internal_revenue_service appeals_office south pine island road suite plantation fl release number rel date we eno date date vil cade a taxpaver name b taxpayer address certified mail dear department of the treasury person to contact employee id number ne refer reply to in re employer_identification_number form required to be filed tax period s ended december 20xx last day to file a petition with the united_states tax_court uun this is a final adverse determination as to your exempt status under sec_501 of the internal_revenue_code irc it is determined that you do not qualify as exempt from federal_income_tax under sec_501 effective january 20xxx primarily to further your insiders’ business interests therefore you are operated for a substantial nonexempt purpose in addition your operations further the private interests of the persons that finance your activities accordingly you are not operated exclusively for exempt purposes described in sec_501 contributions to your organization are not deductible under code sec_170 of any taxes due will not be delayed because you have filed a petition for declaratory_judgment under code sec_7428 the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c we will notify the appropriate state officials of this action as required by code sec_6104 you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely charles fisher team manager internal_revenue_service appeals_office south pine island road suite plantation fl date mar q a taxpayer name department of the treasury person to contact george poskitt employee id number tel fax refer reply to ap area team gp in re eo revocation employer_identification_number b taxpayer address c ein form required to be filed tax period s ended december 20xx last day to file a petition with the united_states tax_court yun certified mail dear this is a final adverse determination as to your exempt status under sec_501 of the internal_revenue_code irc from federal_income_tax under sec_501 effective january 20xx it is determined that you do not qualify as exempt our adverse determination was made for the following reason s a substantial part of your activities consists of providing down payment assistance to home buyers to finance the assistance you rely on home sellers and other real-estate related businesses that stand to benefit from these down payment assistance transactions your receipt of a payment from the home seller corresponds to the amount of the down payment assistance provided in substantially_all of your down payment assistance transactions the manner in which you operate demonstrates you are operated primarily to further your insiders’ business interests therefore you are operated for a substantial nonexempt purpose in addition your operations further the private interests of the persons that finance your activities accordingly you are not operated exclusively for exempt purposes described in sec_501 contributions to your organization are not deductible under code sec_170 you are required to file federal_income_tax returns on the form indicated above you should file these returns within days from the date of this letter unless a request for an extension of time is granted file the returns in accordance with their instructions and do not send them to this office processing of income_tax returns and assessment con ment entit government entities division org address department of the treasury internal_revenue_service te_ge e o examinations commerce street dallas tx taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear sir we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary lf 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 if we issue a determination_letter to you based on technical_advice no publication 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 o f lf 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 lf 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 sincerely marsha a ramirez director e o examinations enclosures letter catalog number 34809f department of the treasury - internal_revenue_service schedule no or exhibit cm 886a explanation of items name of taxpayer org ein year period ended december 20xx legend org organization name secretary donor-i sellers companies ind-1 thru ind-20 donor website website thru individual hs-1 thru hs-5 co-1 thru co-40 thru home thru xx date xyz state president president secretary hb-1 thru hb-131 thru home buyers issue sec_1 whether org org exempt status under internal_revenue_code sec_501 should be revoked because it has not established that it qualifies for tax exempt status and that it purposes is operated exclusively for tax exempt whether org has failed to establish that it is operated exclusively for one or more exempt purposes and whether it organization or persons controlled directly or indirectly by such private interests is operated for the benefit of private interests such as the creator or his family shareholders of the facts organizing documents e e o was requested but did not provide a copy of its form_1023 application_for recognition of exemption available for inspection by the general_public as required by sec_6104 e o provided a copy of its determination_letter dated february 20xx recognizing org as a tax exempt_private_foundation described in sec_501 c of the internal_revenue_code e o provided state of xyz articles of incorporation dated september 19xx the articles stated org was organized as a not-for-profit corporation under the non profit laws of the state of xyz articles of incorporation org articles of incorporation were filed with xyz’s secretary of state on september 19xx n general purpose org is a non profit x yz corporation organized as a private_operating_foundation solely for educational religious scientific and general charitable and eleemosynary purposes as provided under the provisions of sec_617 of the xyz statutes and all acts amendatory thereto within the meaning of sec_170 and sec_501 of the internal_revenue_code of 19xx as amended hereinafter referred to a the code or the corresponding provision of any future united_states internal revenue law form 886-a rev page -1- department of the treasury - internal_revenue_service en 886a name of taxpayer org ein department of the treasury - internal_revenue_service schedule no or exhibit explanation of items year period ended december 20xx specific purpose to support the local church through grants gifts and ministry participation to minister to missionaries and pastors in their retirement years to actively assist other ministries in development and execution of fundraising campaigns and the professional administration of their resources to minister to college students through scholarships to minister to migrant students through educational_assistance to minister to children through preschool programs to minister throughout the world through mission projects officers incorporators incorporators relationship per articles president secretary spouse of president officers relationship per form 990pf return of private_foundation president president secretary secretary spouse of president board minutes minutes of board meetings were in support of the organizations exempt purposes minutes also reflected the board’s awareness of changing org’s sources of support character purpose and methods of operation activities overview form on december 9xx org submitted form_1023 application_for recognition of exemption requesting exemption from federal_income_tax under sec_501 of the internal_revenue_code the application was signed by president president the form_1023 application was received by the service in december 19xx in part i activities and operational information org described its past present and planned activities as follows to support the local church through grants gifts and ministry participation to minister to missionaries and pastors in their retirement years to actively assist other ministries in development and execution of fundraising campaigns and the professional administration of their resources to minister to college students through scholarships to minister to migrant students through educational_assistance to minister to children through preschool programs to minister throughout the world through mission projects form 886-acrev department of the treasury - internal_revenue_service page -2- rae 886a department of the ‘treasury - internal_revenue_service schedule no or exhibit explanation of items name of taxpayer org ein year period ended december 20xx president was classified as a disqualified_person in question 4d because he was a part i question the foundation described org’s primary sources of support would be from contributions from its board_of directors substantial_contributor in the audited year president held positions within the foundation as president and director determination_letter on february 20xx based on the information org provided in recognized a tax exempt_organization as described in sec_501 of the internal_revenue_code its application_for exemption it was form 990pf on april 20xx org was notified by the internal_revenue_service of its receipt of their form_990 for tax_year ending december 20xx the letter stated org was classified as a private_foundation and as such should file a form 990pf each year in october 20xx tege secured copy of org’s 20xx form_990 pf the amounts originally reported on org inc 20xx form_990 corresponded to amounts reported on their 20xx form 990pf income statement revenue contribution gifts grants interest on savings temp investments dollar_figuredollar_figure dollar_figure total revenue expenses grants and allocations professional fees - accounting other professional fees - financial taxes travel conferences printing publications other expenses dollar_figuredollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figuredollar_figure total expenses excess or deficit dollar_figuredollar_figure dollar_figure ' an error in addition amounting to dollar_figuredollar_figure was noted on form 990pf page i line total disbursements and expenses balance_sheet book_value assets cash savings dollar_figure dollar_figure form 886-arrev page -3- department of the treasury - internal_revenue_service horm 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items name of taxpayer org ein year period ended december 20xx grants receivable investments fmv dollar_figure total assets