tax_exempt_and_government_entities_division release number release date legend org organization name org address uil department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx date xx date address address person to contact identification_number contact telephone number in reply refer to te_ge review staff ein last date for filing a petition with the tax_court october 20xx dear this is a final adverse determination_letter as to your exempt status under sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked effective november 19xx our adverse determination was made for the following reasons a substantial part of your activities consists of providing down payment assistance to home buyers to finance the assistance you rely on home sellers and other real-estate related businesses that stand to benefit from these down payment assistance transactions your receipt of a payment from the home seller corresponds to the amount of the down payment assistance provided in substantially_all of your down payment assistance transactions the manner in which you operate demonstrates you are operated primarily to further your insiders’ business interests therefore you are operated for a substantial nonexempt purpose in addition you operations further the private interests of the persons that finance your activities accordingly you are not operated exclusively for exempt purposes described in sec_501 you failed to meet the requirements of sec_501 and sec_1 c -1 in that you failed to establish that you were operated exclusively for an exempt_purpose rather you were operated for the benefit of private interests and a part of your net_earnings inured to the benefit of outsiders your founder and board members contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending december 20xx and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment however you you also have the right to contact the office_of_the_taxpayer_advocate should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling or writing to internal_revenue_service taxpayer advocates office taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_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 we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations department of the treasury - internal_revenue_service form 886a name of taxpayer explanation of items schedule no or exhibit year period ended 20xx09 20xx09 org org legend org organization name address address admin-2 administrator company administrator admin-5 co-2 company xx date xyz state president president admin-3 admin-1 administrator administrator motto motto city city administrator admin-4 co-1 issue whether org operated for a substantial non-exempt purpose rather than for exclusively charitable purposes within meaning of sec_501 issuing property sellers contribution statements for down payments whether org promoted improper charitable_contribution deductions under sec_170 by overview org org is xyz not-for-profit corporation incorporated on january 19xx president president is org’s registered agent and president org’s address is address city xyz on june 19xx org applied for recognition as a tax-exempt_organization under sec_501 on form_1023 on april 19xx based on the information that org provided in its application_for exemption and on the assumption that org would operate in the manner represented in its application org was recognized as of november 19xx as a tax-exempt_organization as described in sec_501 since 19xx org has promoted and operated a down payment assistance dpa program for house buyers under which it provides funds to the buyers to use as their down payment or for closing costs and collects the same amount plus an additional fee from the house sellers org also advised house sellers and others that sellers may claim charitable deductions on their federal_income_tax returns for the amounts they pay to org as more fully described below under org’s program down payment assistance is provided for all types of housing loan programs including federally insured mortgages to buyers whether first time or not and without any income or asset limitations application_for recognition of tax-exempt status form_1023 was filed by org with the irs to apply for recognition of tax-exempt status under penalties of perjury on june 19xx on form_1023 org stated that its purpose was to provide down payment assistance program for low-income individuals and families to allow individuals who could not otherwise do so to own their own home org stated admin-1 is currently the administrator and home buyer of the organization she is a licensed real_estate broker and property consultant admin-1 looks for homes that have the ability to be purchased repaired and for under dollar_figure this keeps the houses within the means of low-moderate income family form 886-acrev department of the treasury - internal_revenue_service page -1- form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org org schedule no or exhibit year period ended 20xx09 20x x09 according to standards set by the department of housing and urban development regarding income limits and financial need the application stated that t he down payment assistance will be provided only to individuals who have a financial need for such services and who complete the educational requirements designed to increase the likelihood of permanent home ownership emphasis supplied regarding fundraising and contributions org’s application_for exemption stated org current- bank loans will solicit private donations and generated revenues org stated that no fundraising was planned federal returns org filed forms late for the fiscal years ended september 20xx 20xx and 20xx it was not required to file and did not file forms 990-t org also filed form sec_941 w-2 and misc in september 20xx and september 20xx and org’s primary reported activity consisted of operating its dpa program as described in more detail below according to part iii of org’s september 20xx form_990 org assists individuals in obtaining down payments for home purchases as total gross_receipts which included the final payment from the now org states that its program allows home sellers to designate a portion of the fees they pay to org to be donated to other charitable organizations co-1 for september 20xx org reported dollar_figure defunct co-1 co-1 of dollar_figure the remaining amounts were collected directly from sellers participating in org’s dpa program org reported that it distributed for the year ended september 20xx for the year ending september 20xx org has reported gross_receipts as dollar_figure and distributed dollar_figure to individuals participating in the dpa program for the year ending september 20xx org’s reported gross_receipts as dollar_figure with distributions to individuals participating in the dpa program of dollar_figure dollar_figure operation of org’s down payment assistance program when operations began and the mission and purpose of our motto is to reduce the required down payment and or closing costs for all home buyers the co-1 co-1 is an irs-approved c nonprofit corporation whose mission is to support the hud-approved nonprofit co-1 housing provider org org first went up during january 20xx it advertised the form 886-a rev department of the treasury - internal_revenue_service page -2- department of the treasury - internal_revenue_service explanation of items form 886a name of taxpayer org org schedule no or exhibit year petiod ended 20xx09 20xx09 org meets the for federal housing administration fha insured loans fha guidelines hud handbook allow charitable organizations to provide gift funds as borrower's funds toward down payment and closing costs under our program the org program is not restrictive like many bond or co-1 housing programs that rely on government granted money just a few of the advantages are e flexability - gift funds may be used for any or all of the following down payment closing costs prepaids payoff debts to qualify dollar_figure maximum gift - not just to dollar_figure down payment - no cash investment is required by the borrower no income limitations no asset requirements no underwriting - org does not underwrite or approve the borrower not restricted to fha loans conforming and non-conforming ok no geographic restrictions eligible_property types - existing resale or new_construction single family units condominiums townhouses manufactured modular homes funds are not restricted to first time home buyers no registration by mortgage_lender company realtor or closing office required expedited funding - org can fund within hours of receipt of paperwork same day if reduced requirements - no roof certification homeowner’s warranties or homebuyer paperwork is received before noon education needed e low fee - -7 of the sales_price in april of 20xx the following changes were made to the org program down payment assistance a down payment is the primary obstacle that thousands of americans face everyday in becoming homeowners the org program provides down payment assistance making ownership possible for thousands of deserving families who may otherwise be unable to achieve the american dream of owning a home the org program is operated by org a non-profit organization recognized as taxed-exempt under the internal_revenue_code sec_501 since inception in 19xx org has been committed to providing co-1 housing and promoting homeownership to all working american families the org program is allowed under hud and federal housing administration guidelines to gift - of the final sales contact price as the down payment to any homebuyer qualifying for an fha insured loan as outlined in hud handbook rev section org through its loan officers mortgage brokers real_estate agents title insurers buyers and sellers many of the participants in org’s dpa program utilize federal housing administration fha financing for and other methods promotes its dpa program to builders lenders form 886-arev department of the treasury - internal_revenue_service page -3- form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org org schedule no or exhibit year period ended 20xx09 20xx09 their home purchase to qualify for a federally insured mortgage a buyer must make a down payment in a specified minimum amount generally equal to of the purchase_price to qualify under applicable department of housing and urban development hud rules such a buyer may only receive gifts to use for the down payment from a relative employer labor_union charitable_organization close friend governmental agency or public entity the seller cannot loan money to the buyer for the down payment org defines programs to be through the co-1 motto org a c not for profit organization is committed to helping moderate income families - those who want to help themselves - to achieve the american dream of home ownership we believe that people at all income levels have a right to decent safe suitable and affordable housing and it is our mission to bring that to them we have