Seller-funded down payment program loses charitable exemption

View official IRS release (PDF)

Plain-English summary

A tax-exempt organization operated a nationwide down payment assistance program for home purchases. Sellers and builders had to pay the organization an amount equal to the assistance provided to a buyer plus a processing fee, and those fees supplied nearly all of the organization's revenue. The IRS found that the organization did not screen buyers by income or need, limit assistance to distressed areas, or conduct meaningful educational activities. It concluded that the program primarily facilitated real estate sales, substantially benefited sellers and other transaction participants, and operated like a commercial business. The IRS also rejected the claim that the program lessened government burdens because no governmental unit had accepted the organization's activity as its responsibility or worked with the organization to perform it. The IRS revoked the organization's section 501(c)(3) status retroactively to its incorporation date.

Ruling snapshot

• Question: Did the seller-funded down payment assistance program operate exclusively for charitable or educational purposes under IRC § 501(c)(3)?
• Outcome: Revocation, effective retroactively to the organization's incorporation date.
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(c), (d), and (e); Rev. Rul. 85-1; Rev. Rul. 85-2.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Appeals Office

Employer Identification Number:

Date: MAR 3 1 2015

Person to Contact:

Number: 201526023 Employee ID Number:
Release Date: 6/26/2015 Tel:
Fax:
Officer UIL: 501.03-30
Certified Mail
Dear

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the Internal
Revenue Code (the “Code”). It is determined that you do not qualify as exempt from Federal income tax
under section 501(c)(3) of the Code: effective February 5, 1999, the date of your incorporation..

Our revocation was made for the following reasons: (1) more than an insubstantial part of your activities
were not in furtherance of an exempt purpose within the meaning of Teas. Reg. § 1.501(c)(3)-1(c); (2)
you operated for the benefit of private interests within the meaning of Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii);
and (3) your primary activity was the operation of a business for a non-exempt purpose with the meaning
of Treas. Reg. §1.501(c)(3)-1(e)(1). Accordingly you are not operated exclusively for exempt purposes as
described in section 501(c)(3).

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. 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.

If you were a private foundation as of the effective date of the adverse determination, you are considered
to be taxable private foundation until you terminate your private foundation status under section 507 of
the Code. In addition to your income tax return, you must also continue to file Form 990-PF by the 15th
Day of the fifth month after the end of your annual accounting period.

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.

We will make this letter and the proposed adverse determination letter available for public inspection
under Code section 6110 after deleting certain identifying information. We have provided to you, in a
separate mailing, Notice 437, Notice of intention to Disclose. Please review the Notice 437 and the
documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow
the instructions in Notice 437.

If you decide to contest this determination, you may file an action for declaratory judgment under the
provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court,
2) the United States Court of Federal Claims, or 3) the United States District Court for the District of
Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date
this determination letter was mailed to you. Please 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. See also Publication
892.

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, please contact the person whose name and telephone number are shown in
the heading of this letter.

Sincerely Yours,

Tim Jarvis
Timothy D. Jarvis
Appeals Team Manager

CC:

Enclosure: Publication 892 and/or 556

Internal Revenue Service

Date: January 12, 2007

ORG
ADDRESS

Certified Mail - Return Receipt Requested

Dear

Department of the Treasury
31 Hopkins Plaza

Baltimore, Maryland 21201

Taxpayer Identification Number:
Form:

Tax Year(s) Ended:

Person to Contact Number:

Contact Numbers:
Telephone:
Fax:

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

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

If you do not agree with our proposed revocation, you must submit to us a written request for Appeals Office
consideration within 30 days from the date of this letter to protest our decision. Your protest should include a

statement of the facts, the applicable law, and arguments in support of your position,

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

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

Letter 3618 (Rev. 11-2003)
Catalog Number: 34800F

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

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

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

Thank you for your cooperation.
Sincerely,
Marsha A. Ramirez
Director, EO Examinations
Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (Rev. 11-2003)
Catalog Number: 34800

00941

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

LEGEND
ORG = Organization name XX = Date State = State website = website
ISSUE

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

FACTS

The ORG was incorporated in the State of State on February 5, 19XX, and received exemption
from Federal income tax under section 501(a) of the Code as an organization described in section
501(c)(3) in a determination letter dated May 7, 19XX. The organization changed its name to
ORG, (ORG) in an amendment to the articles of incorporation filed on December 23, 20XX.

Essentially, ORG has operated a down payment assistance program, which provides funds to
homebuyers, also referred to as gifts, for down payment or other expenses associated with the
purchase of the sellers’ homes, for example, the closing costs. Generally, funds are made
available to any homebuyer who qualifies for a mortgage and purchases a home enrolled in the
ORG’s Down Payment Assistance (DPA) program. Despite some representations to the
contrary, the home sellers or builders who sell their homes through ORG’s DPA program are
required to provide the funds that homebuyers receive from ORG. Thus, through the DPA
program ORG facilitates the sales of homes of persons who pay it the service fees. ORG also
refers to its DPA Program as the Gift Program.

Application for Exempt Status

ORG filed Form 1023 on February 16, 19XX, summarizing its activities as follows:

We will be providing down payment gifts to individuals and families for the purpose of
purchasing a home. 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,
complete an education requirement, demonstrate a need for down payment assistance and
purchase a home in the program. We will promote our program through real estate
agents, mortgage lenders and home sellers/builders.

In Part II, Activities and Operational Information, ORG provides that it will:

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit

Explanation of Items

Name of Taxpayer Year/Period Ended

20XX12 and
20XX12

Provide gifts of up to three percent of the contract sales price to low and moderate
income homebuyers for homes included in the program. This activity will comprise
47.5% of ORG’s activities and will represent 75% of its expenditures.

Collect service fees from home sellers and builders, for the amount of 3.75% of the
contract sales price for their homes to be included in the program. The contributions
from home sellers will be its ongoing and almost exclusive source of funding for future
gifts to low and moderate income homebuyers. This activity will comprise 47.5% of
ORG’s activities and will be the source of 97% of its revenue.