liabilities equity unrestricted total net assets or fund balances total liabilities and net assets fund balances dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure checks written to other organization’s in 20xx org disbursed approximately dollar_figuredollar_figure in checks to other organizations co-1 an organization established by president received dollar_figuredollar_figure in 20xx during the determination process however the organization did not respond to additional information requests by the internal_revenue_service and as a result it was not granted exempt status checks were also written to co-2 for dollar_figuredollar_figure the co-3 received dollar_figuredollar_figure co-4 received a check in the amount of dollar_figuredollar_figure co- received dollar_figuredollar_figure co-6 received dollar_figuredollar_figure co-7 received a check for dollar_figuredollar_figure co-8 dollar_figuredollar_figure co-9 received dollar_figuredollar_figure co-10 received dollar_figuredollar_figure co-i1 received a check for dollar_figuredollar_figure co-12 was given a check for dollar_figuredollar_figure co-13 received dollar_figuredollar_figure website org ts also known as organization the organization’s websites website and website support for-profit and commercial interests information contained on copies of web pages provided by president follows in order to receive gift-funds homebuyers must be able to qualify for a mortgage loan that allows alternate sources of down payment purchase a property where the seller agrees to enroll their home with organization because the requirement enables the subject property to be purchased by homebuyers utilizing gift funds from participating charitable organizations the lenders page advertises that gift funds are available to any homebuyer where the home purchase consists of the following e the mortgage loan used to purchase the home allows the homebuyer gift funds as a_ minimum cash investment sellers voluntarily contribute a portion of the proceeds of the sale to our program to replenish gift funds for future gifts the gift fund letter includes a statement that the gift funds were not made available to the donor s from any person or entity with an interest in the sale of the property including the seller real_estate agent or broker builder loan officer or any entity associated with them form 886-a rrev page -4- department of the treasury - internal_revenue_service department of the ‘treasury internal_revenue_service schedule no ot exhibit orn 886a ‘ explanation of items name of taxpayer org ein year period ended december 20xx the real_estate professionals page advertises realtors can sell homes faster and at the full price when the seller assists the buyer with the down payment and closing costs your sellers benefit because their home sells faster and for the full asking price realtors sell more homes and they earn larger commissions additionally you can advertise your homes as having a free down payment grant the home-sellers page advertises as sellers you can determine the amount of down payment assistance you want a homebuyer to be able to use to purchase your property most sellers choose to allow -5 of the purchase_price you will be asked to add a small administrative fee to your donation the home-seller donation pledged shows an administrative fee of dollar_figuredollar_figure e e e e e e e the brochure organization - feeling left out the brochure states donations to the e o are tax deductible everybody qualifies combined support from sellers realtors lenders or builders make their program possible organization’s team helps you qualify to buy a home gift funds come from a pre-existing pool of funds in the form of tax deductible contributions from corporations individuals government and other charities the brochure defines the qualification process where the homebuyer e e e selects a participating home submits financial information to a participating mortgage_lender upon approval of the mortgage loan the mortgage_lender will submit their organization gift application to the e o the brochure further states if the homebuyer qualifies for the loan they will qualify for org’s gift funds down payment assistance program overview org began its down payment assistance program in september 20xx the organization provides down payment assistance to individuals who would like to become homeowners president president stated that homeowners are referred to mobile home dealers for home purchases the mobile home dealers provide all the funds used tn the organization's down payment assistance program and the donations are reported on their form 990pf the program does not have any i time homebuyer restrictions income restrictions or housing restrictions according to president if a homebuyer qualifies for a loan and if the lender permits the use of down payment assistance funds for down payment or for closing costs the property and homebuyer qualify for their dpa program president also stated that funds are provided by donors and not by participating home-sellers donations are voluntary and their program does not use funds from home-sellers specifically to purchase their form 886-aciev page -5- department of the treasury - internal_revenue_service korm 886a department of the ‘treasury - internal_revenue_service schedule no or exhibit explanation of items year period ended name of taxpayer org ein december 20xx home home-sellers voluntarily participate in his program there are no contractual relationships between home- sellers and org and that the organization’s down payment assistance program is not seller funded audit scope defined our audit included reviewing org’s detailed general ledger the use of a website database known as accurint to help us in our research to identify organization donors participating as home-sellers when organization books_and_records were inadequate or unclear we also used official title company closing statements hud -1 to further identify organization donors participating as home-sellers and to determine org’s non-compliance with revenue_ruling 20xx-27 org provided their detailed general ledger and title company documents to the tege division at our request during the course of our audit the website used for our research is also available to the general_public internal controls review of books records hud-i closing statements the hud-1 closing statements show that org’s books_and_records omitted significant amounts of information about their dpa program’s activities including e e e e e the method and timing of donations received donations base on home sales substantial related_party transactions between donors and home-sellers circular flow of funds seller funding org’s dpa program's reliance on seller funding and its creation of a circular flow of funds has adversely impacted its basis for continued exemption under sec_501 of the internal_revenue_code insufficient internal controls contributed to the organization’s inability to document and identify dpa program transactions more clearly in their books_and_records see sec_1 book and records detailed general ledger on march 12' 20xx the tege division received a copy of org’s detailed general ledger providing information about its down payment assistance program the document consisting of pages provided the following information e e e e e e e e transaction dates organization donors amounts of donation home-sellers including mobile home dealers methods of payment eft transfer check etc grant recipients amounts of dpa grants grant recipient's social_security numbers property addresses city state form 886-acrev department of the treasury - internal_revenue_service page -6- department of the ‘treasury internal_revenue_service harm 886a schedule no or exhibit explanation of items name of taxpayer org ein year period ended december 20xx overview down payment assistance transactions the following transactions identify organization donors participating as home-sellers within org’s dpa program our examination shows the e o’s dpa program being seller funded supporting a circular flow of funds based on home sales and one where private interests and not public interests are served our review of hud -1 closing statements shows donations were based on successful home sales each document identifies an organization donor also participating as a home-seller gift funds are paid from a pre-existing pool of funds for homebuyer closing costs the document also identifies donations returned from the home-seller’s closing proceeds replenishing org’s existing pool of funds and thus supporting a circular flow of funds additionally the hud -1 closing statements also show that amounts returned to org from each home closing exceed homebuyer gift funds by an average of dollar_figure the hud -1 statements identify org’s 20xx dpa program as non-compliant with revenue_ruling 20xx-27 for the reasons cited above donor facts organization documents show co-14 donated dollar_figure to org in the audited year according to president the monies were voluntary donations from unrelated parties org’s books_and_records show ind-1 apparently an individual home-seller and an unrelated party selling three homes to three different dpa grant recipients the transactions appear to be independent and unrelated to further analysis using independent web-based research however identifies ind-1 as a manager employed by co-14 asa result the same transactions are actually related_party transactions because co-14 is an organization donor as well as a home-seller donor grouping factual presentation of down payment assistance program transactions as the table below shows org’s down payment assistance program is seller funded and based on successful homes sales the program supports a circular flow of funds and is non-compliant with revenue_ruling 20xx- co-14 work paper org- trans date _ donor home-seller donation amt related_party homebuyer dpa grant 20xx manager related_party ind-1 hb- dollar_figuredollar_figure 20xx co-14 dollar_figuredollar_figure ind- co-14 co-14 20xx 20xx 20xx manager related_party manager related_party see hud dollar_figuredollar_figure dollar_figuredollar_figure ind-1 20xx hb-2 hb-3 dollar_figuredollar_figure dollar_figuredollar_figure form 886-a rev department of the treasury - internal_revenue_service page -7- deparumcnt of the ‘treasury - internal_revenue_service schedule no or