positioned ourselves to offer a first_time_homebuyer the easiest and most effective way to move from renter to buyer home rehabilitation org renovates existing homes and sells them at below market rates to qualified families working with a large group of lenders org arranges financing which enables families to purchase a home while keeping their housing budget at just percent of their income prospective home buyers are assisted through each step of the home purchase easing their transition to home ownership home buyer assistance program today only percent of renting families in the u s can afford to purchase a modestly-priced home according to a recent study by the census bureau of the remaining pool of renters percent could afford the payments on their own home but do no have the cash required for the initial down payment and closing costs we address this problem with our home buyer assistance program which furnishes grants averaging dollar_figure to qualified families these grants are used for either down payment or closing costs bring affordable homeownership within reach of working families new_construction org is committed to building energy-efficient affordable quality housing in neighborhoods throughout the communities in which we are active as with existing homes buyers will receive assistance throughout the construction and purchase process we are focused on reversing the traditional hurdles which have hit those seeking to own their first home the hardest despite the growth in home ownership over the past decade working families end up paying the highest percentage of their income towards housing more often than not their monthly housing_expenses go to building equity for a landlord rather than for themselves the current high growth rate of the of xyz has intensified that problem form 886-a rev department of the treasury - internal_revenue_service page -4- form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org org schedule no or exhibit year period ended 20xx09 20xx09 we accept and encourage support from corporations foundations and individuals we are able to help the prospective home owner in several ways we will help you to qualify for one or more of several programs that may allow you to own your home we will then help you find a qualified freshly-renovated home in the area you want to live or possibly an affordable new home if you qualify contact us by submitting your name and email for more information org strongly believes in the following three principles homeownership creates stability for both the family unit and the neighborhood thereby creating stability for our community as a whole homeownership is about building communities homeowners take pride in their surroundings often putting extra effort into their neighborhoods homeowners also tend to become more involved in community efforts schools and neighborhood events homeownership is a key component of community economic development owning a home means accumulating wealth it is the primary path to middle class status for many families as home value increases the homeowner’s investment value in that home grows homeowners also strengthen our economy through their purchase of homes and the related furniture and appliances that go with the new purchase in addition the value of a home is something that can help secure loans to finance a business or a child’s education and that value is often passed on to a new generation to help them find economic security the median wealth or net_worth of low-income homeowners non elderly is twelve times greater than the median wealth of similar renters with the same incomes homeownership represents the best possible opportunity for wealth building and economic security for traditionally working class members of our community homeownership has been shown to a reduce crime b reduce teenage pregnancies c increase school retention graduation d increase civic involvement engagement e increase children’s future economic opportunity f increase overall life satisfaction through the home ownership and provide ownership opportunities for low and moderate income families in the org states the mission as org was created in january 19xx to promote communities of xyz form 886-arev department of the treasury - internal_revenue_service page -5- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service org org schedule no or exhibit year period ended 20xx09 20xx09 we are an irs designated c non-profit corporation as well as a hud approved affordable housing provider it is our belief that people at all income levels have a right to decent safe sanitary and affordable housing and it is our mission to promote this cause support for affordable housing for working families does not just help moderate income families it also helps our entire community by encouraging and assisting home ownership we are building pride confidence stability self-sufficiency and a stronger sense of community org’s focus has always been motto we are focused on lowering the traditional housing hurdles which impact working families the hardest the people who are just getting by end up paying the highest percentage of their income towards housing their families more often than not their monthly housing_expenses go to building equity for a landlord rather than for themselves org accomplishes its mission by constructing new housing or rehabilitating existing housing stock these homes are then sold below market_value with favorable financing to low_or_moderate_income families we work extensively with qualifying families and take them every step of the way in their transition from renter to homeowner million in renovations allowing us since our inception years ago we have completed over dollar_figure to improve neighborhoods while preserving existing housing in early 20xx we created a down payment assistance program to provide down payment funds to homeowners and have provided over dollar_figure million in down payment gifts as of january 20xx our staff brings together over years experience in the housing industry this experience includes renovation and resale of low-income properties as well as the construction of low-to- middle income starter homes high-end single family homes multi-unit developments and multi- million dollar resorts in short our experience has prepared us for projects of any magnitude and has given us a focused perspective for benefiting our community one new homeowner at a time the driving force behind our organization has not changed since our beginnings along the way we have retained experienced staff and established relationships with those who share our goals and philosophy this has substantially increased the size of our team and the resources available to us at this time we are exploring ways that we can further expand our team and resources in order to have a positive impact on communities in addition to city city city city and city according to a recent us census study only of renting families can afford to purchase a modestly priced home of the remaining renters could afford the payments on a modestly priced home but do not have the cash reserves for the down payment and closing costs form 886-a rrev department of the treasury - internal_revenue_service page -6- department of the treasury - internal_revenue_service form 886a name of taxpayer explanation of items schedule no or exhibit year period ended 20xx09 20x x09 org org org is dedicated to helping moderate income families - those who help themselves those who play by the rules those who are working to get ahead but without our assistance face years of savings accumulation before they can afford the down payment on their first home we created our down payment assistance program specifically as a solution to this problem our number one priority is to turn renters into homeowners the notes the following members of the team as follows president founder full time staff after business in 19xx after moving to entered the corporate environment for services and labor to residential contractors years in a corporate environment president moved to city xyz and started his first to allow his wife to further her education he re- years and then started another business supplying after moving to xyz and consulting investors on buying and rehabilitating residential units for occupancy by low income section tenants mr president traveled extensively for several years conducting adult education seminars nationwide before founding org in january of 19xx admin-2 executive director full time staff admin-2 was born and raised in city as was his mother before him his grandfather became a minister here in 19xx admin-2 follows a family tradition of working for the benefit of the local community he has a bachelors of science degree in finance from the university of xyz and a xyz residential contractor's license his work experience includes years of training recruiting and managing in sales marketing for several organizations including one of the fastest-growing privately-held companies in the us in 19xx his construction experience is a great help to us when evaluating properties for purchase admin- has both learned from and taught the rest of us his administration skills as well as his skills in the field have helped us reach our current levels of success admin-3 director admin-3 has been a minister volunteer community leader and public speaker for is currently minister of co-2 in city he has served as a director on over a half-dozen boards for a variety of community service organizations years he admin-3 also has extensive construction experience and has successfully marketed and managed his own business for many years his leadership compassion and experience in working with the less privileged members of our community have been invaluable form 886-a crev department of the treasury - internal_revenue_service page -7- form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org org schedule no or exhibit year period ended 20xx09 20x x09 admin-4 director vice-president of technology part-time staff after receiving a degree in engineering from university admin-4 worked in management for several years in his family's - business in city xyz he moved to xyz in 19xx to pursue a career in computer technology he first met mr president when they were both working with real_estate investors nationwide on using computers to analyze real_estate investments and manage investment_property admin-3 has owned and managed several small businesses and currently works as a computer and internet consultant he assists org with all aspects of computerization publishing of public relations materials admin-s director admin-s joined 19xx he was promoted to account executive and transferred to the city office admin-5 moved steadily through the ranks being promoted to assistant vice president and manager of the in 19xx working as a closing officer in the city market in office in 19xx in march of 20xx admin-5 was named vice president of and manager of both