Seek charitable contributions from people working in the real estate industry, for
example, builders, real estate agents, settlement agents, and mortgage brokers. This
activity will comprise 5% of ORG’s activities and will be the source of 3% of its
revenue.

The attachment to Form 1023, The ORG, The Gift Program Guidelines, provides:

The ORG Down payment Assistance Program is for all low to moderate income
homebuyers in need of a down payment gift in order to purchase a home....

Homebuyers must purchase a home in the program, be approved for a mortgage,
complete any HUD approved home buyer class and have their request submitted at least
48 hours prior to settlement. The down payment gift will be provided directly to the
settlement agent for the homebuyer’s down payment. The buyer must agree to return any
gift funds not used towards the home purchase. Moreover, they must agree to return any
gift funds in the event they do not purchase a home included in the Down Payment
Assistance Program. The money we provide does NOT come from the seller of the home
the buyers are purchasing. We have an account from which we provide these gift funds.
We are fully supported by charitable contributions and fees. We do not receive a single
dollar of government funding!

For homes to be included in program, the property seller or builder must agree to the
terms of the ORG sales contract addendum and pay a service fee of 3.75%. This service
fee insures the continued viability of our Down Payment Assistance Program. The home
is then qualified for home buyers using our Down Payment Assistance Program. The
Seller is not obligated to pay the service fee until the time of settlement. Furthermore, the
Seller is not obligated to pay the fee if his or her home sale does not close.

Since our program is for low to moderate income homebuyers we will only include
homes in our program up $ and provide gift funds up to $.

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

Page:2

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

Name of Taxpayer

Year/Period Ended

20XX12 and
20XX12

The lender or real estate agent can not pay the seller’s service fee, only the seller can pay
it.

Homebuyers do not have to be first-time home buyers. We wish to promote continued
home ownership and have seen many situations where homebuyers need our program to
purchase their next home.

Homebuyers do not need to make any cash contribution towards the purchase of their
home. This program can be used in conjunction with any other down payment assistance
programs. Homebuyers may purchase with 0% down payment and closing costs. They
may also use any loan program available to them....

ORG had also indicated that it would utilize forms and form contracts to facilitate the DPA

transactions. To apply for funds from ORG, a potential homebuyer would fill out the Down
Payment Assistance Application (Application), a one page form, which does not ask for any
information on the prospective homebuyer’s income. The Application does not request any
information that would enable ORG to assess the applicant’s need for assistance and whether
offering assistance to the applicant would further ORG’s purported charitable purposes. To
enroll a house into the DPA program a home builder would agree to the terms of the New
Construction Contract Addendum, and a home seller would agree to the terms of the Resale
Contract Addendum. Along with other requirements, the Addendums provide that:

The Seller/[Builder] further agrees to pay a service fee in the amount of $
which is 3.75% of the contract sales price of the home included in the Down Payment
Assistance Program. In consideration, The ORG agrees to provide information regarding
approved home buying classes and down payment assistance to the Buyer that qualify for
the program. The Seller/[Builder] and Buyer recognizes and agrees that this fee is not to
be used to provide down payment assistance to the Buyer of the subject property and the
gift funds provided by The ORG are delivered from pre-existing Down Payment
Assistance Program funds. The Seller/[Builder] understands that they are under no
obligation to pay the service fee if the Buyer, using the ORG program, does not purchase
the home included in the program from the Seller/[Builder]. The Seller/[Builder] is only
obligated to pay the service fee upon successful closing/ settlement.

With respect to the homebuyers, the Addendums provide that:

The Buyer hereby agrees to diligently pursue a loan, sign all required ORG forms, follow
all lender instructions and complete a HUD approved home buyer class. The Buyer
further acknowledges that the ORG., does not warranty the subject property in any way,
written or implied.

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

Page:3

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer ; Year/Period Ended
ORG 20XX12 and
20XX12
Modifications to ORG’s Program

In subsequent submissions to the Service and in its marketing materials, ORG has modified its
DPA program, providing that homebuyers could receive towards down payment or closing costs
three to ten percent of the purchase price of a home enrolled in the DPA program. ORG also
modified its processing fee, providing that the fee would be $ or .75 percent of the purchase price
of a home, whichever is less. In its advertising materials, ORG explains the fees in connection
with enrollment of a house into the DPA program and the processing fee as follows:

Typically, the fee for enrolling in the ORG Downpayment Gift Program is a program fee
plus a processing fee of $ or .75% of the contract sales price, whichever is less. Our fee
is deducted from the seller’s proceeds at settlement. However, ORG offers reduced
pricing for builders and home dealers...

Website (3/23/20XX)

ORG explains the program fee and its connection to the processing fee as follows:

The amount of the program fee depends on the gift amount requested from ORG. If, for
example, the buyer needs 3% from ORG for the down payment, ORG will provide the
gift funds from its existing pool of funds. The seller agrees to replenish the pool of funds
by paying a program fee of 3% plus a processing fee (up to $). If the buyer needs 5%
then 5% plus the processing fee is deducted from the seller’s proceeds and so on and so
forth. Id.

Also, on its Form 990 for the 20XX taxable year, in Part VI, ORG reported that it “...has added
the redevelopment program. The program focuses on the restoration and revitalization of
distressed homes, and on returning those rehabilitated properties to the market at prices that
accommodate low to moderate income homebuyers. The charitable purpose is to revitalize
blighted areas, lessening the burden of government in creating affordable housing for low to -
moderate income buyers.”

ORG’s Actual Activities during the Years under Exam

Since 19XX, ORG has operated a nationwide DPA program. This activity was ORG’s primary
activity during the years under examination. ORG has derived 99% of its revenue from the fees
it charged home sellers and builders to participate in its DPA program. ORG restricted the use of
the gift funds for purchase of a home that is enrolled in the DPA program. To enroll a house into
the DPA program, ORG required home sellers or builders to agree to pay a service fee, which
had two components: a program fee-always equal to the amount ORG gives to the homebuyer,
and a processing fee-generally .75% of the purchase price of a home that ORG retained. The

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
, 20XX12

contractual terms required a settlement agency conducting the closing of a house enrolled in
ORG’s DPA program, to remit the service fees to ORG. The amount of funds ORG transferred
to homebuyers ranged from three to ten percent of the purchase price of a home enrolled in the
DPA program. However, that amount always corresponded and equaled to the amount that the
sellers paid to ORG as the program fee.

