Homebuyer program denied relief from retroactive revocation

Plain-English summary

A public charity said in its exemption application that it would provide home-purchase assistance to low- or moderate-income borrowers who demonstrated need. In operation, it ran a nationwide program without income or geographic limits, gave funds to any buyer who qualified for a mortgage, and received 99 percent of its revenue from seller service fees. The IRS revoked its section 501(c)(3) status because the program resembled a commercial broker, primarily benefited home sellers, and did not lessen government burdens. The organization argued that a brochure disclosed the broader program, but the IRS found that brochure absent from the official application record and found discrepancies in later-submitted program guidelines. Because the organization omitted material facts, operated materially differently from its application, and did not rely in good faith, the IRS denied section 7805(b) relief. Revocation remained effective from the first day of the examination period.

Ruling snapshot

• Question: Should the IRS limit the retroactive effect of revoking the organization's section 501(c)(3) status?
• Outcome: Revocation, with retroactive-relief request denied.
• Key authorities: IRC §§ 501(c)(3) and 7805(b); Treas. Reg. §§ 1.501(a)-1(a)(2), 301.7805(b)-1, and 601.201; Rev. Procs. 2014-5 and 2014-9.

Full text (IRS public release)

Release Number: 201517026 INTERNAL REVENUE SERVICE
Release Date: 4/24/2015
TE/GE TECHNICAL ADVICE MEMORANDUM

Date: January 29, 2015 Uniform Issue List: 7805.00-00
Internal Revenue Service

Attn:

Program Manager

Office of Appeals, Domestic Operations

Taxpayer's Name:

Taxpayer's Address:

Taxpayer's Identification Number:
Year Involved:

Legend:

Corporation =
Program =
Program Application =
Date 1 =
Date 2 =
Date 3 =

ISSUE:

Whether the Commissioner, TE/GE should exercise discretion to grant Corporation relief under
I.R.C. § 7805(b) to limit the retroactive effect of revocation of its exempt status under §
501(c)(3).

Facts as Presented on Form 1023:

Corporation was incorporated on Date 1 and was recognized exempt from federal taxation under
§ 501(c)(3) and classified as a public charity under §§ 170(b)(1)(A)(vi) and 509(a)(1) in a
determination letter dated Date 2. The determination was based solely on the representations
made in the Application for Exemption and the supplemental statements attached to the
application.

Corporation stated that it would be providing Program gifts to individuals and families for the
purpose of purchasing a home. In addition, Corporation stated “to qualify, people must fall into

either low or moderate-income categories as defined by FHA and/or Fannie Mae. They must
qualify for a mortgage, demonstrate a need for Program assistance and purchase a home in the
program. We will promote our program through real estate agents, mortgage lenders and
homesellers/builders”.

During the Appeals Process, Corporation submitted a Request for Relief under Section 7805(b).

Corporation states in its Request for Relief that they submitted a brochure with its original
Application for Exemption (Corporation also submitted a copy of an Application for Exemption

that it claims that it filed with the Service as a supporting document in their Request for Relief);

the brochure contained a statement that Corporation would operate with no geographic

limitations and no income limitations. Corporation argues that this brochure put the Service on

notice and that the Service should have been aware of the manner that Corporation was

promoting the Program upon careful review of the materials.

In addition, Corporation also submitted a copy of their Program Guidelines that it claimed was
also submitted with its Application for Exemption. However, a review of the official record of
the Application for Exemption received from EO Determinations revealed that the brochure was
in fact not included with Corporation’s filed Application for Exemption.

In addition, a review of the Program Guidelines that was submitted with their original
Application for Exemption revealed that there are several discrepancies between the document
submitted with their original Application for Exemption and Request for Relief.