the city and city offices the org explains how the down payment assistance program works as follows once a buyer has begun to look for a house the real_estate agent informs the client about the org program after the buyer has found a house to purchase and begins negotiations with the seller the seller is informed about the program and the tax benefits of the program the seller completes the org program seller participating agreement seller agreement once an agreed-upon price is reached the amount of the down payment is calculated and is requested from the seller to be donated as a gift the buyer is receiving this amount plus down payment called a gift from org there is no change to the agreed-upon sales_price escrow is instructed to withdraw proceeds from the seller’s closing statement in the amount above and categorize it as a contribution to co-1 thereafter funds are credited to org the down payment amount less fees is added to the buyer’s closing escrow statement a sec_5 a gift from org and is used as the buyer’s down payment in addition org charges the seller a fee for each property sold this fee is generally total sales_price for individual sellers or a flat fee of dollar_figure for builders of the form 886-a rev department of the treasury - internal_revenue_service page -8- form 886a department of the tr asury - internal revenue servic explanation of items schedule no or exhibit year petiod ended name of taxpayer org org 20nx09 20xx09 through org’s dpa program buyers receive a gift of the funds that they use for the down payment during the years under examination the down payment gifts were generally between and of the property has stated sales_price a house buyer was eligible to participate in org’s dpa program only if the buyer purchased a house from a seller that agreed to org’s contractual terms org and sellers entered into agreements that required sellers to pay co-1 currently defunct an amount equal to the down payment gift that the buyer received under org’s dpa program org claimed that the seller’s payment was not provided directly to the buyer but instead it was used to replenish the pool of funds that was used to provide gifts to subsequent buyers in addition to requiring the seller to pay an amount equal the amount_of_the_gift provided to the house buyer org required sellers to pay org an administrative fee typically equal to either of the purchase_price or a set amount eg dollar_figure in essence these transactions result in a circular flow of the money the sellers make payments to co-1 co-1 org provides the funds to the buyers who use the funds to make the down payment necessary to purchase the seller’s home despite the representations in its application_for exemption org does not have any income limitations for its dpa program and did not screen applicants for down payment assistance based on income the records provided by org did not include data on the buyers’ incomes and gave no indication that org screened on such data rather org’s dpa program provided gifts to any homebuyers who qualified for a loan as a result for example on october 20xx org’s dpa program provided dollar_figure in down payment assistance for a home that a buyer purchased for dollar_figure on november 20xx org’s dpa program provided dollar_figure in down payment assistance for a home a buyer purchased for dollar_figure on december 20xx org’s dpa program provided down payment assistance of dollar_figure for a home a buyer purchased for dollar_figure in addition on april 20xx org’s dpa program provided down payment assistance of dollar_figure for another buyer’s purchase of a home for dollar_figure org’s promotional material and advertising make it clear that anyone who could qualify for some type of loan was eligible for org’s down payment assistance program for example one piece of promotional literature states mortgage professionals with the org program tap into the ability to help more american families qualify for the purchase of a home for most potential homebuyers the largest obstacle of buying a home is the substantial sum of money required for a down payment and closing costs many of these potential homebuyers have good credit and can afford the monthly mortgage payments yet are unable to save or put together enough money for their down payment and or closing costs you can assist more potential buyers to overcome thi hurdle and achieve this important goal let the org program help you qualify more buyers and increase your business form 886-a rev department of the treasury - internal_revenue_service page -9- form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org org schedule no or exhibit year period ended 20xnx09 20xx09 - use funds for down payment and or closing costs _ new or resale homes first time or repeat home purchase qualify more buyers i increase business and client base - enhance realtor builder relationships ‘ no registration required good with any mortgage allowing gift funds from a non-profit typically f ha no limit on income or assets no restriction geographically ou no repayment of gift funds required the org program assist homebuyers with gift funds of up to of the contract sales_price toward down payment and or closing costs get started today helping more families become homeowners click here for our easy processing another one for realtors promotes was to make better sales that page states realtors costs required by the buyer at closing many of these buyers have good credit and can afford the monthly mortgage payments yet are unable to save or put together enough money for the down payment and or closiny costs org program will gift up to or more of the contract_price to all eligible homebuyers towards down payment and or closing costs the gift funds need not be repaid by the buyer benefits for the buyer ‘ no repayment of gift funds required l no restriction geographically use funds for down payment and or closing costs new or resale homes first time or repeat home purchase no limit on income or assets enabling more families to be able to purchase a home vastly increases the pool of qualified potential homebuyers which in turn will sell homes quicker the key for a realtor to be successful in using the org program is for the buyer’s agent to explain the benefits to both the listing agent and the seller form 886-arev department of the treasury - internal_revenue_service page -10- form 886a department of the treasury i ry - intemal revenue service explanation of items name of taxpayer org org or chedule no o exhibit year period ended 20xx09 20x09 benefits for the seller sell your home faster q cj increase your pool of qualified buyers enhance your marketability and exposure u less time on the market better profit margins oq save money on advertisin g and or carrying cost o advertise no money down example below using dollar_figure as average home sales_price typical home sales transaction description percent list price sale price after negotiation realtor commission seller nets of sale price dollar amount org program transaction descript ion percent list price sale price full price org program gift to buyer of sale price dollar amount seller contribution realtor commission of sale price of sale price seller nets subtract from sales_price note in example above gift to buyer is dollar_figure of sales_price seller contribution is dollar_figure of sale price j the for builders and sellers promote the dmp as a way to sell the house faster and states form 886-a rev department of the treasury - internal_revenue_service page -11- form 886a department of the ‘treasury - internal_revenue_service name of taxpayer explanation of items org org schedule no or exhibit year period ended 20xx09 20k x09 the org program can help you sell your home fast by providing down payment assistance our program enables more families to qualify for purchasing a home org program will gift up to or more of the contract_price to all eligible homebuyers for their down payment and or closing cost increase your pool of potential homebuyers and enroll your property today sell your home s faster sellers and buyers together win by participating with the org program u ‘ increase your pool of qualified buyers l enhance your marketability and exposure ‘1 less time on the market better profit margins save money on advertising and or carrying cost l advertise no money down allow us to help you by participating with the org program we look forward to providing you with excellent service in addition org documents explicitly state that the down payment gift to a buyer comes from the seller and used for replenishment of org funds from the seller’s contribution in the transaction buyers all working and creditworthy americans deserve to own their own home for many potential homebuyers the largest obstacle in achieving homeownership is the down payment and or closing cost required by the buyer at closing many of these buyers have good credit and can afford the monthly mortgage payments yet are unable to save or put together enough money for the down payment and or closing cost org is a 6-year-old co- housing charity amongst its missions is the promotion of co-1 homeownership in communities across the nation the org programsm provides down payment assistance to all qualified fha homebuyers gift funds range up to or more of the contacted price depending on the buyers needs this enables the buyer to move into his or her own home with little or no money out of pocket for the buyer o o no repayment of gift funds required no restriction geographically use funds for down payment and or closing costs form 886-a rev department of the treasury - internal_revenue_service page -12- form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org org schedule no or exhibit year period ended 20xx09 20xx09 first time or repeat home purchase co ld new or resale homes o no limit on income or assets org program requires a seller contribution of the buyers’ gift amount plus a processing fee at closing the sellers’ contribution is for replenishment of future homebuyer gift funds and community development reserve your down payment funds today click here to receive your org program gift funds certificate this certificate reserves funds for you print it out and give it to your realtor or mortgage professional the builders contract with org state the above-mentioned builder makes application to include the above-mentioned property as a qualified home in the org program the builder for the property to be qualified as an enrolled home in the program agrees to the conditions and application process of the program as follows builder will accept buyer’s financing loan terms and loan program that allow the buyer to utilize the charitable gift funds provided by org hereinafter org completion of all the above-mentioned requirements qualifies the buyer of the subject property to receive gift funds from the org program the builder agrees to pay a contribution processing fee at closing to the org program in the amount