In 20XX and 20XX, ORG did not solicit or receive any contributions from the general public or
the government. For these years, ORG derived 99% of its revenue from the home sellers’ and
builders’ service fees. ORG’s total revenues for 20XX and 20XX were $ and $, respectively. Its
net assets increased from $ to $ in 20XX and to $ by the end of 20XX. On its Forms 990, it

reported that it made gifts to homebuyers of $ and $ during 20XX and 20XX, respectively.

ORG funds its operation on on-going basis solely with the service fees it receives from home
sellers and home builders. ORG does not have an established endowment or fund from which it
could provide funds to homebuyers. ORG does not solicit contributions from the general public
or the government. For the years under examination, there is no evidence that ORG received any
contributions from the government or an individual unrelated or unconnected to the real estate
transactions it facilitated.

In September 20XX, ORG began a redevelopment program by purchasing houses for
rehabilitation and land for redevelopment. In 20XX, ORG purchased one property and in 20XX,
it purchased seven homes which it renovated and sold by the end of 20XX. In 20XX, ORG
derived income of $ from these activities. For the years under examination, this activity had
been negligible compared to ORG’s DPA activity.

ORG marketed the DPA program to the general public via its internet website, and, directly,
to individuals with ability to promote the program, for example, to home sellers, home
builders, realtors, mortgage bankers, etc. On average, ORG received 4,000 applications per
month from homebuyers nationwide. ORG incurred significant expenses for marketing the
DPA program, for example, in 20XX, marketing was ORG’s biggest expense at $. In
comparison, the second highest expense for that year was salary and benefits at $. See
Financial Statements and Independent Auditors’ Report, the ORG., December 31, 20XX.

Despite its representations on Form 1023, ORG did not screen homebuyers or limited its
assistance to low to moderate income homebuyers. ORG did not screen for individual’s need
for down payment or closing costs and did not in any way limit funds for purchases of houses
in a defined geographic location undergoing economic depression. Instead, it relied on the
mortgage lenders and realtors to qualify individuals for the DPA program. In fact, ability to
obtain a mortgage on a home enrolled in ORG’s DPA program was the only eligibility

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

Form 886A Department of the Treasury - internal Revenue Service Schedule No. or Exhibit
Explanation of items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

requirement for participation in the DPA program. ORG’s promotional and advertising
materials indicate that the DPA program is available to anyone who qualifies for a mortgage.
On its website, under “Frequently Asked Questions,” ORG answers “No” to the question “Are
there any income requirements?” website (3/27/20XX). ORG advertised that “Few
restrictions” is one of the benefits of ORG’s DPA program to homebuyers. Website

(3/27/20XX).

ORG did not conduct educational activities. Although ORG asserts that it provided homebuyers
with the resources they need to make informed financial decisions, it did not submit any
information about its educational programs, classes, or presentations. ORG’s guidelines appear
to require a homebuyer to complete any HUD approved homebuyer class before the closing.
ORG does not conduct, sponsor, or participate in these classes, nor does it have safe guards in
place to assure that a homebuyer actually completes any educational program or class on
homeownership, financial management, or budgeting. ORG does not develop the educational
materials and is not in any way connected to the HUD approved homebuyer education courses,
which are otherwise available to the general public. See The ORG, Gift Program Guidelines.

Benefits of ORG’s DPA program

ORG’s advertising and marketing materials set forth in detail how the DPA program benefits
individuals connected to the real estate transactions it facilitated, including, the sellers, realtors,
builders, and lenders. For example, ORG’s marketing materials for sellers’ state: “Are you
finding it difficult to sell your home? Maybe you’re ready to move, but your home is still on the
market. At ORG, we understand that this is a complicated, and sometimes stressful, process —
we are here to help! Through the ORG Downpayment Gift Program, ORG expands the number
of potential buyers for your home by removing the barrier of a large down payment. With more
available buyers, ORG can reduce the time your home is on the market and make it easier to sell
your home. Website (3/23/20XX).

Under the heading “Benefits of an ORG Partnership to a Home Seller,” ORG provides:

e Expand Buyer Pool, Shorten Time to Sell. ORG has helped over 150,000 sellers
more their home to a buyer. Results speak for themselves.

e Easy to Use. No one has a process as easy as ours. Try it!

e Efficient. No one in the industry moves faster; we immediately react to the
circumstances of your transaction.

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of items

Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

e Financial Strength and Stability. The down payment gift money is there on time,
every time.

e Customer Service. Acknowledged best in the industry, our competent staff is always
ready to assist and serve.

e Information. We think the more everyone knows about the home buying process,
the better. We have a state-of the-art Homebuyer Education Course that informs both
buyer and seller.

© Marketing. We help your real estate professional with an array of marketing
materials, such as site signs, door knob hangers and postcards. An ORG home is an
attraction to the buyer! Id.

To home builders, ORG states:

ORG respects the challenges and risks associated in building new communities and new
homes.

As you move into the “seller” phase of the development, you must rely on dependable
partners to assist you in selling your homes. ORG has an admirable track record of
helping builders in this regard. Our down payment assistance program greatly expands
the pool of potential buyers who could purchase homes in your communities. We
provide up to 10% in down payment assistance to overcome one of the major obstacles
for otherwise qualified buyers.

Our mission is aligned with yours — to put people into homes and create satisfaction with
the buyer. Plus our selection of marketing materials can enhance your chances of success
in selling out your development. Take your homes from selling to sold using ORG.
website (3/23/20XX).

With regard to real estate professionals, ORG states that:

At ORG, we know you want to close deals quickly and efficiently. After all, a satisfied
home buyer is your best advertising. That’s why ORG is your ideal down payment
assistance provider partner. .