exhibit parry 886a explanation of items name of taxpayer org ein year period ended december 20xx 20xx 20xx 20xx 20xx co-14 co-14 co-14 co-14 dollar_figuredollar_figure see hud hb-4 dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure totals dollar_figuredollar_figure dollar_figuredollar_figure ind-2 trans date 20xx homebuyer hb-5 dpa grant dollar_figuredollar_figure donor home-seller donation amt related_party ind-2 ind-2 20xx totals dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure co-15 trans date donor home-seller related_party homebuyer donation amt dpa grant 20xx 20xx 20xx 20xx co-15 co-15 co-15 co-15 totals hb-6 hb-7 dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure trans dae donor home-seller related_party homebuyer donation amt dpa grant work-paper jm-2 manager related_party 20xx ind-3 hb-131 dollar_figuredollar_figure 20xx co-16 dollar_figuredollar_figure 20xx co-16 hb-9 dollar_figuredollar_figure co-16 co-16 20xx 20xx 20xx mhb-10 totals co-16 dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure ind-4 trans date donor home-seller related_party homebuyer donation amt dpa grant ind-4 20xx 20xx totals ind-4 hb-11 dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure form 886-a rrev page -8- department of the treasury - internal_revenue_service orm 886a deparunent of the ‘treasury - internal_revenue_service schedule no or exhibit explanation of items name of taxpaver org ein year period ended december 20xx ind-5 donor home-seller ind-5 lrans date 20xx homebuyer hb-12 dpa grant dollar_figuredollar_figure donation amt related_party 20xx totals ind-5 dollar_figuredollar_figure dollar_figure dollar_figure co-17 date work paper org-4 homebuyer donor home-seller related_party donation amt dpa grant dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure ind-7 co-18 ind-6 totals hb-13 co-18 co-17 hb-14 co-19 ind-8 manager president 20xx 20xx total sec_1 20xx 20xn homebuyer 20xn 20xx dpa grant related_party related_party donation amt work paper org-5 donor home-seller donor home-seller work paper org-6 trans date trans date _co-20 20xx -3 20xx 20xx 20xx 20xx dollar_figuredollar_figure unrecorded donor home-seller co-20 co-20 donation amt donation amt related_party related_party homebuyer unrecorded homebuyer dpa grant dpa grant 20xx trans date 20xx 20xx 20xx hb-18 co-20s hb-19 co-20 hb-17 hb-19 hb-15 hb-16 co-20 co-20 co-20 co-20 co-20 co-19 co-20 totals hb-20 dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure form 886-arev page -9- department of the treasury - internal_revenue_service schedule no or exhibit department of the treasury - internal_revenue_service form 886a explanation of items name of taxpayer org ein year period ended december 20xx 7t t 20x s 20xx 20xx 20xx 20x 20xx ind-9 trans date donor home-seller related_party homebuyer donation amt dpa grant 20xx 20xx ind-9 ind-9 totals hb-24 dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure donation amt dpa grant related_party donor home-seller work paper org-7 homebuyer dollar_figuredollar_figure hb-25 president s i1 20xx 20xn hb-26 dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure co-21 co-21 co-21 dollar_figuredollar_figure dollar_figuredollar_figure hb-29 co-22 totals director 20xx 20xx trans date 20xx 20xx co-21 co-21 hb-27 hb-28 donor home-seller 20xx 20xx form 886-acrev department of the treasury - internal_revenue_service donation amt related_party homebuyer dpa grant 20xx 20xx page -10- hb-30 co-22 co-22 co-22 totals hb-31 dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figure co-21 trans date 20xx 20xx co-21 co-21 co- co-2 dollar_figuredollar_figure dollar_figuredollar_figure oer 886a depariment of the treasury - internal_revenue_service schedule no or exhibit explanation of items name of taxpayer org ein yearc period ended december 20xx co-23 trans date donor home-seller related_party work paper org-8 homebuyer donation amt dpa grant president related_party hb-32 president president 29p0xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx ind-10 ind-11 co-24 co-23 ind-10 ind-10 co-23 co-24 co-23 totals scans dale donor home-seller related_party homebuyer donation amt dpa grant work paper org-9 chairman 20xx ind-12 hb-37 20xx co-25s related_party 20xx ind-13 hb-38 co-25s 20xx 20xx 20xx chairman co-25s ind-12 hb-39 totals co-26 trans date donor home-seller related_party work paper org-10 homebuyer donation amt dpa grant 20xx president ind-14 hb-40 20xx co-26 20xx president ind-14 hb-4 ind-14 s 20xn 20xx 20xx 20xx president president president ind-14 ind-14 hb-42 hb-44 hb-43 co-26 form 886-acrev page -11- department of the treasury - internal_revenue_service department ofthe lreasury internal_revenue_service schedule no or exhibit borm 886a explanation of items name of taxpayer org ein year period ended december 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx co-26 ind-14 ind-14 co-26 ind-14 ind-14 co-26 totals president president president president co-27 work paper org-11 dpa grant donation amt homebuyer hb-54 hb-5 hb-53 20xx hb-52 co-27 totals co-27 ind-15 co-27 ind-15 co-27 ind-15 co-27 ind-15 hb-49 hb-50 finance manager finance manager finance manager finance manager 20xx 20xx donor home-seller ind-15 ind-15 trans date 20xx 20xx 20xx 20xx related_party fiance manager finance manager 20xx 20xx 20xx 20xx co-28 form 886-acrev page -12- department of the treasury - internal_revenue_service donor home-seller donation amt related_party homebuyer dpa grant trans date 20xx 20xx 20xx 20xx 20xx 20xx 20xx co-28 co-28 co-28 co-28 co-28 hb-55 co-28 co-28 en r86a department of the ‘freasury - internal_revenue_service schedule no or exhibit explanation of items name of taxpayer org ein year period ended december 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx hb-73 20xx 20xx 20x 20xx 20xx 20xx hb-72 hb-71 hb-69 hb-70 co-29 trans date donor home-seller related_party homebuyer donation amt dpa grant at eoree 20xx 20xx 20xx oe c029 hb-74 hb-75 form 886-arev page -13- department of the treasury - internal_revenue_service department of the preasury internal_revenue_service schedule no or exhibit form 886a name of taxpayer l explanation of items org ein year period ended december 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20x x 20xx 20xx 20xx 20xx a mps c0-29 c0-29 c0-29 co-29 coze8 vie coe co-29 co-29 7e -79 coa co-29 co-29 hb-80 hb-81 hb-83 co-29 l1 20xx 20xx 20xn 20xx 20xx 20xx 20xx c0-29 totals c27 cor28 co-29 20xx 20xx 20xx 20xx 20xx coq-29 co-29 co-29 co-29 hb-87 co-30 20xx donor home-seller trans date 20xx 20xx cor58 co-30 donation amt related_party dpa grant homebuyer hb-91 hb-90 co-30 form 886-acrev page -14- department of the treasury - internal_revenue_service born 886a deparument of the preasucy - internal_revenue_service schedule no or exhubir name of taxpayer org ein explanation of items year period ended december 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx co-30 co-30 co-30 co-30 co-30 co-30 co-30 co-30 co-30 co-30 co-30 co-30 co-30 20xx 20xx 20xx 20xx 20xx totals _ls 20xx 20xx 20xx co-30 co-30 co-30 co-30 ind-16 aan donation amt grant amt ind-16 trans date cc 20xn homebuyer hb-101 20xx homeowner ind-16 totals ind-17 trans date 20xx ce eaca ind-17 homebuyer hb-102 donation amt homeowner grant amt 20xx co-31 trans date work paper 4org-12 donor home-seller donation amt related_party homebuyer dpa grant eee ind-17 total sec_2 20xx a president hb-103 ind-18 form 886-a rev department of the treasury - internal_revenue_service page -15- form 886a depariment of the treasury - internal_revenue_service schedule no or exhibit explanation of items name of taxpayer org ein year period ended december 20xx co-31 20xx ead president hb-107 hb-104 hb-106 hb-105 a eee ind-18 co-31 hb-108 hb-109 ee director ind-19 co-31 ind-18 ind-19 co-3 ind-19 ind-19 co-31 20xx 20xx 20xn 20xn 20xx 20xx 20xx 20xx 20xx a 20xx 20xx 20xx 20xx 20xx 20xx 20xx 20xx trans date 20xx 20xx ind-19 co-31 ind-19 co-31 ind-19 ind-19 co-31 donor home-seller ind-20 ind-20 homebuyer hb-114 hb-112 hb-113 donation amt related_party diigo paso director dpa grant hb-110 ind-20 hb-i11 totals totals eo summary of down payment assistance program transactions in our initial interview president stated that donations received and down payment assistance grants disbursed were unrelated transactions he indicated that donations were received throughout the year and in no way directly related to the down payment assistance program president further stated that donations were not based on successful home sale closings and their dpa program was not seller funded our independent research differs with president’s statements and our findings identify org’s dpa program as one e consisting of substantial related_party transactions relying ona seller funded program form 886-a rev department of the treasury - internal_revenue_service page -16- ete 886a deparonent of the treasury incermal revenue service schedule no or exhibit explanation of items name of taxpayer org ein year period ended december 20xx creating a circular flow of funds hud settlement statements overview on july 20xx we requested that the e o send twenty-seven selected hud-1 settlement statements the request was based on homebuyer information provided earlier by org on october 20xx the tege division received from org the twenty-seven requested copies of the hud-1 settlement statements the closing statements were requested in order to gain more insight into the organization’s down payment assistance program and to determine org’s level of non-compliance with revenue_ruling 20xx-27 the settlement statements we obtained show acceptance of both written and verbal contractual agreements made between the homebuyer and home-seller on the settlement_date the title company conducted a final review of the agreements if both agreed the documents were signed and title was transferred the title company was authorized upon closing to disburse funds normally the settlement and disbursement dates occured on the same date the settlement statements also showed information about gift funds provided to home buyers by org as well as home-seller donations returned to org from closing proceeds all closing statements showed that home-seller’s donations returned to org exceeded homebuyer gift funds disbursed by org by several hundred dollars the settlement statements include the following information e e the name