of dollar_figure of the contract sales_price of the home enrolled in the which is program this supports the ongoing efforts of org to promote affordable housing the builder recognizes and agrees that this fee is not to be used to provide down payment assistance to the buyer of the subject property the builder is under no obligation to pay the fee if the buyer using the program does not purchase the subject enrolled home from the builder the builder is only obligated to pay the fee upon successful settlement closing of the subject enrolled home the settlement closing agent is hereby instructed by the builder to retain and forward the fee to the org program administrator upon successful completion of settlement closing the builder instructs the settlement closing agent to return any gift funds not used by the purchaser to org furthermore the settlement agent is instructed to return any gift funds to org immediately upon an unsuccessful completion of settlement closing no changes may be made to the preprinted text of this agreement without prior written consent from org however org does not solicit outside public contributions as funds are received from co-1 as its source of funds from contributions from sellers and related fees because the amount of the contribution is always equal to the amount of the down payment assistance provided to the buyer plus the service fee in fact the actual source of the down payment assistance is the seller’s contribution clearly seen from the enrollment form downloadable from the org programsm form 886-a rev department of the treasury - internal_revenue_service page -13- form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org org schedule no or exhibit year period ended 20xx09 20xx09 promoting homeownership since 19xx a c charitable_organization - ein resale property enrollment agreement i we with the org programsm to enroll the property located at in seller hereby enter into this agreement which is county property into the org program as detailed herein of the contract sales_price of the home enrolled in the the above mentioned seller makes application to include the above mentioned property as a qualified home in the org program the seller for the property to be qualified as an enrolled home in the program agrees to the conditions and application process of the program as follows seller will accept buyer’s financing loan terms and loan program that allow the buyer to utilize the charitable gift funds provided by org hereinafter org completion of all the above mentioned requirements qualifies the buyer of the subject property to receive gift funds from the org program the seller agrees to pay a contribution processing fee at closing to the org program in the amount of dollar_figure program this supports the ongoing efforts of org to promote affordable housing the seller recognizes and agrees that this fee is not to be used to provide down payment assistance to the buyer of the subject property the seller is under no obligation to pay the fee if the buyer using the program does not purchase the subject enrolled home from the seller the seller is only obligated to pay the fee upon successful settlement closing of the subject enrolled home the settlement closing agent is hereby instructed by the seller to retain and forward the fee to the org program administrator upon successful completion of settlement closing the seller instructs the settlement closing agent to return any gift funds not used by the purchaser to org furthermore the settlement agent is instructed to return any gift funds to org immediately upon an unsuccessful completion of settlement closing no changes may be made to the preprinted text of this agreement without prior written consent from org seller seller company address print name print name date date title _ - _ _ _ in 20xx org brokered homes over dollar_figure there were dpa amounts in excess of dollar_figure dpa transactions between buyers and sellers of which were for in 20xx org brokered there were dpa amounts in excess of dollar_figure dpa transactions of which were for homes costing more than org also promoted its dpa program by advising house sellers and others that contributions are amounts they pay to org on its website in advertisements and in other promotional materials org characterized house sellers’ payments to org as inter alia gifts donations contributions and charitable_contributions yet on its forms org listed no contributions received instead it reported its funding as indirect public support form 886-acrev department of the treasury - internal_revenue_service page -14- department of the treasury - internal_revenue_service form 886a name of taxpayer explanation of items schedule no or exhibit year petiod ended 20xx09 20xx09 org org as seen above on its contract with each seller org labeled the seller’s payment to org as both a gift and a contribution these contracts obligate the seller in consideration for participating in org’s program to pay org an amount equal to the amount of the dpa received by the buyer the contract which was required to be signed by each participating seller stated seller further understands that the seller is only obligated to make the contribution if a home buyer utilizing the org program purchases the participating home in a promotion on org’s directed at real_estate agents org acknowledged that sellers’ payments to org were reimbursements for the dpa given to the buyer the seller agrees to reimburse org for the amount of the down-payment and closing-cost assistance the parties to the down payment assisted real_estate transactions including the realtors builders and lenders benefited more than incidentally from org’s operations the references below from some of org’s promotional material clearly demonstrate this benefit sellers org advertised that its dpa program financially benefits sellers by providing them with ready buyers enabling the sellers to sell for higher prices and allowing them to sell faster due to the larger pool of potential buyers thereby reducing the costs associated with real_estate remaining unsold for an extended period for example org advertised on your home s faster increase your pool of qualified buyers enhance your marketability and exposure less time on the market better profit margin sec_1 save money on advertising and or carrying cost co advertise no money down o sell realtors org’s promotional materials tell realtors that they will sell their listings faster with org the materials further state for example realtors across the country are discovering the benefits of using the org program with their prospective buyers and sellers for many potential homebuyers the largest obstacle of homeownership is the down payment and or closing costs required by the buyer at closing many of these buyers have good credit and can afford the monthly mortgage payments yet are unable to save or put together enough money for the down payment and or closing costs org program will gift up to or more of the contract_price to all eligible homebuyers towards down payment and or closing costs the gift funds need not be repaid by the buyer in addition org stated enabling more families to be able to purchase a home vastly increases the pool of qualified potential homebuyers which in turn will sell homes quicker the key for a realtor to be successful in using the org program is for the buyer s agent to explain the benefits to both the listing agent and the seller builders org’s promotional materials tell builders that the org program can help you sell your home fast by providing down payment assistance our program enables more form 886-arev department of the treasury - internal_revenue_service page -15- form 886a department of the treasury - internal revenuc service explanation of items name of taxpayer org org schedule no or exhibit year period ended 20xx09 20x x09 families to qualify for purchasing a home org program will gift up to or more of the contract_price to all eligible homebuyers for their down payment and or closing cost increase your pool of potential homebuyers and enroll your property today sellers and buyers together win by participating with the org program sell your home s faster oc lj increase your pool of qualified buyers o enhance your marketability and exposure o less time on the market better profit margins oc save money on advertising and or carrying cost advertise 7no money down allow us to help you by participating with the org program we look forward to providing you with excellent service lenders org’s promotional materials tell lenders that using org will i ncrease your business help your realtors and builders sell more homes and turn your cash poor borrowers into homeowners the materials urge them to introduce the org program to buyers and realtors thereby develop ing a great referral base telling them with the org program tap into the ability to help more american families qualify for the purchase of a home for most potential homebuyers the largest obstacle of buying a home is the substantial sum of money required for a down payment and closing costs many of these potential homebuyers have good credit and can afford the monthly mortgage payments yet are unable to save or put together enough money for their down payment and or closing costs you can assist more potential buyers to overcome this hurdle and achieve this important goal let the org program help you qualify more buyers and increase your business other parties do not appear to have benefited by org’s dpa program beyond the intended benefit to the sellers buyers realtors builders and lenders described above no other individuals or entities appeared to receive additional private benefit from org’s operations during the years examined there are no disclosures apparent on either balance_sheet in 20xx or 20xx that are classified as related_party transactions co-1 was not operational after 20xx and the passing of president there were no checks submitted showing payments to co-1 during the periods under exam law argument sec_501 of the code provides for the exemption from federal_income_tax of corporations organized and operated exclusively for charitable or educational_purposes provided that no part form 886-a rev department of the treasury - internal_revenue_service page -16- form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org org schedule no or exhibit year period ended 20xx09 20x x09 of the net_earnings of such corporations inures to the benefit of any private_shareholder_or_individual see sec_501 sec_1_501_c_3_-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 sec_501 an organization must not engage in substantial activities that fail to further an exempt_purpose in 326_us_279 the supreme court held that the presence of a single purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes nonexempt sec_1_501_c_3_-1 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 sec_1_501_c_3_-1 defines the term charitable for sec_501 purposes as including