ORG gives buyers up to 10% of the sales price of a home for a down payment or closing
costs, removing the largest barrier for many prospective homeowners.

For listing agents, a down payment gift greatly expands the pool of potential purchasers;
more eligible buyers means less time on the market.

Using ORG means dependability and consistency, perfect timing and efficiency — more
Closed deals done right. Website (3/23/20XX).

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page:7

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

With respect to benefits to settlement agents, ORG provides that:
Settlement Agents are the unsung heroes of any closing process....

As your partner, ORG aligns your goals with ours, to put people into homes. It must be
done in a smooth transaction at the last minute bringing together a lot of information.
ORG is consistently dependable; we fit seamlessly into the process, allowing you to do
your job professionally...

Our program puts up to 10% toward down payment or closing costs, eliminating a barrier
that often uncouples a transaction. We value your responsibilities and assist you in
performing them. Website (3/23/20XX).

For real estate lenders ORG provides that “ORG will help increase your business — this translates
into more closed deals and an increase in revenue.” Website (3/23/20XX). It also provides that
“[o]ur partnership extends to providing essential elements of a successful marketing program that
can increase your business and visibility.” Id.

Lessening the Burdens of Government

In a number of letters and responses to requests for additional information addressed to the
Internal Revenue Service, ORG asserts that its activities are charitable mainly because they
lessen the burdens of government by enabling individuals, who otherwise would not be able to
purchase a house to achieve homeownership. See Letters dated: May 12, 20XX; February 7,
20XX, September 10, 20XX; May 6, 20XX. Specifically, ORG alleges that “ORG’s program
actually fulfills several functions that government has recognized as its own: educating and
counseling home buyers, providing access to capital, and redeveloping blighted properties for
resale at affordable prices.” See ORG’s letter dated, May 12, 20XX. In support of its position,
ORG relies on a number of Federal legislative acts: the United States Housing Act of 1937, 42
U.S.C. § 1437; Section 2 of the Housing and Urban Development Act of 1968, 12 U.S.C. § 1701;
and sections 101, 102 and 202 of the Cranston-Gonzalez National Affordable Housing Act,
U.S.C 12701, 12702 and 12721; and American Dream Downpayment Act of 20XX, H.R. 1276.
See ORG’s letter dated September 10, 20XX, see also ORG’s letter dated, May 12, 20XX.
Additionally, ORG points to recent legislative proposals in the United States Congress and
government official statements. Id.

However, an independent report, An Examination of Downpayment Gift Programs Administered
by Non-Profit Organizations, submitted to the United States Department of Housing and Urban
Development (March 1, 20XX) (Report) concludes that seller-funded down payment assistance
has led to underwriting problems, which require immediate attention. The report also concludes

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page:8

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

that the processing fees charged by the seller-funded down payment assistance providers, which
are passed through to homebuyers in higher property prices, have lead to an increase in the
effective cost of homeownership. ORG’s DPA program is identical to the typical down payment
assistance program subject of the Report. A copy of the report is enclosed with this RAR.

LAW

Section 501 of the Code provides for the exemption from federal income tax of organizations
organized and operated exclusively for, among other listed purposes, charitable or educational
purposes, provided that no part of the net earnings of such corporations inures to the benefit of
any private shareholder or individual. See IRC. § 501(c)(3).

Section 1.501(c)(3)-1(d)(1)(i) provides that an organization may be exempt as an organization
described in section 501(c)(3) if it is organized and operated exclusively for religious, charitable,
scientific, testing for public safety, literary, educational, or prevention of cruelty to children or
animals.

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

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

Section 1.501(c)(3)-1(d)(3)(i) provides, in part, that the term “educational” for section 501(c)(3)
purposes includes the instruction of the public on subjects useful to the individual and beneficial
to the community.

Section 1.501(c)(3)-1(d)(2) defines the term “charitable” for section 501(c)(3) purposes as
including relief of the poor and distressed or of the underprivileged; advancement of religion;
advancement of education or science; erection or maintenance of public buildings, monuments,
or works; lessening of the burdens of Government; and promotion of social welfare by
organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood
tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights
secured by law; or (iv) to combat community deterioration and juvenile delinquency.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
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Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer Year/Period Ended
ORG , 20XX12 and
20XX12

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

In Easter House v. U.S., 12 Cl. Ct. 476, 486 (1987), aff'd, 846 F.2d 78 (Fed. Cir.), the U.S.
Court of Federal Claims considered whether an organization that provided prenatal care and
other health-related services to pregnant women, including delivery room assistance, and placed
children with adoptive parents qualified for exemption under § 501(c)(3). The court concluded
that the organization did not qualify for exemption under § 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.
In addition, although the organization provided health care to indigent pregnant women, it only
did so when a family willing to adopt a woman’s child sponsored the care financially.
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 § 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 § 501(c)(3) 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 Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii). 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

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: 10

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12
manner.” American Campaign Academy, 92 T.C. at 1077. See also Airlie Foundation v.

Commissioner, 283 F. Supp. 2d 58 (D.D.C., 20XX), where 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, inter alia, whether the organization uses commercial promotional methods (e.g.
advertising) and the extent to which the organization receives charitable donations.

See also, Living Faith Inc. v. Commissioner, 950 F.2d 365 (7th Cir. 1991) (holding that a
religious organization which ran restaurants and health food stores in furtherance of its health

ministry did not qualify for tax-exempt status because it was operated for substantial commercial
purposes and not for exclusively exempt purposes). _

Rev. Rul. 20XX-27, 20XX-21 LR.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.
20XX-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

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
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Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

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. 20XX-27, Situations 1 and 3 describe organizations that provide down payment and
closing costs to qualified homebuyers, in the manner that could qualify for exemption from —
Federal income tax under section 501(c)(3). In Situation 1, the organization’s purposes and
activities relieve the poor, distressed and underprivileged by enabling low-income individuals
and families to obtain decent, safe and sanitary homes. In Situation 3, the organization’s
purposes and activities combat community deterioration in a specific, economically depressed
area that has suffered a major loss of population and jobs. Importantly, these organizations
conduct broad based fundraising programs to attract gifts, grants, and contributions from several
foundations, businesses, the general public, and receive funding from government agencies. See
Rev. Rul. 20XX-27. Their policies and procedures prevent the grantmaking 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.