Facts as Developed During the Examination Process and Appeals Process:

During the period under examination, Corporation’s primary activity was the operation of a
nationwide Program under which Corporation was merely acting as a broker to facilitate the
selling of homes. Corporation operated without income limitations and did not screen
homebuyers for Program funds based on income or geographical limitations. Since its inception,
Corporation has promoted and operated a Program for homebuyers under which they provide
funds to the homebuyer to use as their down payment and collects the same amount, plus an
additional fee from the homeseller. Corporation derived 99% of its revenue from the service fee
charged to homesellers. Corporation did not solicit funds from the general public or government.
Corporation was funded entirely from the service fee that was charged to the homeseller for
enrolling their home in the Corporation Program.

Corporation restricted the use of the gift to the purchase of a home that was enrolled in the
Corporation Program. Corporation required homesellers or builders to enter into an agreement to
pay a service fee. The service fee was comprised of a program fee and a processing fee. The
program fee was always equal to the amount of Program funds that Corporation provided to the
homebuyer.

Corporation did not have any income limitations for its Program and did not screen homebuyers
to determine if they qualified as low to moderate income homebuyers or limit its Program to low
or moderate income homebuyers. Corporation’s promotional materials state that Program funds
are available to anyone who qualifies for a mortgage. Corporation represented that 57 percent of
homebuyers that they assisted were in the middle-income census track. Corporation made this
finding only after it provided Program assistance to the homebuyers. In addition, Corporation’s
promotional material and advertising make it clear that its Program was open to anyone who,
without any income limitations, otherwise qualified for a home mortgage.

The examination documented that Corporation’s Application for Program does not contain any
questions to establish whether the applicant is in the low to moderate income level. A document
that is completed by the lender does request the homebuyer’s income. However, these
documents are sent to Corporation only after the homebuyer has been approved for a mortgage.

Corporation asserted during the examination that its Program is designed to assist a charitable
class because only a house of a specified value may be enrolled in the program. However, the
examination discovered no evidence that Corporation limited the enrollment of homes to the
specified limit.

Corporation did not limit its assistance to homes located in geographical areas experiencing
economic depression or deterioration. Rather, Corporation made Program funds available for
any property, provided that the homeseller or home builder agree to remit to Corporation the
amount correlating to the amount of Program funds transferred to the homebuyer, pay the service
fee, and the buyer qualifies for a mortgage, usually a FHA insured mortgage.

Corporation recommended that potential homebuyers take a free online homeownership course,
but did not require that the homebuyer complete the course to receive funds from the Program.
In addition, Corporation did not conduct educational activities.

The examination concluded that during the years under examination, Corporation did not qualify
for tax-exempt status under § 501(c)(3). The examination recommended that Corporation’s
exemption letter be revoked effective as of the first day of the examination period for the
following reasons:

• Corporation’s Program was operated in a manner similar to the organization described
Rev. Rul. 2006-27, 2006-1 C.B. 915 (May 22, 2006),

• Corporation operated primarily for the benefit of homesellers,

• Corporation failed to establish that its activities lessen the burdens of government, and
Taxpayer appealed the proposed revocation. The Office of Appeals sustained the revocation.
Section 4.04 of Rev. Proc. 2014-5, 2014-1 I.R.B. 169, 173 states that all requests for § 7805(b)

relief are mandatory TAM’s with respect to all exempt organizations. Delegation Order 30-1
(formerly DO-96, Rev. 13) delegates authority to the Commissioner, Tax Exempt and
Government Entities (TEGE), to prescribe the extent to which any ruling relating to the internal
revenue laws shall be applied without retroactive effect.

Corporation requests that the Commissioner TEGE exercise discretion and grant relief to limit
the retroactive effect of revocation under § 7805(b) to Date3.

Law:

I.R.C. 7805(b)(8) provides that the Secretary may prescribe the extent, if any, to which any
ruling (including any judicial decision or any administrative determination other than by
regulation) relating to the internal revenue laws shall be applied without retroactive effect.

Treas. Reg. § 1.501(a)-1(a)(2) state that an organization that has been determined by the
Commissioner to be exempt under § 501(a) may rely upon such determination so long as there
are no substantial changes in the organization’s character, purposes, or methods of operation, and
subject to the Commissioner’s inherent power to revoke rulings because of a change in the law or
regulations, or for other good cause.