the relief of the poor and distressed or of the underprivileged and the promotion of social welfare by organizations designed to lessen neighborhood tensions to eliminate prejudice and discrimination or to combat community deterioration the term charitable also includes the advancement of education id sec_1_501_c_3_-1 provides in part that the term educational for sec_501 purposes relates to the instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 provides that an organization that operates a trade_or_business as a substantial part of its activities may meet the requirements of sec_501 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 cl_ct aff'd 846_f2d_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 sec_501 the court concluded that the organization did not qualify for exemption under sec_501 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 form 886-arev department of the treasury - internal_revenue_service page -17- form 886a department of the treasury - intemal revenue service explanation of items name of taxpayer org org schedule no or exhibit year period ended 20x x09 20xx09 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 sec_501 easter house cl_ct pincite in 92_tc_1053 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 sec_501 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 sec_1_501_c_3_-1 the court concluded by stating that even if the political party’s candidates and entities did comprise a charitable_class the organization would bear the burden of proving that its activities benefited members of the class in a non-select manner american campaign academy t c pincite in 71_tc_202 the court held that an organization that marketed handicrafts made by disadvantaged artisans through museums and other non-profit organizations and shops operated for exclusively charitable purposes within the meaning of sec_501 the organization in cooperation with national craft agencies selected the handicrafts it would market from craft cooperatives in communities identified as disadvantaged based on objective evidence collected by the bureau of indian affairs or other government agencies the organization marketed only handicrafts it purchased in bulk from communities of craftsmen the organization did not market the kind of products produced by studio craftsmen nor did it market the handicrafts of artisans who were not disadvantaged the court concluded that the overall purpose of the organization’s activity was to benefit disadvantaged communities the organization’s commercial activity was not an end in itself but the means through which the organization pursued its charitable goals the method the organization used to achieve its purpose did not cause it to serve primarily private interests because the disadvantaged artisans directly benefited by the activity constituted a charitable_class and the organization showed no selectivity with regard to benefiting specific artisans therefore the court held that the organization operated exclusively for exempt purposes described in sec_501 in 283_fsupp2d_58 d d c the court relied on the commerciality doctrine in applying the operational_test because of the commercial manner in form 886-arev department of the treasury - internal_revenue_service page -18- form 886a department of the treasury - internal_revenue_service name of taxpayer org org schedule no or exhibit year petiod ended 20xx09 20xx09 explanation of items which the organization conducted its activities the court found that it was operated for a nonexempt commercial purpose rather than for a tax-exempt purpose as the court stated among the major factors courts have considered in assessing commerciality are competition with for-profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations see also 950_f2d_365 7th cir 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 in 88_tc_1 aff'd without published opinion 838_f2d_465 4th cir the court held that an association formed in a private real_estate development to operate parks swimming pools boat docks and other recreational facilities did not qualify as a sec_501 organization although the organization provided some benefit to the general_public the primary intended beneficiaries were the residents and property owners of the private development thus the organization operated for a substantial non-exempt purpose rather than for exclusively charitable purposes revrul_67_138 1967_1_cb_129 held that helping low-income persons obtain adequate and affordable housing is a charitable activity because it relieves the poor and distressed or underprivileged in revrul_67_138 the organization carried on several activities directed to assisting low-income families obtain improved housing including conducting a training course on various aspects of homebuilding and homeownership coordinating and supervising joint construction projects purchasing building sites for resale at cost and lending aid in obtaining home construction loans revrul_70_585 1970_2_cb_115 described an organization formed to alleviate a shortage of housing for moderate-income families in a particular community the organization planned to build housing to be rented at cost to moderate-income families the revenue_ruling held that the organization failed to qualify for exemption under sec_501 because the organization’s program was not designed to provide relief to the poor or further any other charitable purpose within the meaning of sec_501 and the regulations revrul_72_147 1972_1_cb_147 held that an organization that provided housing to low- income families did not qualify for exemption under sec_501 because it gave preference to employees of a business operated by the individual who also controlled the organization although providing housing for low-income families furthers charitable purposes doing so in a manner that gives preference to employees of the founder’s business primarily serves the private interest of the founder rather than a public interest form 886-a crev department of the treasury - internal_revenue_service page -19- department of the treasury - internal_revenue_service form 886a name of taxpayer explanation of items schedule no or exhibit year petiod ended 20x x09 20x x09 org org revrul_72_559 1972_2_cb_247 held that an organization that subsidized recent law graduates during the first three years of their practice to enable them to establish legal practices in economically depressed communities that have a shortage of available legal services and to provide free legal services to needy members of the community qualified for exemption under sec_501 although the recipients of the subsidies were not themselves members of a charitable_class the resulting benefit to them did not detract from charitable purposes rather the young lawyers were merely the instruments by which the organization accomplished the charitable purpose of providing free legal services for those unable to pay for or obtain such services revrul_74_587 1974_2_cb_162 held that an organization providing low-cost or long-term loans to or equity investments in businesses operating in economically depressed areas qualified for exemption under sec_501 the organization provided financial assistance only to businesses that were unable to obtain funds from conventional sources and gave preference to businesses that would provide training and employment opportunities for unemployed or under- employed area residents although some of the individual business owners receiving financial assistance from the organization were not themselves members of a charitable_class the benefit to them did not detract from the charitable character of the organization’s program as in revrul_72_559 the recipients of aid were instruments for accomplishing the organization’s charitable purposes revrul_76_419 1976_2_cb_146 held that an organization that converts blighted land in an economically depressed community to an industrial park and leases space on favorable terms to businesses that agree to hire a significant number of unemployed area residents and train them in needed skills qualifies for exemption under sec_501 the organization furthered charitable purposes by improving economic conditions for the poor and distressed and combating community deterioration the organization offered inducements to businesses solely for the purpose of advancing charitable goals revrul_2006_27 describes conditions that failed to qualify for exemption under sec_501 because the organization’s program was not designed to provide relief to the poor or further any other charitable purpose within the meaning of sec_501 and the regulations under y’s grant making procedures y’s staff considering a particular applicant’s application knows the identity of the party selling the home to the grant applicant and may also know the identities of other parties such as real_estate agents and developers who may receive a financial benefit from the sale moreover in substantially_all of the cases in which y provides down payment assistance to a home buyer y receives a payment from the home seller further there is a direct correlation between the amount of the down payment assistance provided by y in connection with each of these transactions and the amount of the home seller’s payment to y finally y does not conduct a broad based fundraising campaign to attract financial support rather most of y’s support comes from home sellers and real estate-related businesses that may benefit from the sale of homes to buyers who receive y’s down payment assistance benefiting private interests form 886-a crev department of the treasury - internal_revenue_service page -20- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service org org schedule no or exhibit year period ended 20x x09 20x x09 sec_501 of the code requires that an organization be operated exclusively for sec_1 c -1 charitable purposes in order to be exempt from federal_income_tax states that an organization is not operated exclusively for charitable purposes unless it serves a public rather than a private interest and its net earning do not inure to the benefit of any shareholder or individual if an organization serves both a public interest and a private interest however an organization will be exempt only if the benefit conferred to the private interest is incidental and not substantial to the exempt_purpose served see gcm date revrul_69_545 1962_2_cb_117 and revrul_78_86 1978_1_cb_151 however operated exclusively has two meanings both of which are contained in sec_1_501_c_3_-1 it provides that an organization will be regarded as operated exclusively only if it engages primarily in activities that accomplish one or more exempt purposes such as those specified in sec_501 and that it will not be so regarded if more than an insubstantial part of its activities does not further an exempt_purpose even if an organization's activities serve a charitable_class or are otherwise charitable within the meaning of sec_501 it must demonstrate that its activities