of the home-seller address city state and zip code the lender’s name address city state and zip code the property address city state and zip code the settlements agent’s name tin address city state and zip code the settlement_date the disbursement date the homebuyer and home-seller settlement costs respectively the amount of down payment assistance provided to each homebuyer by org the amount of each home-seller’s donation returned to org comparative presentation hud settlement statements e o’s books records overview the following presentation identifies and compares the same transactions recorded in the organization’s books_and_records with information recorded on the hud closing statements in each document we compare information about the homebuyer the home-seller the donor-home-seller relationship dpa grant amount date e o provided dpa funds the settlement_date the disbursement date and home-seller donations to org from closing proceeds all documents were provided to the tege division by org comparative presentation form 886-arrev department of the treasury - internal_revenue_service page -17- born 886a department of the ‘preasury - laternal revenue service schedule no or exhibit explanation of items name of taxpayer org ein year period ended december 20xx hud-1 settlement statements org’s detailed general ledger hs-1 homebuver home-seller info hud -1 settlement statement _detailed general ledger homebuyer home-seller hb-115 hs-1 hb-115 hs-1 no ye sec_2 co-32 20xx not recorded not recorded donation to org donation to org no 20xx ye sec_3 20xx hs-2 no 20xx co-32 ye sec_11 20xx detailed general ledger hb-116 is home seller a org donor date e o wired gift funds dpa grant amount hud sttlmnt dsbursemnt date supports circular flow of funds i hud-1 settlement statement hb-116 homebuver home-seller info homebuyer dpa grant amount hud stthmnt dsbursemnt date supports circular flow of funds home-seller is home seller a org donor date e o wired gift funds homebuyer home-seller info homebuyer home-seller is home seller a org donor date e o wired gift funds dpa grant amount hud sttlmnt dsbursemnt date donation to org supports circular flow of funds homebuyer home-seller info homebuyer home-seller is home seller a org donor date e o wired gift funds detailed general ledger hb-118 not recorded no 20xx hud-1 settlement statement hb-118 co-15 yes hud-1 settlement statement hb-117 co-32 not recorded not recorded detailed general ledger ye sec_3 20xx no 20xx hb-117 co-33 20xx not recorded 20xx 20xx co-33 co-15 no _no yes yes xk hs-2 was not the home-seller but the title company closing this transaction form 886-a rev page -18- department of the treasury - internal_revenue_service orm 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items name of taxpayer org ein year period ended december 20xx dpa grant amount hud stumnt dsbursemnt date donation to org supports circular flow of funds dollar_figuredollar_figure not recorded not recorded 20xx dollar_figuredollar_figure yes no dollar_figuredollar_figure co-34 yes co-34 20xx 20xx not recorded donation to org not recorded no homebuyer lome-seller info ilomebuyer home-seller info is home seller a org donor date e o wired gift funds dpa grant amount hud sttimnt dsbursemnt date donation to org supports circular flow of funds detailed general ledger hb-120 co-34 ye sec_12 20xx detailed general ledger hb -119 hs-3 no 20xx hud-1 settlement statement hb-120 co-34 ye sec_12 20xx hud-1 settlement statement hb -119 co-34 yes 20xx supports circular flow of funds _ _homebuyer home-seller - homebuyer hhome-seller is home seller a org donor date e o wired gift funds dpa grant amount hud stthnnt dsbursemnt date hud-1 settlement statement homebuyer home-seller info homebuyer home-seller info homebuyer _home-seller is home seller a org donor date e o wired gift funds homebuyer home-seller ls home seller a org donor date e o wired gift funds dpa grant amount hud sttimnt dsbursemnt date donation to org supports circular flow of funds hud- settlement statement hb-122 co-34 yes 20xx detailed general ledger hb-122 co-34 yes 20xx detailed general ledger hb-12 co-34 yes 20xx dpa grant amount hud sttlnnt dsbursemnt date hb-121 co-34 yes 20xx not recorded 20xx 20xx 20xx 20xx co-34 co-34 __ yes yes yes yes form 886-aciev page -19- department of the treasury - internal_revenue_service form 886a department of the preasury - internal_revenue_service schedule no or exhibit explanation of items name of taxpayer org ein year period ended december 20xx donation to org supports circular flow of funds not recorded yes no co-34 homebuyer home-seller info homebuyer hud settlement statement hb-125 detailed general ledger hb-123 home-seller co-34 co-34 is home sellera org donor date e o wired gift funds dpa grant amount hud sttlmnt dsbursemnt date donation to org supports circular flow of funds ye sec_12 20xx ye sec_12 20xx 20xx 20xx yes yes co-20 co-20s hb-124 co-20 co-20 co-20s date e o wired gift funds homebuyer -home-seller yes 20xx dollar_figuredollar_figure 20xx dollar_figure yes yes 20xx dollar_figuredollar_figure not shown not shown no detailed general ledger hb-124 co-20 co-20 hud settlement statement homebuyer home-seller info is home seller a org donor date e o wired gift funds dpa grant amount hud sttlmnt dsbursemnt date donation to org homebuyer home-seller is home seller a org donor detailed general ledger hb-23 co-20 inc co-20 yes supports circular flow of funds hud settlement statement homebuyer home-seller info dpa grant amount homebuyer home-seller info homebuyer home-seller is home seller a org donor date e o wired gift funds dpa grant amount hud sttlmnt dsbursemnt date donation to org supports circular flow of funds hud settlement statement hb-125 co-35 ye sec_4 20xx dollar_figuredollar_figure 20xx dollar_figuredollar_figure yes supports circular flow of funds hb-125 co-35 no 20xx dollar_figuredollar_figure not recorded not recorded no 20xx dollar_figuredollar_figure 20xx dollar_figuredollar_figure yes hud sttlnint dsbursemnt date donation to org 20xx dollar_figuredollar_figure 20xx dollar_figuredollar_figure yes hb-23 co-20s inc yes detailed general ledger co-35 form 886-a rev page -20- department of the treasury - internal_revenue_service farm 886a deputment of the treasury - internal_revenue_service schedule no or exhibit explanation of items name of taxpayer year period ended org ein december 20xx co-36 homebuyer home-seller is home sellera org donor date e o wired gift funds dpa grant amount hud sttlmnt dsbursemnt date homebuyer home-seller info donation to org hud settlement statement hb-126 co-36 ye sec_3 20xx detailed general ledger hb-126 co-33 no 20xn not recorded not recorded no supports circular flow of funds homebuyer home-seller info homebuyer home-seller is home seller a org donor ' date e o wired gift funds dpa grant amount hud sttimnt dsbursemnt date donation to org hud settlement statement hb-127 co-36 ye sec_5 20xx detailed general ledger hb-127 co-33 no dollar_figure 20xx supports circular flow of funds not recorded no not recorded co-36 20xx 20xx yes ye sec_15 co-36 homebuyer home-seller info homebuyer home-seller is home seller a org donor date e o wired gift funds dpa grant amount hud sttlmnt dsbursemnt date donation to org supports circular flow of funds hud settlement statement hb-128 co-36 ye sec_12 20xx detailed general ledger hb-128 co-33 no 20xx not recorded not recorded no co-37 homebuyer home-seller info homebuyer home-seller is home seller a org donor date e o wired gift funds dpa grant amount hud sttlmnt dsbursemnt date donation to org supports circular flow of funds detailed general ledger hb-129 hs-4 no 20xx hud settlement statement hb-129 co-37 not recorded not recorded no yes 20xx 20xx 20xx yes yes co-38 form 886-a rev page -21- department of the treasury - internal_revenue_service horm 886a department of the treasury - internal_revenue_service schedule no or exhibit explanation of items name of taxpayer org ein year period ended december 20xx detailed general ledger homebuyer home-seller info homebuyer lllome-seller is home seller a org donor date e o wired gift funds dpa grant amount hud stthmnt dsbursemnt date donation to org supports circular flow of funds not recorded not recorded _no hb-130 co-38 ye sec_4 20xx hb-130 co-38 ye sec_4 20xx hud settlement statement 20xx yes co-38 detailed general ledger homebuyer home-seller info homebuyer lome-seller is home seller a org donor date e o wired gift funds dpa grant amount hud sttlmnt dsbursemnt date donation to org __ hud settlement statement hb-62 co-38 yes 20xx hb-62 co-38 yes 7v 20xx supports circular flow of funds 20xx 20xx yes yes co-38 detailed general ledger hud settlement statement homebuyer thome-seller info homebuyer home-seller is home seller a org donor date e o wired gift funds dpa grant amount hud sttlmnt dsbursemnt date donation to org supports circular flow of funds hb-66 co-38 yes 20xx hb-66 co-38 yes 20xx 20xx 20xx yes yes hud settlement statement homebuyer home-seller info homebuyer home-seller ts home seller a org donor date e o wired gift funds dpa grant amount hud stthnnt dsbursemnt date donation to org supports circular flow of funds detailed general ledger hb-68 co-38 yes 20xx not recorded hb-68 co-38 yes 20x x not recorded 20xx no co-38 co-38 homebuver home-seller info homebuver hud settlement statement detailed general ledger hb-69 hb-69 yes form_8 86-arev page -22- department of the treasury - internal_revenue_service form 886a department of the ‘treasury - internal_revenue_service schedule no or exhibit explanation of items name of taxpayer org ein year period ended december 20xx home-seller is home seller a org donor date e o wired gift funds donation to org supports circular flow of funds dpa grant amount hud sttlmnt dsbursemnt date co-38 yes 20xx co-38 yes 20xx not recorded no not recorded 20xx yes ll co-39 no ye sec_23 co-40 20xx 20xx hb-50 co-39 ye sec_3 20xx dpa grant amount hud sttlmnt dsbursemnt date homebuyer home-seller is home seller a org donor date e o wired gift funds detailed general ledger hb-130 hs-5 no 20xx detailed general ledger hb-49 ind-15 no 20xx dpa grant amount hud sttimnt dsbursemnt date donation to org supports circular flow of funds homebuyer home-seller info homebuyer home-seller is home seller a org donor date e o wired gift funds l hud settlement statement homebuyer home-seller