Under Treas. Reg. § 1.501(c)(3)-1(d)(2), the term “charitable” includes lessening the burdens of
government.

Rev. Rul. 85-1, 1985-1 C.B. 177, holds that an activity is a burden of government only if there is
an objective manifestation 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:

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

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

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

4. The organization pays governmental expenses.

5. Regular government funding of the organization’s activities through grants or general
   obligation bonds backed with the full faith and credit of the governmental unit (as
   opposed to general revenue bond financing).

6. The governmental unit is 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

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
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Form 886A Department of the Treasury - internal Revenue Service Schedule No. or Exhibit
Explanation of items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

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. .

In Columbia Park and Recreational Association, Inc, v. Commissioner, 88 T.C. 1 (1987), aff'd
without published opinion 838 F.2d 465 (4th 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 is 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 (20XX), 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.

ANALYSIS

ORG does not qualify as an organization described in I.R.C. § 501(c)(3) because it operates a
program that does not exclusively serve an exempt purpose described in section 501(c)(3). It is
organized and operated primarily for a nonexempt business purpose of facilitating real estate
transactions for private benefit of the parties involved in the transactions, including sellers, home
builders, lenders, real estate professionals, and homebuyers.

ORG’s DPA program does not further a charitable purpose

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page:13

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

ORG’s DPA program does not provide relief of the poor and distressed or of the underprivileged
within the meaning of Treas. Reg. § 1.501(c)(3)-1(d)(2). ORG does not operate the DPA
program to address the needs of low-income people by enabling them to obtain decent, safe, and
sanitary housing. See Rev. Rul. 20XX-27, Situation 1, See also Rev. Rul. 70-585, Situation 1.
Despite its representations on Form 1023, in fact, ORG has no income limitations for
participation in its DPA program, and it does not screen the applicants. The Application for
down payment assistance does not contain any questions to establish an applicant’s income level.
The mortgage and real estate companies determine who is eligible for assistance from ORG
solely based on an applicant’s ability to sustain mortgage payments on the house enrolled in the
DPA program. ORG’s advertising and promotional materials indicate that the DPA program is
open to anyone who otherwise qualifies for a mortgage, without any income limitations. In fact,
ORG advertised its DPA program as having no income restrictions and few restrictions
otherwise. Website (3/27/20XX) and website (3/27/20XX).

ORG asserts that the DPA program is designed to assist a charitable class because only a house
of specified value may be enrollment in the program. First, there is no evidence that ORG
limited enrollment of homes to the specified limit. Second, even if it did so, limiting a home’s
sale price does nothing to assure that ORG assisted members of a charitable class, low-income
individuals.

ORG does not limit its assistance to a geographic area experiencing economic depression,
deterioration, or neighborhood tensions. See Rev. Rul. 20XX-27, Situation 3 and Rev. Rul. 70-
585, Situation 4. Assistance to homebuyers is available irrespective of the property’s location so
long a home seller or home builder enrolls the property into the DPA program by agreeing to the
terms of the New Construction Contract Addendum or Resale Contract Addendum. Facilitating
the purchases of homes in a broadly defined geographic area does not combat community
deterioration or serve other social welfare objectives within the meaning of section 501(c)(3) of
the Code.

ORG’s DPA program is not educational within the meaning of Treas. Reg. § 1.501(c)(3)-
1(d)(3)(i) because its educational activities are minimal compared to the primary activity of
facilitating real estate transactions. Further, the educational aspects of ORG’s activities are
merely incidental to the advertising and marketing of the DPA program. Although ORG has
indicated its intention to provide education for homebuyers, there is no evidence that ORG in
fact did so. Also, there is no evidence that ORG required or verified the applicants’ participation
or completion of any educational programs or financial counseling. There is no evidence that
ORG provided any meaningful financial counseling or instruction on homeownership and
budgeting to meet its purported charitable purpose of educating homebuyers about the
responsibilities of home ownership. Moreover, even if ORG conducted substantial educational
activities, in accordance with Rev. Rul. 20XX-27, it would not qualify for exemption from

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page:14

Form 886A Department of the Treasury - Imemal Revenue Service Schedule No. or Exhibit
Explanation of items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

Federal income tax under section 501(c)(3) because it is funded primarily by sellers’
contributions, and it is operated for the benefit of individuals connected to the real estate
transactions ORG facilitates.

ORG’s DPA program is virtually identical to the program described in Rev. Rul. 20XX-27,
Situation 2. ORG does not solicit or receive funds from any sources other than sellers’ service
fees. Rather than having policies to withhold the identity of contributors and home sellers from
the grantmaking staff, ORG’s policies mandate that before funds to a homebuyer are made
available ORG’s staff must make sure that the house seller or builder had agreed to pay ORG the
service fee (the program fee and the processing fee). In essence, ORG’s policy is to insure that
the seller agrees to reimburse ORG dollar-for-dollar for the amount ORG transfers to a
homebuyer.

Similarly to the organization in Rev. Rul. 20XX-27, through a circular flow of the money,
ORG allows homebuyers to obtain cash for down payment or closing costs, to satisfy the
requirements for Federal Housing Administration (FHA) insured mortgages. Generally, three
percent down payment is required for an FHA mortgage. Under the applicable Department of
Housing and Urban Development (HUD) guidelines, the down payment must be made with a
homebuyer’s funds or a gift to a homebuyer from a relative, employer, labor union, charitable
organization, close friend, governmental agency, or public entity. Thus, as a purported
charitable organization, ORG has acted as conduit between the homebuyer and the home
seller. The home sellers provide the funds that the home buyers receive from ORG for the
down payment on a FHA insured mortgage. Acting as a conduit, ORG operates for the
substantial nonexempt purpose of facilitating the sales of homes on behalf of home sellers by
enlarging the potential market of buyers.