serve a public rather than a private interest within the meaning of reg sec_1_501_c_3_-1 furthermore sec_1_501_c_3_-1 holds that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest therefore the activities of an organization exempt under sec_501 must benefit the general_public in a way that distinguishes it from a for-profit corporation the latter of which serves shareholders private interests serving the public is a basic tenet of the law of charity whose purpose is to ensure that those who constitute the public benefit equally revrul_72_147 1972_1_cb_147 held that an organization that provided housing to low income families did not qualify for exemption under sec_501 because it gave preference to employees of business operated by the individual who also controlled the organization the ruling reasoned that although providing housing for low-income families furthers charitable purposes doing so in a manner that gives preference to employees of the founder’s business primarily serves the private interest of the founder rather than a public interest in kj's fund raisers v commissioner t c memo aff'd u s app lexis 2d cir the tax_court held and the second circuit affirmed that an organization formed to raise funds for distribution to charitable causes did not qualify for exemption under sec_501 because its activities resulted in a substantial private benefit to its founders the founders of the organization were the sole owners of kj's place a lounge at which alcoholic beverages were served the founders served as officers of the organization and at times also controlled the organization’s board the tax_court found and the second circuit agreed that the founders exercised substantial influence over the affairs of the organization the form 886-a rev department of the treasury - internal_revenue_service page -21- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service org org schedule no or exhibit year period ended 20x x09 20x x09 organization’s business consisted of selling lucky or similar instant win lottery tickets to patrons of kj's place the organization derived most of its funds from its lottery ticket sales the organization solicited no public donations the lottery tickets were sold during regular business hours by the owners of the lounge and their employees from the proceeds of the sales of the lottery tickets the organization made grants to a variety of charitable organizations although supporting charitable organizations may be a charitable activity the tax_court nevertheless upheld the commissioner’s denial of exemption to the organization on the ground that the organization’s operation resulted in more than incidental private benefit the tax_court held and the second circuit affirmed that a substantial purpose of kj's activities was to benefit kj’s place and its owners by attracting new patrons by way of lottery ticket sales to kj's place and by discouraging existing customers from abandoning kj's place in favor of other lounges where such tickets were available thus the organization was not operated exclusively for exempt purposes within the meaning of sec_501 promoting improper charitable_contribution deductions sec_170 allows as a deduction subject_to certain limitations and restrictions any charitable_contribution as defined in sec_170 payment of which is made within the taxable_year sec_170 defines a charitable_contribution as a contribution or gift to or for_the_use_of an entity described in one of the paragraphs of sec_170 sec_170 describes certain entities organized and operated exclusively for religious charitable scientific literary or educational_purposes generally to be deductible as a charitable_contribution under sec_170 a transfer to a charitable_organization must be a contribution or gift a charitable_contribution is a transfer of money or property without receipt of adequate_consideration made with charitable intent 477_us_105 a payment generally cannot be a charitable_contribution if the payor expects a substantial benefit in return american bar endowment pincite see also 449_f2d_413 ct_cl substantial benefits are those that are greater than those that inure to the general_public from transfers for charitable purposes which benefits are merely incidental to the transfer singer pincite organizations that promote tax_avoidance schemes do not qualify for exemption under sec_501 as organizations described in sec_501 see church of world peace inc v commissioner t c memo aff d u s app lexis dio cir in church of world peace the church used its tax-exempt status to create a circular tax-avoidance scheme individuals made tax-deductible charitable donations to the church the church then returned the money to the individuals in the form of tax-free housing allowances and also reimbursed the individuals for church expenses that were in fact unrelated to church operations the church emphasized tax_advice in connection with this tax-avoidance scheme the tax_court form 886-a rev department of the treasury - internal_revenue_service page -22- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service org org schedule no or exhibit year period ended 20xx09 20xx09 held and the tenth circuit affirmed that the church did not comply with the requirements of sec_501 because by promoting a circular flow of funds from donors to the church and back to the donors and facilitating improper charitable_contribution deductions the church did not operate exclusively for exempt purposes enumerated in sec_501 effective date of revocation an organization may ordinarily rely on a favorable determination_letter received from the internal_revenue_service sec_1_501_a_-1 revproc_2003_4 dollar_figure cross-referencing dollar_figure et seq 2003_1_cb_123 an organization may not rely on a favorable determination_letter however if the organization omitted or misstated a material fact in its application or in supporting documents in addition an organization may not rely on a favorable determination if there is a material_change inconsistent with exemption in the organization’s character purposes or methods of operation after the determination_letter is issued sec_601_201gi revproc_90_27 1990_1_cb_514 the commissioner may revoke a favorable determination_letter for good cause sec_1_501_a_-1 revocation of a determination_letter may be retroactive if the organization omitted or misstated a material fact or operated in a manner materially different from that originally represented sec_601_201 revproc_2003_4 dollar_figure cross-referencing dollar_figure et seq analysis org does not qualify as an organization described in sec_501 because it operates a program that does not exclusively serve an exempt_purpose described in sec_501 provides substantial private benefit to persons who do not belong to a charitable_class and org has violated the requirements of sec_501 by promoting improper charitable_contribution deductions charitable purposes include relief of the poor and distressed see sec_1_501_c_3_-1 of the regulations org’s down payment assistance program does not operate in a manner that establishes that its primary purpose is to address the needs of low-income people by enabling low- income individuals and families to obtain decent safe housing see revrul_70_585 situation the down payment assistance program did not serve exclusively low-income persons despite the representations in its application_for exemption org does not have any income limitations for participation in its dpa program org did not screen applicants for down payment assistance based on income org’s electronic records do not even include data on the buyers’ incomes instead the program is open to anyone without any income limitations who otherwise qualified for these loans our analysis showed that in fact for the years at issue org’s dpa program provided down payment assistance on hundreds of expensive homes the program is not even limited to first-time homebuyers form 886-a crev department of the treasury - internal_revenue_service page -23- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service org org schedule no or exhibit year period ended 20xx09 20xx09 org’s dpa program does not limit assistance to certain geographic areas or target those areas experiencing deterioration or neighborhood tensions see revrul_70_585 situation down payment assistance is available for any property that is otherwise able to qualify for a mortgage arranging or facilitating the purchase of homes in a broadly defined geographic area does not combat community deterioration or serve other social welfare objectives within the meaning of sec_501 of the code only an insubstantial portion of the activity of an exempt_organization may further a nonexempt purpose as the supreme court held in 326_us_279 the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes even if org’s dpa program were directed to exclusively low-income individuals or disadvantaged communities org’s total reliance for financing its dpa activities on home sellers or other real-estate related businesses standing to benefit from the transactions demonstrates that the program is operated for the substantial purpose of benefiting private parties the manner in which org operated its dpa program shows that the private benefit to the various participants in org’s activities was the intended outcome of org’s operations rather than a mere incident of such operations org’s down payment assistance procedures are designed to channel funds in a circular manner from the sellers to the buyers and back to the sellers in the form of increased home prices to finance its down payment assistance activities org relies exclusively on sellers and other real-estate related businesses that stand to benefit from the transactions it facilitates org neither solicits nor receives funds from other sources like the organization considered in 92_tc_1053 org is structured and operated to assist the private parties who fund it and give it business sellers who participate in org’s dpa program benefit from achieving access to a wider pool of buyers thereby decreasing their risk and the length of time the home is on the market they also benefit by being able to sell their home at the home’s full listed price or by being able to reduce the amount of the negotiated discount on their homes about of all org-assisted transactions in 20xx and 20xx involved one particular seller a national home builder buyers who participate in org’s dpa program benefit by being able to purchase a home without having to commit more of their own funds org real_estate professionals who participate in org’s dpa program from real_estate brokers to escrow companies benefit from increased sales volume and the attendant increase in their compensation it is evident from the foregoing that org’s dpa program provides ample private benefit to the various parties in each home sale before providing down payment assistance org’s grant making staff takes into account whether there is a home seller willing to make