Partners in Charity, Inc. v. Comm'r

• Decision Date: 26 August 2013
• Docket Number: No. 1701–11X.,1701–11X.
• Citation: 141 T.C. 151,141 T.C. No. 2
• Parties: PARTNERS IN CHARITY, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

?141 T.C. No. 2
141 T.C. 151

PARTNERS IN CHARITY, INC., Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 1701–11X.

United States Tax Court.

Aug. 26, 2013

Decision for IRS.

P was established as a nonprofit corporation under the laws of Illinois. P applied for recognition of tax-exempt status, explaining that its primary activity was to provide down-payment assistance grants to home buyers. R determined that P was a charitable organization described in I.R.C. sec. 501(c)(3). In actual operation, P required each home seller to pay to P the down-payment amount along with a fee. R retroactively revoked his determination, and P filed for a declaratory judgment under I.R.C. sec. 7428.

Held: P's down-payment assistance program was not operated for a charitable purpose, and P engaged in substantial commercial activities that did not further an exempt purpose. Therefore, P is not an organization described in I.R.C. sec. 501(c)(3).

Held, further, R did not abuse his discretion in making his adverse determination retroactive to the date of P's incorporation.

Alvin S. Brown, for petitioner.

Mark A. Weiner, for respondent.

GUSTAFSON, Judge:

After examining the activities of petitioner, Partners In Charity, Inc. (“PIC”), for the years 2002 and 2003, the Internal Revenue Service (“IRS”) issued to PIC a final adverse determination letter dated October 22, 2010, revoking its recognition of PIC's tax-exempt status. The revocation was retroactively effective to the date of PIC's incorporation on July 10, 2000. On January 20, 2011, PIC timely petitioned this Court pursuant to section 7428 ¹ and Rule 210, seeking a declaratory judgment that PIC was an organization described in section 501(c)(3) during 2002 and 2003 (the examination years) and that the IRS's revocation of PIC's tax-exempt status be declared null and void.

The issues for decision are: (1) whether during the examination years PIC was operated exclusively for a charitable purpose (we hold that it was not); and (2) whether, in retroactively revoking its determination that PIC was an organization described in section 501(c)(3), the IRS abused its discretion (we hold that it did not).

[141 T.C. 152]

FINDINGS OF FACT

The administrative record underlying the IRS's adverse determination was filed with the Court in accordance with Rule 217, and a subsequent trial was conducted in Washington, D.C. The parties stipulated some of the facts.

PIC's formation

Before creating PIC, Charles Konkus was a real estate developer in the Chicago area, focusing his business ventures on developments for medium—to high-income consumers. Mr. Konkus observed that home ownership was becoming more difficult for low-income individuals, and he decided to create a means for helping home buyers. Mr. Konkus incorporated PIC as an Illinois not-for-profit corporation on July 10, 2000. Mr. Konkus served as PIC's executive director, devoting 40 hours a week to the job and receiving no direct compensation in return. In addition to Mr. Konkus, PIC had two other individuals on its board of directors—Katy Motlagh and Jeanne Weaver—but they devoted virtually no time to their positions with PIC. Mr. Konkus exercised unchecked control over PIC's operations and finances.

PIC's application for recognition of tax-exempt status

In July 2000 PIC submitted to the IRS Form 1023, “Application For Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code”, on which PIC reported:

Partners In Charity will 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. Partners in Charity [sic] will also engage in other affordable housing efforts, using excess contributions to develop low-income apartments for seniors and families, the acquisition and rehabilitation of single-family homes, and contributions to other housing related charitable organizations such as faith based charities, community based charities and national charities such as Habitat for Humanity.

In response to a question regarding PIC's expected sources of financial support PIC reported on Form 1023: “Partners in Charity [sic] will solicit gifts from corporations, foundations, and individuals with whom the members, directors and officers have personal relationships.” In addition PIC reported

[141 T.C. 153]

that it expected to receive “gifts, grants, and contributions” of $100,000 during 2002 and $150,000 during 2003, and that it expected to pay “contributions, gifts, grants and similar amounts” of $80,000 and $120,000 during 2002 and 2003.