info hud settlement statement __ hud settlement statement homebuyer home-seller info homebuyer home-seller is home seller a org donor date e o wired gift funds dpa grant amount hud sttlmnt dsbursemnt date supports circular flow of funds circular flow of funds detailed general ledger hb-74 co-29 ye sec_3 20xx dollar_figuredollar_figure not recorded not recorded no hud settlement statement hb-80 co-29 yes homebuyer home-seller info homebuyer home-seller is home sellera org donor detailed general ledger hb-80 co-29 yes hb-74 co-29 ye sec_3 20xx dollar_figuredollar_figure 20xx donation to org supports circular flow of funds hb-130 co-40 yes 20xx co-29 20xx co-29 20xx yes yes no form 886-acrev page -23- department of the treasury - internal_revenue_service porm 886a department of the preasury - enrernal revenue service schedule no or exhibit explanation of items name of taxpayer org ein year period ended december 20xx dpa grant amount date e o wired gift funds hud sttlmnl dsbursemnt date donation to org supports circular flow of funds 20xx 20xx 20xx 20xx yes ye sec_26 co-29 20xx 20xx not shown not shown no date e o wired gift funds dpa grant amount hud sttlmnt dsbursemnt date donation to org supports circular flow of funds detailed general ledger hb-83 co-29 yes homebuyer home-seller info homebuyer home-seller is home seller a org donor hud settlement statement hb-83 co-29 yes homebuyer home-seller info homebuyer home-seller is home seller a org donor date e o wired gift funds supports circular flow of funds hud sttlmnt dsbursemnt date donation to org hb-100 co-30 ye sec_1 20xx not recorded not recorded no hb-100 co-30 ye sec_11 hud settlement statement detailed general ledger dpa grant amount 20xx co-30 20xx yes yes summary of comparative presentation our review of hud-1 closing statements shows significant differences between information recorded in the organizations books_and_records the hud-1 documents describe transactions between homebuyers home- sellers and org in each hud-1 closing statement the homebuyer receives gift funds paid_by org toward their closing costs the hud- documents further show org receiving donations from home-sellers for amounts greater than the gifted funds provided which average dollar_figure closing statements with information recorded in org’s books_and_records we noted in all closing statements that the organization’s 20xx down payment assistance program was non-compliant with revenue_ruling 20xx-27 because org’s dpa program in comparing information recorded in the hud- e e e is seller funded receives donations based on home sales supports a circular flow of funds form 886-a rev page -24- department of the treasury - internal_revenue_service ‘corm 886a name of taxpayer department of the ‘urcasury - internal_revenue_service explanation of items org ein schedule no or exhibit year period ended december 20xx the following hud-1 closing statement comparisons highlight some of the many discrepancies found in the organization's books_and_records for example hs-1 hud-1 closing statement orqg’s general ledger shows hs-1 as a home seller and donor-1 a donor according to the information recorded in org’s books_and_records there is an independent relationship between hs-1 home-seller and donor-1 an organization donor the same transactions in the hud-1 closing statements identify hs-1 as both home seller and org donors as part of a related_party transaction the hud-1 document clearly identifies this transaction as related_party seller funded and part of a circular flow of funds org’s books_and_records are ambiguous unclear and incomplete and offered no additional explanation for the differences noted co-32 hud-i closing statement org’s general ledger shows hs-2 as a home-seller and does not identify a donor according to the hud-1 closing statement hs-2 was the name of the settlement agent co-32 was both the home-seller and organization donor again org’s books_and_records were ambiguous unclear and incomplete the hud-1 document clearly identifies this transaction as related_party seller funded and part of a circular flow of funds org’s books_and_records did not provide any further explanation our review of hud-i documents show that within the organization’s dpa program org donors substantially participated as home-sellers resulting in the creation of a circular flow of funds and a program that relied substantially on seller funding the hud-1 documents show that significant facts relating to org’s dpa program were omitted from the organization’s books_and_records questioning their transactional integrity as a result of the discrepancies noted above president was contacted on october 20xx and asked to provide the remaining copies of the hud-1 settlement statements our information_document_request idr-5 was faxed to president's dedicated fax line on october 20xx and resent on october 20xx at his request to date president has not responded to our subsequent telephone messages asking that he send the documents requested and that he contact us as yet the documents have not been received a non-profit corporation that helps low-income individuals and families purchase decent safe and sanitary revenue_ruling 20xx-27 situation x is homes throughout the metropolitan area in which x is located as a substantial part of its activities x makes assistance available exclusively to low-income individuals and families to provide part or all of the funds they need to make a down payment on the purchase of a home x uses standards set by federal housing statutes and administered by the department of housing and urban development to determine who is a low-income form 886-aciev page -25- department of the treasury - internal_revenue_service form r86a department of the treasury - internal_revenue_service ty schedule no or exhibit name of taxpayer org ein explanation of items year period ended december 20xx individual individuals are eligible to receive assistance from x's program if they are low-income individuals have the employment history and financial history necessary to qualify for a mortgage and would so qualify but for the lack of a down payment x also offers financial counseling seminars and conducts other educational activities to help prepare potential low-income home buyers for the responsibility of home ownership x will consider applications for assistance in connection with an applicant’s purchase of any home that meets x’s standards for habitability before making a grant of down payment assistance x requires a home inspection report for the property that the applicant intends to buy to ensure that the house will be habitable to fund its down payment assistance program and other activities x conducts a broad based fundraising program that attracts gifts grants and contributions from several foundations businesses and the general_public x's grantmaking process is structured to ensure that x’s staff awarding grants on behalf of x does not know the identity of the party selling the home to the grant applicant or the identities of any other parties such as real_estate agents or developers who may receive a financial benefit from the sale the staff also does not know whether any of the interested parties to the transaction have been solicited for contributions to x or have made pledges or actual contributions to x further x does not accept any contributions contingent on the sale of a particular property or properties situation y is a nonprofit corporation that is like x in all respects as set forth in situation except as follows under y’s grantmaking procedures y’s staff considering a particular applicant’s application knows the identity of the party selling the home to the grant applicant and may also know the identities of other parties such as rea estate agents and developers who may receive a financial benefit from the sale moreover in substantially_all of the cases in which y provides down payment assistance to a home buyer y receives a payment from the home seller further there is a direct correlation between the amount of the down payment assistance provided by y in connection with each of these transactions and the amount of the home seller’s payment to y finally y does not conduct a broad based fundraising campaign to attract financial support rather most of y’s support comes from home sellers and real estate-related businesses that may benefit from the sale of homes to buyers who receive y's down payment assistance a nonprofit corporation formed to combat community deterioration in an economically depressed area that situation z is has suffered a major loss of population and jobs studies have shown that the average income in the area is below the median level for the state z cooperates with government agencies and community groups to develop an overall plan to attract new businesses to the area and to provide stable sources of decent safe and sanitary housing for the area residents without relocating them outside the area as part of the renewal project z receives funding from government agencies to build affordable housing units for sale to low and moderate-income families as a substantial part of its activities z makes down payment assistance available to eligible home buyers who wish to purchase the newly-constructed units from z z also offers financial counseling seminars and conducts other educational activities to help prepare potential low and moderate-income home buyers for the responsibility of home ownership form 886-a rev page -26- department of the treasury - internal_revenue_service korm 886a department of the preasury internal_revenue_service schedule no or exhibit explanation of items name of taxpayer org ein year period ended december 20xx to fund its down payment assistance program and other activities z conducts a broad based fundraising program that attracts gifts grants and contributions from several foundations businesses and the general_public down payment assistance program’s non-compliance with revenue_ruling 20xx-27 situation as defined within internal_revenue_bulletin 20xx-21 may 20xx revenue_ruling 20xx-27 most closely identifies org’s 20xx down payment assistance program situation under y’s grant making procedures ’s staff considering a particular applicant’s application knows the identity of the party selling the home to the grant applicant and may also know the identities of other parties such as