ORG’s representation that 57 percent of homebuyers it assisted were in the “middle-income”
census tracts, does not alter the fact that ORG failed to screen the applicants and operate the
DPA program according to its representations on Form 1023. ORG made this finding after it
provided the assistance to the homebuyers, and after the Service challenged ORG’s DPA
program. By not screening applicants for the DPA program prior to making funds available to
homebuyers and by not having any policies or safeguards to insure that payments were made to
low or moderate income individuals, ORG failed to show that its down payment assistance to
homebuyers, even without considering the enormous benefit to the home sellers, was exclusively
in furtherance of its purported charitable purposes. Further, ORG operated the DPA program in
a manner that is materially different from its representations on Form 1023.

Even if ORG’s DPA program was directed to exclusively serve low-income individuals or
individuals purchasing homes in disadvantaged communities, ORG’s total reliance for financing
of its DPA program on home sellers and individuals connected to the real estate transactions

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
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Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

demonstrates that the DPA program provides substantial benefit to private parties involved in the
transactions. See Rev. Rul. 20XX-27, Situation 2. ORG does not facilitate transactions and does
not assist a homebuyer who may otherwise be a member of a charitable class; unless ORG is
assured that a home seller will make an equivalent contribution and pay a processing fee. The
seller’s obligation to make a payment to ORG is contingent on closing of the real estate deal.

The homebuyer’s receipt of the down payment assistance funds from ORG is contingent on
purchasing of a home enrolled into ORG’s DPA program.

ORG does not engage in broad based fundraising, instead, it exclusively relies on payments from
individuals which directly stand to benefit from the transactions ORG facilitates. Similarly to
ORG, in Columbia Park and Recreation Association, the organization did not solicit or receive
voluntary contributions from the public. Instead, the organization’s revenue came solely from
the members whom it served. See Columbia Park and Recreation Association, 88 T.C. at 20.
The court stated that the fact that the organization’s method of financing was dissimilar from a
typical public organization was an important factor undercutting the organization’s position that
it was organized and operated for a charitable purpose. The court said “[p]etitioner thus lacks
this normal trait of a section 501(c)(3) organization, or more specifically, an organization which
operates primarily for a public interest.” Id. at 20, 21.

The manner in which ORG operates its DPA program shows that the private benefit to various
parties connected to the real estate transactions is the intended outcome of the Organization’s
operations rather than a mere incident of such operations. ORG has outlined these benefits on its
website and in its marketing materials and they are significant. The Organization’s down
payment assistance procedures are designed to channel funds in a circular manner from the
sellers to the buyers. Because the amount of transfer to a homebuyer always equals the amount
seller transfers to ORG, in fact, the actual source of the “gift” funds is from homebuyers, not a
pre-existing pool of funds as ORG claims. Further, in accordance with Rev. Rul. 20XX-27,
Situation 2, the funds ORG makes available to homebuyers are not “gifts” because they are not
made out of detached and disinterested generosity, but rather are made in response to an
anticipated economic benefit, the sale of an enrolled home in less time and for a price which may
be higher than the seller would otherwise be able to obtain.

Like the organization in American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989)

and Rev. Rul. 20XX-27, Situation 2, ORG’s structure and operations are designed to assist the
private parties who fund it and give it business. The home sellers who enroll their homes in
ORG’s DPA program benefit from getting access to a wider pool of buyers, thereby decreasing
their risk and the length of time that their homes are on the market. They also benefit by being
able to sell their home at the home’s full listed price or by being able to reduce the amount of the
negotiated discount on their homes. The homebuyers who participate in ORG’s DPA program
benefit by being able to purchase a home without having to commit more of their own funds.
Real estate professionals who participate in ORG’s DPA program, from real estate brokers to

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
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Form 886A Department of the Treasury - internal Revenue Service Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

escrow companies, benefit from increased sales volume and the attendant increase in their
commission and compensation.

ORG charges a market rate fee commensurate to the services it provides and makes significant
profit. ORG does not provide assistance to anyone within a charitable class it purportedly
intends to benefit. Instead, it provides assistance only to homebuyers who purchase a home for
which the seller had agreed to pay ORG the service fee. In this respect, ORG is identical to the
organization in Easter House, which provided health care to indigent pregnant women, but only
when a family willing to adopt a woman’s child sponsored the care financially.

Substantial Nonexempt Purpose

Only an insubstantial part of activities of a tax-exempt organization’s maybe in furtherance of a
nonexempt purpose. Treas. Reg. § 1.501(c)(3)-1(c)(1). An organization will not be regarded as
a tax-exempt entity if more than an insubstantial part of its activities is not in furtherance of an
exempt purpose. Id. As the Supreme Court held in Better Business Bureau of Washington D.C.,
Inc. v. United States, 326 U.S. 279, 283 (1945), the presence of a single non-exempt purpose, if
substantial in nature, will destroy the exemption regardless of the number or importance of truly

exempt purposes.

ORG has been organized and operated primarily for a nonexempt business purpose of facilitating
real estate transactions for private benefit of the parties involved in the transactions. ORG’s
promotional material and its marketing activities show that ORG operated in a manner consistent
with a commercial business seeking to maximize sales of services, rather than in a manner
consistent with a charitable or educational organization seeking to serve a charitable class in
furtherance of the purposes enumerated in section 501(c)(3). Facilitation of real estate
transactions has been ORG’s primary activity, for which ORG charged significant market rate
fees and derived substantial profit. ORG’s operations are similar to an organization which was
denied exemption because it operated a conference center for commercial purposes. See Airlie

Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C., 20XX).

Operating a trade or business of facilitating home sales is not an inherently charitable activity.
ORG’s primary activity was in furtherance of a nonexempt business purpose, mainly maximizing
the number of transactions and fees it collected. Similarly to the organizations in American
Campaign Academy, supra, and Easter House v. U.S., 12 Cl. Ct. 476, 486 (1987), aff'd, 846 F.