a payment to cover the down payment assistance the applicant has requested for a short_period of time org specifically created a second exempt_organization co-1 co-1 to give the appearance of receiving funding from the public however org neither solicits nor receives funds from other sources org requires the home form 886-a rev department of the treasury - internal_revenue_service page -24- form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org org schedule no or exhibit yeat period ended 20xx09 20xx09 seller to reimburse it dollar-for-dollar for the amount of funds expended to provide down payment assistance on the seller’s home plus an administrative fee of several hundred dollars per home sale org secures an agreement from the seller stipulating to this arrangement prior to the closing no dpa assistance transactions take place unless org is assured that the amount of the down payment plus the fee is or will be paid_by the seller upon closing org’s instructions to title and escrow companies provide that at the close of escrow the seller’s contribution along with any org fees must be sent to org within hours escrow companies that do not appropriately disburse funds in a timely manner are prohibited from utilizing the org dpa program org’s receipt of a payment from the home seller corresponding to the amount of the down payment assistance in virtually every transaction indicates that the benefit to the home seller and others involved in the transaction is not a mere accident but rather an intended outcome of org’s operations in this respect org is like the organization considered in easter house which provided health care to indigent pregnant women but only when a family willing to adopt a woman’s child sponsored the care financially org’s promotional material and its marketing activities show that org operated in a manner consistent with a commercial firm seeking to maximize sales of services rather than in a manner that would be consistent with a charitable or educational_organization seeking to serve one or more of the charitable purposes enumerated in sec_501 the manner in which org operated its dpa program shows that org was in the business of facilitating the sales of homes in a manner indistinguishable from an ordinary trade_or_business in this respect org’s operations were similar to an organization which was denied exemption because it operated a conference center for commercial purposes see 283_fsupp2d_58 d d c operating a trade_or_business of facilitating home sales is not an inherently charitable activity unlike the trade_or_business in 71_tc_202 org’s trade_or_business was not utilized as a mere instrument of furthering charitable purposes but was an end in itself org provided services to home sellers for which it charged a market rate fee org did not market its services primarily to persons within a charitable_class org’s primary goal consisted of maximizing the fees it derived from facilitating the sales of real_property org did not solicit or receive any funds from parties that did not have interest in the down payment transactions like the organizations considered in american campaign academy supra and easter house v u s cl_ct aff'd 846_f2d_78 fed cir a substantial part of org’s activities furthered commercial rather than exempt purposes based on the foregoing org has not operated exclusively for exempt purposes and accordingly is not entitled to exemption under sec_501 org is also not entitled to exemption under sec_501 because it promoted improper charitable_contribution deductions a payment of money generally cannot be deducted as a charitable_contribution if the payor expects to receive a substantial benefit in return a seller’s payment to org is not tax deductible as a charitable_contribution under sec_170 because the seller receives form 886-a rev department of the treasury - internal_revenue_service page -25- form sec_86a department of the treasury - internal_revenue_service explanation of items name of taxpayer org org schedule no or exhibit year period ended 20x x09 20x x09 valuable consideration in return for the payment in addition the seller’s payment to org is not tax deductible to the seller because the payment is compulsory furthermore the payments from the home sellers to org also do not qualify as gifts under sec_102 the payments from the home sellers do not proceed from detached and disinterested generosity but rather in response to an anticipated economic benefit namely facilitating the sale of the seller’s home under 363_us_278 such payments are not gifts for purposes of sec_102 an organization that promotes an abusive tax_avoidance scheme is not entitled to exemption as an organization described in sec_501 see church of world peace inc v commissioner t c memo in its promotional materials and public appearances org advertised that sellers who participate in its dpa program would be able to claim a charitable_contribution_deduction for their payments to org org used the prospect of a charitable_contribution_deduction as an inducement for sellers to participate in its dpa program in claiming that the seller-participants in its dpa program would be entitled to a charitable_contribution_deduction org falsely and fraudulently misrepresented the quid pro quo nature of these payments because org has promoted improper charitable_contribution deductions in connection with its dpa program org does not operate exclusively for exempt purposes enumerated in sec_501 and does not qualify for exemption as an organization described in sec_501 and that its down payment assistance will the government proposes revoking org’s exemption back to the organization’s inception because the organization operated in a manner materially different from that represented in its application_for exemption in its application_for exemption signed under penalties of perjury on june 19xx org represented that its purpose was to provide down payment assistance program for low income individuals and families be provided only to individuals who have a financial need for such services and who complete the educational requirements designed to increase the likelihood of permanent home ownership despite these representations in its application_for exemption org does not have any income limitations for its dpa program and did not screen applicants for down payment assistance based onincome the electronic records provided by org did not include data on the buyers’ incomes and gave no indication that org screened on such data rather org’s dpa program provided gifts to any homebuyers who qualified for a loan furthermore although org has an educational module on its website org did not obtain verification from buyers that they had reviewed or completed the module revocation of a determination_letter may be retroactive if the organization operated in a manner materially different from that originally represented sec_601_201 revproc_2003_4 org’s operation of its dpa activities in a manner materially different from that represented in its application_for exemption justifies retroactive revocation of org’s determination_letter conclusion in order to qualify for exemption under sec_501 an organization must be both organized and operated to achieve a purpose that is described under that code section org’s dpa form 886-a crev department of the treasury - internal_revenue_service page -26- form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org org schedule no or exhibit year period ended 20xx09 20xx09 program is not operated in accordance with internal_revenue_code sec_501 and the regulations hereunder governing qualification for tax exemption under code org provides down payment assistance purportedly in the form of a gift to individuals and families for the purchase of ahome org offers its down payment assistance to interested buyers regardless of the buyers’ income levels or need org’s dpa activities do not target neighborhoods in need of rehabilitations or other relief such as lessening neighborhood tensions or eliminating prejudice and discrimination org operates in a manner indistinguishable from a commercial enterprise org’s primary activity is brokering transactions to facilitate the selling of homes org’s primary goal is to maximize the fees from these transactions org’s brokering services are marketed to homebuyers sellers realtors lenders homebuilders and title companies regardless of the buyers’ income level or need and regardless of the condition of the community in which the home is located alliances are built with the realtors lenders homebuilders and title companies to assure future business for the mutual benefit of the participants although org has an educational module on its website org did not obtain verification from buyers that they had reviewed or completed the module org does not engage in any counseling or other activities that further charitable purposes because org’s primary activity is not conducted in a manner designed to further sec_501 purposes provides private benefit to all commercial enterprises home buyers and sellers org is not operated exclusively for exempt purposes within the meaning of sec_501 furthermore org has promoted an abusive tax_avoidance scheme in connection with its dpa program by advising sellers that they may take a charitable_contribution_deduction for their payments to org even though such payments were quid-pro-quo payments for services rather than payments motivated by detached and disinterested generosity org’s promoter activities are inconsistent with sec_501 exemption for the foregoing reasons revocation of exempt status is proposed because the facts show that in 20xx through 20xx org operated in a manner materially different from that represented in its form_1023 application the government proposes that the revocation be effective retroactively to the date of the organization’s inception taxpayer’s position org’s position with respect to the issues facts applicable law and government’s position as discussed in this report is unknown org failed to respond to the governments statements of fact form 886-a rev department of the treasury - internal_revenue_service page -27- tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 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 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 the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication 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 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 catalog number 34809f if we do not hear from you within 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 days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 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 sec_6104 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 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 the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation enclosures publication publication report of examination sincerely marsha ramirez director eo examinations letter catalog number 34809f