real_estate agents and developers who may receive a financial benefit from the sale moreover in substantially_all of the cases in which y provides down payment assistance to a home buyer y receives a payment from the home seller further there is a direct correlation between the amount of the down payment assistance provided by y in connection with each of these transactions and the amount of the home seller’s payment to y finally y does not conduct a broad based fundraising campaign to attract financial support rather most of y's support comes from home sellers and real estate-related businesses that may benefit from the sale of homes to buyers who receive y’s down payment assistance legal principles sec_501 of the code provides for the exemption from federal income_taxation of corporations described in sec_501 of the code to be described in sec_501 an organization must be organized and operated exclusively for charitable educational or other exempt purposes and may not permit any of its net_earnings to inure to the benefit of any private_shareholder_or_individual sec_1 c -i c 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 of the code 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 nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes ifa substantial part of an organization’s activities furthers non-charitable purposes the organization is not operated exclusively for charitable purposes even though its other activities further charitable purposes see 477_f2d_340 cir cert_denied 413_us_910 sec_1 c -i c of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 ii of the regulations provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest to meet this requirement it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests form 886-a rev page -27- department of the treasury - internal_revenue_service department of the ereasury - internal_revenue_service schedule no or exhibit form 886a explanation of items name of taxpayer org ein year period ended december 20xx of the poor and distressed or of the underprivileged advancement of education sec_1_501_c_3_-1 of the regulations defines the term charitable as used in sec_501 of the code as including the relief combating community deterioration and lessening the burdens of government sec_1_501_c_3_-1 of the regulations provides in part that the term educational as used in sec_501 of the code relates to the instruction of the public on subjects useful to the individual and beneficial to the community sec_1 c -i e of the regulations provides that an organization that operates a trade_or_business as a substantial part of its activities may meet the requirements of sec_501 of the code if the trade_or_business furthers an exempt_purpose and provided the organization's primary purpose does not consist of carrying on an unrelated_trade_or_business revrul_2006_27 2006_21_irb_915 sets forth standards for determining when an organization that provides funds to homebuyers for down payment or closing costs qualifies for exemption from federal_income_tax under sec_501 in situation an organization provides down payment assistance to low-income individuals and families it offers financial counseling seminars and conducts other educational activities to help prepare potential low-income homebuyers for the responsibility of home ownership under the organization’s grantmaking procedures the staff considering a particular applicant’s application knows the identity of the party selling the home to the grant applicant and may also know the identities of other parties such as real_estate agents and developers who may receive a financial benefit from the sale moreover in substantially_all of the cases in which the organization provides down payment assistance to a homebuyer the organization receives a payment from the home seller further there is a direct correlation between the amount of the down payment assistance provided by the organization to the homebuyer and the amount of the home seller’s payment to the organization finally the organization does not conduct a broad based fundraising campaign to attract financial support rather most of the organization’s support comes from home sellers and real estate-related businesses that may benefit from the sale of homes to buyers who receive the organization's down payment assistance the revenue_ruling holds that the organization described in situation under sec_501 because it finances its down payment assistance activities with contributions from sellers and individuals that stand to benefit from the transactions that the organization facilitates the fact that the organization relies on seller's payments for most of its funding and in substantially_all of the transactions the payment from a home seller corresponds to the amount that the organization gives to a homebuyer indicate that the benefit to the home seller is a critical aspect of an organization’s operations revrul_2006_27 also holds that the payments to homebuyers in situation are not gifts but rebates or purchase_price reductions because sellers make the payments not out of detached and disinterested generosity but in response to an anticipated economic benefit namely the sale of their home at a higher price and in less time is not exempt from federal_income_tax revrul_2006_27 situations and describe organizations that provide down payment and closing costs to qualified homebuyers in the manner that could qualify for exemption from federal_income_tax under sec_501 in situation the organization’s purposes and activities relieve the poor distressed and underprivileged by enabling low-income individuals and families to obtain decent safe and sanitary homes in form 886-arev page -28- department of the treasury - internal_revenue_service form 886a name of taxpayer deparunent of the preasury - internal_revenue_service schedule no or exhibit explanation of items org ein year period ended december 20xx situation the organization's purposes and activities combat community deterioration in a specific economically depressed area that has suffered a major loss of population and jobs importantly these organizations conduct broad based fundraising programs to attract gifts grants and contributions from several foundations businesses the general_public and receive funding from government agencies see revrul_2006_27 their policies and procedures prevent the grant making staff from knowing identities of the parties involved in the transaction and whether anyone related to the transaction had made or agreed to make or made a contribution to the organization cl_ct aff'd 846_f2d_78 fed cir cert_denied 488_us_907 in easter house v u s the court held that an organization that operated an adoption agency was not exempt under sec_501 of the code because a substantial purpose of the agency was a nonexempt commercial purpose the court concluded that the organization did not qualify for exemption under 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 adoption agencies engaged in substantial advertising and accumulated substantial profits accordingly the court found that the business_purpose and not the advancement of educational and charitable activities purpose of plaintiff's adoption service is its primary goal and held that the organization was not operated exclusively for purposes described in 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 of the code because it also served private interests more than incidentally the court found that the organization was created and funded by persons affiliated with entities of a particular political_party and that most of the organization's graduates worked in campaigns for the party’s candidates consequently the court concluded that the organization conducted its educational activities with the objective of benefiting the party’s candidates and entities although the candidates and entities benefited were not organization insiders the court stated that the conferral of benefits on disinterested persons who are not members of a charitable_class may cause an organization to serve a private interest within the meaning of sec_1_501_c_3_-1 i1 of the regulations the court concluded by stating that even if the political party’s candidates and entities did comprise a charitable_class the organization would bear the burden of proving that its activities benefited members of the class in a non-select manner in aid to artisans inc v commissioner t c the court held that an organization that marketed handicrafts made by disadvantaged artisans through museums and other nonprofit_organizations and shops was operated for exclusively charitable purposes within the meaning of sec_501 of the code the organization in cooperation with national craft agencies selected the handicrafts it would market from craft form 886-a rev page -29- department of the treasury - internal_revenue_service ifoena 886a department of the treasury internal_revenue_service schedule no or exhibit name of taxpayer org ein explanation of items year period ended december 20xx cooperatives in communities identified as disadvantaged based on objective evidence by the bureau of indian affairs or other government agencies the organization marketed only handicrafts it purchased in bulk from these communities of craftsmen it did not select individual craftsmen based on the needs of the purchasers the court concluded that the overall purpose of the activity was to benefit disadvantaged communities the organization’s commercial activity was not an end in itself but merely the means through which the organization pursued its charitable purposes the method it used to achieve its purpose did not cause it to serve primarily private interests because the disadvantaged artisans directly benefited by the activity constituted a charitable_class and the organization showed no selectivity with regard to benefiting specific artisans therefore the court held that the organization operated exclusively for exempt purposes in 283_fsupp2d_58 d d c the court relied on the commerciality doctrine in applying the operational_test to an organization that operated a conference center as its primary activity and derived most of its revenues from user fees because of the commercial manner in which this organization conducted its activities the court found that it was operated for a non-exempt commercial purpose rather than for a tax-exempt purpose in