Treas. Reg. § 301.7805(b)-1 grants to the Commissioner authority to prescribe the extent to
which any ruling issued by his authorization shall be applied without retroactive effect.

Treas. Reg. § 601.201(l)(1) states that a ruling (or a determination letter per § 601.201(m) may
be revoked or modified at any time in the wise administration of the taxing statutes.

Treas. Reg. § 601.201(l)(4) states that a ruling found to be in error or not in accord with the
current views of the Service may be modified or revoked by notice to the taxpayer.

Treas. Reg. § 601.201(n)(3)(ii) states that a ruling or determination letter recognizing exemption
may not be relied on if there is a material change inconsistent with the exemption in the
character, the purpose, or the method of operation of the organization.

Treas. Reg. § 601.201(n)(6)(i) addressing the revocation or modification of determination letters
on exemption and foundation status, provides that such revocation may be retroactive if the
organization omitted or misstated a material fact or operated in a manner materially different
from that originally represented. Revocation or modification will ordinarily take effect no later
than the time at which the organization received written notice that its exemption ruling or
determination letter might be revoked or modified.

Rev. Proc. 2014-5, 2014-1 I.R.B. 169, § 4.04 states that all requests for relief under § 7805(b)
must be made through a request for technical advice (TAM). Section 19.04 states further that

when, during the course of an examination by EO Examinations or consideration by the Appeals
Area Director, a taxpayer is informed of a proposed revocation, a request to limit the retroactive
application of the revocation must itself be made in the form of a request for a TAM and should
discuss the items listed in section 18.06 as they relate to the taxpayer’s situation.

Section 18 of Rev. Proc. 2014-5, lists the criteria necessary for granting section 7805(b) relief as
well as the effect of such relief. Section 18.06 states, in part, that a TAM that revokes a
determination letter is not applied retroactively if:

(1) there has been no misstatement or omission of material facts;

(2) the facts at the time of the transaction are not materially different from the facts on which
the determination letter was based;

(3) there has been no change in the applicable law; and

(4) the taxpayer directly involved in the determination letter acted in good faith in relying on
the determination letter, and the retroactive revocation would be to the taxpayer’s
detriment.

Rev. Proc. 2014-9, 2014-2 I.R.B. 281, sets forth procedures for issuing determination letters
(from EO Determinations) and rulings (on applications for recognition of exempt status by EO
Technical) on the exempt status of organizations under § 501. These procedures also apply to
revocation or modification of determination letters or rulings.

Section 12.01 of Rev. Proc. 2014-9, states, in part, that the revocation or modification of a
determination letter or ruling recognizing exemption may be retroactive if the organization
omitted or misstated a material fact, or operated in a manner materially different from that
originally represented. In certain cases an organization may seek relief from retroactive
revocation or modification of a determination or ruling under § 7805(b) using the procedures set
forth in Rev. Proc. 2014-4, which further refers to Rev. Proc. 2014-5, sections 18 and 19.

Section 12.01(1) of Rev. Proc. 2014-9, states that where there is a material change inconsistent

with exemption in the character, the purpose, or the method of operation of an organization,
revocation or modification will ordinarily take effect as of the date of such material change.

Taxpayer’s Position:

In their request for relief under § 7805(b), Corporation represented that under § 601.201(l)(5)
relief should be granted because:

(1) Corporation made no misstatement or omission of material facts;

(2) Corporation operated in a manner not materially different from the facts stated in
its Application for Exemption, on which the exemption was granted on Date 2.

(3) There has been no change in the applicable law;

(4) The organization acted in good faith in relying on the Date2 determination letter
and retroactive revocation would be to their detriment.

Corporation represents that it submitted a copy of a brochure with its Application for Exemption
describing how it planned to distribute and promote their Program. In this brochure, it states that
Corporation would operate their Program with no income restrictions or geographic limitations.
As such the Service should have been aware of this manner of promoting the Program and
should not be allowed to rely on the no income limitations statement to retroactively revoke its
exempt status.