2d 78 (Fed. Cir. 1988), a substantial part of ORG’s activities furthered a commercial purpose
rather than a charitable purpose within the meaning of section 501(c)(3) of the Code.

Lessening the burdens of government

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page:17

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

ORG’s primary activity has been the facilitation of real estate transactions and there is no
evidence showing that a governmental unit has accepted or recognized this activity as its burden.
As a tax neutral party, with exclusive source of funding from home seller’s service fees, ORG
enables homebuyers without cash to obtain from their home seller or builder cash for down
payment or closing costs. As such, ORG acts merely as a conduit, facilitating transfers of cash
from home sellers or homebuilder to homebuyers. For these services, ORG charges home
sellers’ market rate processing fees and generates a significant profit. These fees have lead to an
increase in the effective cost of homeownership. See the Report.

There is no objective manifestation that a governmental unit has accepted as its burden facilitation
of real estate transactions in the manner as conducted by ORG. There is no statute specifically
creating ORG or any other organization conducting similar activities. In fact, the FHA has
expressly provided that it does not approve non-profits down payment assistance programs
similar to ORG. See HUD Handbook 4155.1 and Mortgage Letter 00-8. Also in support of its
position, ORG points to statement of government officials, however, as Rev. Rul. 85-1 provides,
little weight should be given to government officials’ statements praising or expressing approval
of the organization or the activities it conducts.

There is no evidence of interrelationship between ORG and a governmental unit. No
governmental unit directly controls or participates in ORG’s activities or operations. ORG’s
activities are only indirectly subject to the applicable real estate and mortgage laws. There is no
Federal or state law or regulation directly governing the DPA programs or ORG's activities.
Further, no governmental unit appoints ORG’s board of directors and there is no evidence that a
governmental unit has ever previously engaged in the activities that ORG performs or similar
activities. See Rev. Rul. 85-1 and Rev. Rul. 85-2.

ORG does not defray expenses of a governmental unit because there is no evidence that a
governmental unit would engage in the type of transactions that ORG performs. ORG bears no
economic burden from providing grants to homebuyers because it does not use its own funds to
provide any assistance to homebuyers. ORG does not conduct broad based fundraising, but
instead relies exclusively on house sellers’ contributions to fund its DPA program. To the extent
that the house sellers’ bear the economic burden of the transfers of cash to the homebuyers,
arguably they are the ones, and not ORG, that defray some costs that a government could
potentially incur if it choose to provide cash towards down payment or closing costs to any
individual regardless of their income, race, homebuyer status, or geographic location. ORG
receives no grants from any governmental unit. As stated above, its operations are sustained
exclusively by fees and contributions from house sellers. Similarly to a business entity, rather
than a governmental expenditure program, ORG derives significant profits from its activities.

ORG’s activities may actually harm the homebuyers it purports to help. For example, an
independent report has concluded that tax-exempt organization’s programs similar to the ORG’s

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page:18

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of items

Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

DPA program have lead to mortgage underwriting problems and higher cost of homeownership.
See the Report. Specifically, the Report state that “...the seller-funded Downpayment
Assistance Program (DAP) structure leads to a lessening of loan underwriting quality... Another
factor supporting our conclusions was the lack of borrower readiness to undertake the
responsibilities of homeownership, as reported by underwriters, realtors, and the borrowers
themselves. Furthermore, the effective costs of homeownership are increased even more by the
processing fees charged by the seller-funded DA providers which get passed through to
borrowers in higher property prices. In some counties the inflated sales prices results in higher
settlement fees as well.” The Report at viii, ix. Additionally, the Report states:

Increased cost of homeownership to borrowers receiving seller-funded DA without
realizing any tangible benefit associated with the increased costs. These costs include
seller-funded DAP processing fees, mortgage payment protection insurance premiums
and higher settlement costs when the expense items are calculated based on a percentage
of the sales price.

Another study, conducted by the Office of Inspector General (OIG) (Audit Case Number #), has
concluded that mortgages involving assistance from tax-exempt organizations provided in the
manner similar to ORG, should be ineligible for FHA insurance.

Independent of the question of what a governmental unit recognizes as its burden, ORG’s
activities go far beyond the activities which the government has arguably recognized as its
burden. Contrary to the ORG’s DPA program, the government’s involvement in promotion of
homeownership is narrowly tailored, targeting mainly first-time, low-income, veterans, and
minority homebuyers. For example, the American Dream Downpayment Initiative (ADDI) is a
Federal program aimed at increasing homeownership among lower income and minority
households. ADDI provides grants to low-income, first-time purchasers of a single-family
home for down payment and closing costs. FHA Zero Down Payment and Payment Incentives
program is another Federal program aimed at lowering the barriers to homeownership by
allowing first-time homebuyers with strong credit record to finance 100 percent of the home
purchase price and closing costs. The Department of Veterans Affairs administers a home loan
program, which is aimed at increasing homeownership opportunities for the eligible veterans.
The program allows veterans to purchase a home without any down payment and under
favorable terms. Under the FHA guidelines, the grants to homebuyers under these programs are
gifts, not mere inducements to purchase. Furthermore, through these programs the Federal
government does not merely facilitate real estate transactions through transfers of cash in a
circular manner between parties interested in the real estate transactions. To take advantage of
these programs, a homebuyer is not limited to purchasing a house enrolled in the program.
Furthermore, a house seller is not required to make a contribution to a government agency or pay
any fees for selling a house through one of these programs. Further, unlike ORG’s DPA

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page:19

Form 886A Department of the Treasury - internal Revenue Service Schedule No. or Exhibit
Explanation of items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

program, these government programs have strict income or status requirements before assistance
is given to a homebuyer.