reaching this conclusion the court stated that a mong the major factors courts have considered in assessing commerciality are competition with for profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include infer alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations revrul_67_138 1967_1_cb_129 held that helping low income persons obtain adequate and affordable housing isa charitable activity because it relieves the poor and distressed or underprivileged the organization carried on several activities directed to assisting low-income families obtain improved housing including coordinating and supervising joint construction projects purchasing home sites for resale at cost and helped low income people obtain home construction loans revrul_70_585 1970_2_cb_115 discussed four situations of organizations providing housing and whether each qualified as charitable within the meaning of sec_501 of the code situation described an organization formed to construct new homes and renovate existing homes for sale to low-income families who could not obtain financing through conventional channels the organization also provided financial aid to eligible families who do not have the necessary down payment when possible the organization recovered the cost of the homes through very small periodic_payments but its operating funds were obtained from federal loans and contributions from the general_public the revenue_ruling held that by providing homes for low-income families who otherwise could not afford them the organization relieved the poor and distressed situation described an organization formed to ameliorate the housing needs of minority groups by building housing units for sale to persons of low and moderate income on an open-occupancy basis the housing was made available to members of minority groups who were unable to obtain adequate housing because of local discrimination the housing units were located to help reduce racial and ethnic imbalances in the community as the activities were designed to eliminate prejudice and discrimination and to lessen neighborhood tensions the form 886-a rev page -30- department of the treasury - internal_revenue_service gorm 886a department of thy vecastrg - internat revenue service schedule no or exhibit name of taxpayer org ein explanation of items year period ended december 20xx revenue_ruling held that the organization was engaged in charitable activities within the meaning of sec_501 of the code situation described an organization formed to formulate plans for the renewal and rehabilitation of a particular area in a city as a residential community the median income level in the area was lower than in other sections of the city and the housing in the area was generally old and badly deteriorated the organization developed an overall plan for the rehabilitation of the area it sponsored a renewal project and involved residents in the area renewal plan the organization also purchased apartment buildings that it rehabilitated and rented at cost to low and moderate income families with a preference given to residents of the area the revenue_ruling held that the organization is described in sec_501 of the code because its purposes and activities combated community deterioration situation 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 of the code because the organization's program was not designed to provide relief to the poor or further any other charitable purpose within the meaning of sec_501 and the regulations revrul_85_1 1985_1_cb_177 holds that an activity is a burden of government only if there is an objective manifestation by a governmental_unit that it considers the activity to be its burden the ruling also provides that little weight should be given to government officials that merely praise or express approval of an organization and its activities instead the government must formally recognize the organization and its operations as relieving its burdens several factors set forth in the revenue_ruling bear on whether the governmental_unit has made an objective manifestation these factors are e e e e e a statute specifically creates the organization and clearly defines the organization’s structure and purposes the activity is an integral part of a larger governmental program or is acted jointly with a governmental_unit the governmental_unit controls the activities of the organization for example by appointing the board members the organization pays governmental expenses regular government funding of the organization’s activities through grants or general obligation bonds backed with the full faith and credit of the governmental as opposed to general revenue bond financing the governmental_unit ts not prohibited from performing the particular activity revrul_85_2 1985-1c b holds that an organization lessens the burden of government if it engages in activities that a governmental_unit considers to be its burden and such activities actually lessen such governmental burden an organization must demonstrate through all the relevant facts and circumstances that a governmental_unit considers the organization to be acting on its behalf thereby freeing up the government assets that would otherwise be devoted to the particular activity form 886-a rev page -31- department of the treasury - internal_revenue_service deparnment of the ‘reasury - internal_revenue_service form 886a schedule no or exhibit explanation of items name of taxpayer org ein year period ended december 20xx in columbia park and recreational association inc v commissioner t c aff'd without published opinion 838_f2d_465 cir the court provided that expending funds for services and items similar to those in the budget of a municipal government is insufficient to establish that a governmental_unit accepted the activities as its responsibility in public industries inc v commissioner t c memo the court stated that even if a governmental_unit considers an activity to be a proper governmental function an organization must establish that it has a solid relationship with the governmental_unit to support a finding that the organization was acting on the governmental unit’s behalf on the issue of whether the organization’s activities actually lessen the burdens of government the court noted that showing that an organization’s activities might improve general economic conditions or might reduce the negative consequences if the activities are not conducted is not enough to demonstrate that organization's activities actually lessen the government’s burden in 114_tc_498 an organization that developed a certification program for safe construction claimed that it was lessening the burdens of government governmental agencies were among those that requested that the organization develop the certification program the court held that the government’s concern with obtaining high quality work in public construction projects falls short of establishing that the government considers the certification program to be its own responsibility and that the organization was acting on its behalf in addition the court stated that even if the certification program lessened the burdens of government because it also conferred benefit on private owners and developers it furthered a substantial nonexempt purpose by lessening the burdens on private parties even if an organization's activities serve a charitable_class or are otherwise charitable within the meaning of sec_501 to qualify for exemption from federal_income_tax under sec_501 a as on organization described in sec_501 the organization must demonstrate that its activities serve a public rather than a private interest within the meaning of reg sec_1_501_c_3_-1 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 of the code because it gave preference to employees of a business operated by the individual who also controlled the organization the ruling reasoned that although providing housing for low income families furthers charitable purposes doing so in a manner that gives preference to employees of the founder's business primarily serves the private interest of the founder rather than a public interest in kj's fund raisers v commissioner t c memo aff'd u s app lexis 2d cir the tax_court held that an organization formed to raise funds for distribution to charitable causes did not qualify for exemption under sec_501 because the primary purpose of its activities was to attract customers to its founders’ private business the founders of the organization were the sole owners of kj's place a lounge at which alcoholic beverages were served the founders served as officers of the organization and at times also controlled the organization’s board the tax_court found that the founders exercised substantial influence over the affairs of the organization the organization’s business consisted of selling lucky or similar instant win lottery tickets exclusively to patrons of kj's place the lottery tickets were sold during regular form 886-a rev page -32- department of the treasury - internal_revenue_service department of the treasury - internal_revenue_service form 886a explanation of items schedule no or exhibit name of taxpayer org ein year period ended december 20xx business hours by the owners of the lounge and their employees the organization derived most of its funds from its lottery ticket sales the organization solicited no public donations from the proceeds of the sales of the lottery tickets the organization made grants to a variety of charitable organizations charitable organizations may be a charitable activity the tax_court nevertheless upheld the commissioner's denial of exemption to the organization on the ground that the organization’s operation resulted in more than incidental private benefit to kj’s place and indirectly its owners the second circuit affirmed although supporting taxpayer s position president has made several statements about his position and the organization’s down payment assistance program president's position in his may 20xx letter to the internal_revenue_service referring to mobile home dealers as donors and as home-sellers he stated these home-sellers provide all the funds we use for this program and the amount of their contributions are reported on form 990pf in his december 20xx letter to the internal_revenue_service regarding home-sellers he stated no part of any down payment assistance using