revenue Service Internal Revenue Service
EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008
P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You may fax your statement using the fax number shown in the heading of this letter. If
you fax your statement, please call the person identified in the heading of this letter to
confirm that he or she received your fax.

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

Sincerely,

Lois Lerner
Director, Exempt Organizations

Enclosure: Publication 892