The determination of whether an organization actually lessens a burden of government is also
made based on all relevant facts and circumstances. See Rev. Rul. 85-1. A favorable working
relationship between the government and the organization is strong evidence that the
organization is actually lessening the burdens of government. Id. ORG’s does not actually
lessen the burdens of government because its activities are not similar to the activities that the
government has arguably accepted as its burden. ORG’s activities, as explained above, may
actually increase the burdens of government. Through its activities, it merely facilitates real
estate transactions for the benefit of private parties connected to the real estate transactions. We
find no evidence that ORG has a working relationship with HUD, FHA, VA, or any federal
government agency that works on lowering barriers to homeownership. We also find no
evidence that in the absence of ORG a government unit would engage in the activities now being
performed by ORG. Accordingly, there is no objective manifestation that the ORG is acting on

behalf of a governmental unit. See Public Industries, Inc. v. Commissioner, 61 T.C.M. 1626.

Even if ORG’s activities improve economic conditions of homebuyers or neighborhoods, it is not
enough to show that ORG actually lessens the government’s burden. Public Industries, Inc. As
in Columbia Park and Recreation Association, the benefit to private individuals is an integral
part of ORG’s DPA program. Columbia Park and Recreation Association, 88 T.C. at 17. Any
benefit to homebuyers or the public from ORG’s activities is merely incidental and relatively
insubstantial to the benefits ORG provides to the parties related to real estate transactions it
facilitates. Thus, analogous to the situation in Quality Auditing Company, Inc., even if the DPA
program lessen the burdens of government, because it also conferred substantial benefits on
individuals connected to the real estate transactions, including home sellers, builders, lenders,
real estate professionals, and homebuyers, ORG lessens the burdens of private parties, thereby
furthering of a substantial nonexempt purpose.

Not every activity concerning which a governmental unit passes legislation or expresses an
interest in can be considered as an activity which the government unit has assumed as its burden.
The government is interested in all aspects of the lives of its citizens and the enactment of
various pieces of legislation may indicate that the government has an “interest” in the activity.
The government’s interest in an activity is not the equivalent of the government assuming the
burden of the activity because there must be an objective manifestation that a government
accepts the activity as its own burden. ORG failed to show that a governmental unit has
accepted as its burden the activities it conducts, and it failed to establish that its activities
actually lessen that burden.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page:20

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

The legislative initiatives that ORG cites do not in any way establish that the Federal government
has accepted as its burden provision of down payment and closing costs to any individual who
qualifies for a mortgage in the manner as provided by ORG. Instead, these legislative acts are a
reflection of a goal of the national housing policy, to promote broad based homeownership.
They reflect the government’s commitment to bringing down the barriers to homeownership and
promotion of homeownership by minorities, veterans, first-time homeowners, and low to
moderate income individuals. In fact, ORG recognizes this in stating that “[t]hrough DPA and
complementary programs, ORG helps achieve the Federal Government’s goal of promoting
home ownership, eliminating prejudice, alleviating poverty, and building and sustaining stable
neighborhoods and communities — all without government funding or taxpayer dollars.” See
ORG’s Letter dated May 12, 20XX, at 8.

ORG’s reliance on the HUD’s approval of gifts from charitable organizations to homebuyers for
down payment is misplaced because according to the guidelines, ORG’s transfer of funds to a

homebuyer is not a gift, but is nothing more than an inducement to purchase a house listed in the
DPA Program. The FHA rules provide that: “[t]he gift donor may not be a person or entity with
an interest in the sale of the property, such as the seller, real estate agent or broker, builder, or
any entity associated with them. Gifts from these sources are considered inducements to
purchase and must be subtracted from the sales prices. No repayment of the gift may be
expected or implied. (As a rule, we are not concerned with how the donor obtains the gift funds
provided they are not derived in any manner from a party to the sales transaction.)” In the case
of ORG, a home seller is in fact the obligated source of the homebuyer’s down payment
assistance “gift” from ORG. ORG’s grants are derived entirely from a required payment from a
house seller with interest in the real estate transaction. ORG’s grant to a homebuyer is
intrinsically tied to the home seller’s payment in that a home seller’s payment is the exclusive
source of money ORG transfers to a homebuyer, and the amount of each seller’s contribution is
always equal to the amount ORG transfers to the homebuyer plus a processing fee. Thus, ORG
is merely a conduit between the homebuyer and home seller and its argument that the house
sellers’ contributions only replenish the down payment assistance funds has no merit and
represents an argument of form over substance.

ORG points to its participation in the State’s program, “OPPORTUNITY: Home Ownership
Program,” and the request from the Governor of State to provide down payment assistance with
the state’s Mortgage Finance Authority (MFA) as evidence that its activities have been
recognized as the burden of government. However, ORG’s involvement in these programs did
not begin until 20XX, well after the start of its operations and after the tax periods under
examination. Furthermore, ORG has never provided any substantiation for this agreement. It
has failed to show that either the government of State or State have recognized, accepted, or
regarded ORG’s activities as their burden. There is no evidence that State or State showed an
indication that ORG was assuming their burdens.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page:21

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of items
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12
CONCLUSION

ORG does not operate in a manner that exclusively furthers a charitable or educational purpose.
Facilitating real estate transactions is a nonexempt business purpose and it has been ORG’s
primary activity during the years under examination. ORG operates in a manner
indistinguishable from a commercial enterprise. To maximize its profits, ORG markets and
advertises its program and charges market rate processing fees. Its activities are funded solely by
service fees from sellers and house builders. ORG does not solicit funds from the general public
or the government. ORG’s activities benefit to substantial degree individuals connected to the
real estate transactions it facilitates, rather than members of a charitable class, including
homebuyer, sellers, home builders, lenders, and other real estate professionals. At best, ORG’s
educational and charitable activities are incidental to its primary activity of operating the DPA
program while accumulating substantial profits. ORG do not lessen a burden of government
because there is no evidence that a governmental unit has accepted or recognized the activities
performed by ORG as its burden and that ORG actually lessen the burden.

For the foregoing reasons, revocation of exempt status is proposed. Because the facts show that,
in 20XX and 20XX, ORG operated in a manner materially different from that represented in its
Form 1023, the government proposes that the revocation be effective retroactively to the date of
the organization’s inception. ORG will be allowed 30 days to review this report and respond with
a protest.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page:22