the home-seller’s funds or was provided by home-sellers or homebuilders or other interested parties in the form of donations to org’s specifically to replenish funds if and only if their homes were purchased through our down payment assistance program in hts april 20xx response to our april 20xx preliminary findings report president stated don’t understand what you mean by seller driven funding we accept donations from sellers typically after they closed on the sale of their home in 20xx we chose to use of the donations we received to help families buy homes president further asked the internal_revenue_service to reserve your decision until the court challenges of revenue_ruling 20x x-27 are decided however it program immediately is decided we will voluntarily comply or discontinue the president also stated that his organization’s dpa program is not impermissibly serving private interests explaining that donations are made by donors not participating as home-sellers home-seller donations received at closing are unrelated to home sales and are not used to replenish a pool of funds he also stated that a circular flow of funds does not exist within his down payment assistance program because home-sellers and donors are unrelated and that org’s dpa program is not seller funded government position the purpose of our audit focused strictly on exempt_organization activities specifically to determine if org’s 20xx dpa program was compliant with existing law form 886-a rev page -33- department of the treasury - internal_revenue_service form 886a schedule no or exhibit - internal_revenue_service department of the oa explanation of items name of taxpayer org ein year period ended december 20xx the fact that org’s home-sellers are not contractually obligated to the ministry does not diminish the fact that the organization's dpa assistance program is non-compliant with revenue_ruling 20xx-27 and with its sec_501 exemption rather it shows an expansion of down payment assistance activities that include donors and organizations having for-profit and commercial interests participating as home-sellers in their dpa program the for-profit organizations have acknowledged their commitment to org by providing funds from their closing proceeds based on home-sales to replenish the organization’s existing pools of funds as shown in the hud-1 analysis in concluding our audit of the organization’s 20xx form 990pf its books_and_records hud - closing statements as well as the tege division’s independent and qualitative research relative to donor home-seller participation we found that org’s down payment assistance program was not compliant because it promoted and served private interests resulting from the substantial level of participation between organization donors as home-sellers the public interest was not served their dpa program substantially relied on home-seller funding to finance its activities and created a circular flow of funds donations received from home-sellers were based on home sales hud -1 documents show that home-seller proceeds exceeded dpa grants provided to homebuyers by several hundred dollars per transaction org’s down payment assistance to homebuyers ranged from ofthe home selling_price one transaction provided over dollar_figure in down payment assistance to the law requires that an organization claiming exemption under sec_501 also be operated exclusively for prescribed exempt purposes under the operational_test an organization is regarded as operated exclusively for exempt purposes only if it engages primarily in activities that accomplish one or more exempt_purpose org must establish that it is organized and operated exclusively for exempt purposes in order to qualify for tax- exempt status under sec_501 in this context the term operated exclusively for exempt purposes is interpreted as engaged primarily in activities in furtherance of one or more of the organization’s exempt purposes this is known as the primary purpose doctrine our analysis of the organization’s books_and_records and of official u s department of housing urban development hud -1 documents demonstrates that org’s 20xx down payment assistance program activities were not exclusively charitable failure to provide relevant information is a sufficient basis for both the service and the courts to refuse to recognize an organization as exempt this reduces the possibility that an organization may retreat into claims of ignorance about its own operations simply stated the organization must establish the factual basis for its exemption org failed to establish that it revenue_ruling 20xx-27 is operated in accordance with sec_501 and compliant with based on our analysis and the facts stated above org’ sec_501 exempt status should be revoked because it has failed to establish that its down payment assistance program was operated exclusively for prescribed exempt purposes form 886-a rrev page -34- department of the treasury - internal_revenue_service form 886a department of the ‘freasury - incernal revenue service schedule no or exhibit name of taxpayer org ein year period ended december 20xx explanation of items to be operated exclusively for purposes described in sec_501 only an insubstantial portion of the activity of an exempt_organization may further a nonexempt purpose as the supreme court held in better business bureau of washington d c inc supra the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes org is not operated exclusively for exempt purposes described in sec_501 it operates primarily for private benefit of home sellers other individuals and entities that stand to benefit from the real_estate transactions it facilitates the primary purpose served by org’s dpa program is a commercial one overshadowing any educational or charitable purposes the organization may have served essentially through its dpa program org transfers cash from the participating home sellers or homebuilders to homebuyers thus enabling homebuyers to satisfy the down payment and closing cost payment requirements for their home purchases org operates primarily for a non-exempt business_purpose in a manner similar to a commercial enterprise facilitating real_estate transactions see american campaign academy supra and easter house v u s cl_ct aff'd 846_f2d_78 fed cir facilitation of real_estate transactions is not a per se a charitable activity see rev_rul 20xx-27 generally org does not solicit or receive contributions from the general_public to fund its dpa program almost all of org’s revenue is derived from home sellers org’s activities promotional materials and marketing strategies show that org operates for the benefit of home sellers home builders lenders real_estate professionals and homebuyers also org’s total reliance for financing of its dpa program on the participating home sellers and individuals connected to the real_estate transactions and their willingness to pay for the services demonstrate that org ’s dpa program provides substantial benefit to private parties involved in the transactions see rev_rul 20xx-27 situation who participate in org’s dpa program benefit from achieving access to a wider pool of buyers thus org enables them to sell their homes faster and for a higher price this private benefit to home sellers is substantial even in the case where the homebuyer is poor and distressed or underprivileged or where the sale of the home happens to combat community deterioration real_estate professionals who participate in org’s dpa program from real_estate brokers to escrow companies benefit from increased sales volume and the attendant increase in their compensation sellers org does not qualify as an organization described in sec_501 because its primary activity the operation of a down payment assistance program does not exclusively serve any exempt_purpose described or enumerated in sec_501 and the regulations charitable purposes include relief of the poor and distressed or of the underprivileged see sec_1_501_c_3_-1 of the regulations org’s dpa program does not provide relief of the poor and distressed or of the underprivileged org has no income or any other meaningful limitations for participation in its dpa program the program is open to anyone without any income limitations who otherwise qualified for a mortgage mostly an fha insured mortgage although some down payments and closing cost grants have been made to low income and very low income individuals as defined by the hud form 886-a rev page -35- department of the treasury - internal_revenue_service form 886a department of the ureasury - internal_revenue_service schedule no or exhibit name of taxpayer org ein explanation of items year period ended december 20xx org does not pre-screen recipients’ income or other qualifications for assistance contemporaneously with the making of the grants to the homebuyers by merely facilitating real_estate transactions through transfer of cash from home sellers to homebuyers without any meaningful limitations educational instruction on homeownership and budgeting and without ensuring homebuyer’s ability to afford the home it can hardly be said that org relieved the needs of the poor and distressed or of the underprivileged or that org operated in furtherance of its purported charitable goal of expanding and maintaining the supply of safe decent and affordable housing for low and moderate income persons conclusion based on the facts presented above org has not demonstrated that it engages primarily in activities that accomplish exempt purposes the organization’s dpa program is non - compliant with revenue_ruling 20xx- because the program is seller funded and supports a circular flow of funds donations were substantially ceived from donors participating as home-sellers and their donations were based on successful home sale sings moreover org serves private interests more than incidentally and as such fails to qualify as an organization exempted from federal_income_tax under sec_501 the proposed revocation of org’s tax exempt status is effective beginning january 20xx form_1120 u s income_tax return should be filed for tax years ending december 20xx 20xx 20xx and 20xx subsequent returns are due no later than the day of the month after the end of each tax_year returns should be sent to the following mailing address form 886-a rev page -36- department of the treasury - internal_revenue_service