Government’s Position:

A taxpayer may rely on a ruling or determination letter, assuming that the taxpayer does not
make any material changes inconsistent with its exemption in its character, purpose or method of
operation. §§ 601.201(n)(3)(ii) and 1.501(a)-1(a)(2). If the taxpayer does make such material
changes, revocation of exempt status will ordinarily take effect as of the date of the change.
Section 12.01(1), Rev. Proc. 2014-9. However, revocation may be retroactive if the taxpayer
omitted or misstated material facts. § 601.201(n)(6)(i). Even if the taxpayer has not changed or
misstated any facts, the Commissioner may correct an error in a prior ruling. § 601.201(l)(4).

The procedures for requesting retroactive relief are described in § 18 of Rev. Proc. 2014-5, supra
based on § 601.201(l)(5). A taxpayer may be eligible for relief if it has made no misstatements
or omissions of material facts; if the facts at the time of the transaction are not materially
different from the facts on which the determination was based; there has been no change in the
law; and the taxpayer relied in good faith on the determination letter. Relief is not always
available, even under these circumstances. The Commissioner may correct a mistake by the
Service, even if the taxpayer has not changed its behavior and had relied on the earlier ruling.

Revocation of an organization’s determination letter recognizing exempt status may be
retroactive if the organization omitted or misstated a material fact. § 601.201(n)(6)(i).
Corporation did omit or misstate a material fact and operated in a manner materially different
from that was originally represented in its Application for Exemption.

Corporation has omitted material facts and has operated in a manner materially different from the
facts as represented in its Application for Exemption. Therefore, it is appropriate to revoke
Corporation’ determination letter recognizing it as a tax-exempt organization retroactively to
Date 3, the date it was determined that Corporation operated in a way that was materially
different that that described in its Application for Exemption.

Instead of operating in the manner as described in its Application for Exemption on which its
determination was made, Corporation began operating a seller-financed Program without any
income or geographical limitations on a nationwide basis. In addition, Corporation did not
screen its Program recipients on the basis of income. Corporation provided funds to any
homebuyer who qualified for a home mortgage.

Corporation claims that they submitted a copy of a brochure that states that they would operate
their program without geographical limitations and no income limitations with their Application
for Exemption. However, a review of the official administrative record received from EO
Determinations revealed that this brochure was in fact not submitted with their Application for
Exemption. In addition, Corporation submitted a copy of their Program Guidelines with their
Request for Relief that contained several discrepancies when compared to the document
submitted with their Application for Exemption. Therefore, Corporation misstated and omitted
material facts and operated in a manner materially different from that originally represented in its
application.

Corporation has not satisfied all of the requirements under § 18.06 of Rev. Proc. 2014-5 for
granting such relief for the following reasons:

(1) Corporation omitted material facts in its Application for Exemption.

(2) Corporation operated in a manner materially different from the facts under which
the determination letter granting exemption was issued.

(3) There has been no change in the applicable law.

(4) Corporation did not act in good faith in relying on the determination letter and
retroactive revocation would be to their detriment.

Corporation has omitted material facts and has operated in a manner materially different from the
facts as represented in its Application for Exemption therefore, it is appropriate to revoke
Corporation’ determination letter recognizing it as a tax-exempt organization back to the
effective date of the determination letter.

Recommendation:

The Commissioner, TE/GE, exercises discretion to deny Corporation relief under I.R.C. 7805(b)
because Corporation has made material misstatements and its operations are materially different
from what was represented in its Application for Exemption. Therefore, it is appropriate to
revoke Corporation’s determination letter dated Date 2 effective as of the first day of the
examination period which is Date 3.

This ruling is based on the facts as they were presented and on the understanding that there will

be no material changes in these facts. This ruling does not address the applicability of any
section of the Code or regulations to the facts submitted other than with respect to the sections
described. Because it could help resolved questions concerning your federal income tax status,
this ruling should be kept in your permanent records.

A copy of this memorandum is to be given to Corporation. Section 6110(k)(3) provides that it
may not be used or cited as precedent.

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