t c memo united_states tax_court darl n and bonnie s miller petitioners v commissioner of internal revenue respondent docket no filed date david p leeper for petitioners gerald l brantley for respondent memorandum opinion dinan special_trial_judge this case is before the court on petitioners’ motion for award of reasonable_litigation_costs pursuant to sec_7430 and rules and ' filed date petitioners did not request a hearing in his notice of objection to petitioners’ motion for costs filed by unless otherwise indicated all section references are to the internal_revenue_code in effect for the year all rule references are to the tax_court rules_of_practice and procedure - - respondent on date respondent requested a hearing in this matter we conclude that a hearing is not necessary we decide petitioners' motion based on the record the record consists of petitioners’ motion for costs with attached affidavits respondent's notice of objection to petitioners' motion for costs and the uncontroverted statements by the parties as contained in the aforementioned documents on their joint federal_income_tax return petitioners claimed inter alia itemized_deductions of dollar_figure an advertising deduction on schedule c2 of dollar_figure and other schedule c expenses in the amount of dollar_figure the dollar_figure claimed expenses consist of credit reports dollar_figure business development big_number loan costs big_number contract labor big_number costs of funds big_number big_number upon audit of petitioners' return respondent determined the following adjustments as stated in the statutory_notice_of_deficiency because petitioners' adjusted_gross_income for exceeded dollar_figure respondent reduced petitioners' itemized_deductions in the amount of dollar_figure the amount claimed by petitioners as advertising expense on schedule c2 of their return in the amount of dollar_figure was reduced in the amount of dollar_figure because it was determined that the dollar_figure was either a personal_expense and or was not an ordinary and necessary business_expense - - the amount claimed by petitioners as a credits report deduction on schedule c2 of their return in the amount of dollar_figure was reduced to the amount of dollar_figure because the amounts disallowed were determined to be nondeductible and or personal in nature the amount claimed by petitioners for business development on schedule c2 of their return in the amount of dollar_figure was disallowed because that amount was determined to be a personal_expenditure the amount claimed by petitioners as cost of loans on schedule c2 of their return in the amount of dollar_figure was reduced to dollar_figure the amount disallowed dollar_figure was determined to be nondeductible and or personal in nature the amount claimed by petitioners for contract labor on schedule c2 of their return in the amount of dollar_figure was reduced to dollar_figure because the amount disallowed dollar_figure was determined to be personal in nature the amount claimed by petitioners for costs of funds on schedule c2 of their return in the amount of dollar_figure was disallowed because the amount claimed was determined to be loan payments and or other nondeductible items in a report dated date respondent's examining agent noted that petitioners' accountant had prepared a general ledger for from information provided by petitioners upon examining the various accounts contained in the ledger the examining agent opined that a number of - - items in the ledger appeared to be nondeductible and or personal in nature petitioner was reluctant to provide any information beyond what was contained in the ledger on the ground that since the items appeared in a ledger they were necessarily correct and further verification should be unnecessary petitioners would not sign a form_872 to extend the statute_of_limitations and the case was forwarded for the issuance of a statutory_notice_of_deficiency the notice_of_deficiency was mailed to petitioners on date the petition consisting of seventy-seven paragraphs most of which alleged evidentiary facts was filed on date respondent's answer was filed on date by letter dated date to petitioners' attorney david p leeper respondent's appeals officer informed mr leeper as follows dear mr leeper i have reviewed the examiner's workpapers that were prepared in connection with the examination of the millers' tax returns for based on these workpapers many of the expenses disallowed were for lack of substantiation by the taxpayer the following information is need sic to help resolve these issues at our scheduled appeals_conference a list of the recipients of the various statuettes deducted as advertising expense this list should include the location and approximate dates the items were placed copies of invoices for credit reports from sarma and any other reporting services that total dollar_figure for invoices to substantiate business development expense of dollar_figure less the dollar_figure loan payment that the taxpayer included in this account the examiner has allowed based on an estimate because the taxpayer did not provide substantiation during the examination since this is not acceptable to the taxpayer the full amount needs to be verified invoices for dollar_figure from american express and dollar_figure from centurion deducted as a cost of loans invoices from the platinum card for dollar_figure and dollar_figure that was deducted as labor costs invoices or other substantiation for the dollar_figure deducted as cost of funds thanks for your cooperation by letter dated date mr leeper responded to the appeals officer's letter of date and provided to respondent the requested documentation including those invoices showing payments to sarma on date within weeks from having received the substantiation from mr leeper that was requested by respondent the appeals officer forwarded to mr leeper a proposed stipulation and decision document on date the parties filed a stipulation of settlement in this case - - discussion a taxpayer who substantially prevails in an administrative or court_proceeding may be awarded reasonable costs incurred in those proceedings sec_7430 in order to determine that the taxpayer was a prevailing_party it must be shown that the position_of_the_united_states in the proceeding was not substantially justified the taxpayer substantially prevailed with respect to either the amount in controversy or the most significant issue or issues presented and the taxpayer met the net_worth requirements of u s c sec d b on the date the petition was filed sec_7430 a the taxpayer must also show that all administrative remedies have been exhausted to obtain a judgment for litigation costs sec_7430 that the taxpayer has not unreasonably protracted the administrative or judicial proceedings sec_7430 b redesignated as b by the act and that the costs claimed are reasonable in amount sec_7430 c and these requirements are in the conjunctive and each must be met in order for the court to determine that administrative or litigation costs should be awarded pursuant because the petition was filed after date the burden is on respondent to show that the government's position was substantially justified taxpayer bill of right sec_2 publaw_104_168 secs 110_stat_1452 see 108_tc_430 our holding however does not depend on which party has the burden - to sec_7430 88_tc_492 renner v commissioner tcmemo_1994_372 petitioners contend that they have substantially prevailed with respect to the amounts in controversy and on the most significant issue in these cases they further contend that they have met the net_worth requirements of u s c sec d b that they have exhausted the administrative proceedings available to them within the internal_revenue_service and that they have not unreasonably protracted the administrative or court proceedings they also argue that the costs claimed are reasonable respondent denies that petitioners have substantially prevailed with respect to the amounts in controversy and on the most significant issue in this case respondent admits that petitioner darl n miller meets the net_worth requirements but denies that petitioner bonnie s miller has shown that she meets the net_worth requirements respondent alleges that because petitioners failed to provide relevant information to the examining agent so that a 30-day_letter could be issued petitioners failed to exhaust their administrative remedies respondent further alleges that by failing to submit relevant information requested by the examining agent at the administrative level before the issuance of the statutory_notice_of_deficiency petitioners unreasonably protracted the proceedings in this case - - finally respondent does not agree that the claimed costs are reasonable we first consider whether respondent's position in this case was substantially justified for the reasons stated infra we find that it was whether respondent's position was substantially justified depends on whether respondent's position and actions were reasonable in light of the facts of the case and applicable precedents 102_tc_715 100_tc_457 affd in part and revd and remanded in part 43_f3d_172 5th cir the fact that respondent concedes a part of the case is not necessarily indicative that a position is not substantially justified 102_tc_660 affd without published opinion sub nom tsa the stanford associates inc v commissioner 77_f3d_490 9th cir a position is substantially justified when it is justified to a degree that could satisfy a reasonable person 487_us_552 the principal issue in this case is one of substantiation at the administrative level petitioners were reluctant to provide to respondent's examining agent substantiation of their claimed expenses other than the ledger prepared by their accountant based upon unsubstantiated information they had provided to him --- - the petition was filed in this case on date the answer was filed on date by letter dated date respondent's appeals officer requested of petitioners' counsel mr leeper various documents to substantiate various claimed deductions that had not previously been provided to respondent mr leeper provided the requested substantiating documentation to respondent's appeals officer on date on date within weeks from having received from mr leeper the requested substantiating documentation respondent forwarded to mr leeper a proposed settlement of the case on the basis of the facts contained in the record we find and hold that at all relevant times respondent's position in the administrative and litigation proceedings in this case was substantially justified because the provisions of sec_7430 are conjunctive minahan v commissioner t c pincite and because we hold that respondent's position in this case was at all relevant times substantially justified we will deny petitioners’ motion we therefore need not address respondent's other objections to the motion an appropriate order and decision will be entered