On October 2, 2000, the IRS asked PIC to provide assurances (1) that PIC would serve a charitable class (mentioning the safe harbor guidelines in Rev. Proc. 96–32, 1996–1 C.B. 717) and (2) that no private interests of individuals with a financial stake in the project would be furthered. On October 9, 2000, PIC submitted to the IRS a “Statement of Policy” signed by Mr. Konkus as “President/Treasurer/Director” of PIC, which stated:

Partners In Charity, Inc. has adopted a policy to comply with the low income housing safe harbor guidelines in that at least 75% of units for a given project will be made available for families earning 60% or less of the area's median income as adjusted for family size. The remaining 25% of the units for a given project will be made available to persons on the lower end of the economic spectrum who may not necessarily be members of a charitable class.

The Directors and Officers in Partners In Charity, Inc. are not real estate developers, property managers or owners of significant parcels of undeveloped lands. Partners In Charity, Inc. intends to have a community-based Board of Directors once it established a track record and can attract qualified community-based individuals to serve.

The IRS's prior determination

On November 9, 2000, the IRS ruled favorably on PIC's application and issued to PIC a determination letter that stated: “[B]ased on information you supplied, and assuming your operations will be as stated in your application for recognition of exemption, we have determined you are exempt from federal income tax under section 501(a) of the Internal Revenue Code as an organization described in section 501(c)(3).” This determination was effective as of PIC's incorporation date, July 10, 2000.

The DPA program

As its title suggests, PIC's “down payment assistance” (“DPA”) program provided home buyers with funds to use for down payments for home purchases. However, it obtained those funds (along with a fee) from home sellers; and in only two-tenths of 1% of its transactions did PIC make a DPA grant where the seller was not reimbursing the down payment

[141 T.C. 154]

and PIC's fee. A seller's payment to PIC equaled the down payment amount that PIC gave to the buyer plus PIC's fee—i.e., either 0.75% of the final sale price or, in the case of a professional home builder, $500.

PIC created and used a document entitled “Gift Letter and Grant Application” to effect its agreements with buyers and created and used a “Seller Participation Agreement” for agreements between itself and sellers. In addition to those documents, PIC collected the following information: the property's address; the buyer's annual income; the buyer's gender and ethnicity; the name of the loan originator and lending institution; the type of loan the buyer intended to use; a copy of the purchase contract; a copy of the first two pages of the appraisal report; and copy of the settlement statement (HUD–1). Much of this information appeared on a form called the “Gift Funds Request” form, which was created by PIC and filled out by the buyer's lender.

“Seller Participation Agreement ”

PIC induced a prospective seller to sign a “Seller Participation Agreement”. This agreement provided that a seller's property would qualify as a “Participating Home” in PIC's program if the seller (a) agreed to accept the buyer's terms for financing (using an eligible loan program that accepted charitable gifts from non-profit organizations) and (b) delivered the real estate purchase contract to a PIC-approved escrow officer or closing agent. The Seller Participation Agreement further provides:

PIC agrees to assist in the dissemination of pre-qualification information to prospective homebuyers, including the PIC home buying guide, and to utilize the PIC Program to provide home ownership education and down payment assistance to qualified homebuyers, any one of which may elect to purchase the Participating Home. In consideration of the foregoing, Seller agrees to make a contribution to PIC in the amount of * * * [the down payment amount plus a fee of 0.75% of the purchase price] within (2) business days from the transfer of the Participating Home to the Buyer. [Emphasis added.]

The Seller Participation Agreement states: “[T]he [seller's] contribution will not be used to provide down payment assistance to the Buyer of the [seller's] Participating Home.” Instead, to fund the current buyer's DPA grant, PIC used money it had acquired from previous sellers' contributions.

[141 T.C. 155]

PIC would then use the current seller's payments to fund future grants and to cover PIC's operating expenses.² A seller was obligated to make a contribution to PIC only “if a homebuyer utilizing the PIC Program purchases the [seller's] Participating Home”.

C. “Gift Letter and Grant Application ”

A buyer requested PIC funding by submitting to PIC a signed “Gift Letter and Grant Application”, which stated in part:

Once Partners In Charity, Inc., a non-profit organization, has received the following:

1. A signed copy of this form.

2. A copy of the Seller Participation Agreement.

3. The lender's request for gift funds.

4. Copy of Appraisal (First 2 pages only)

5. Copy of Purchase and Sale Agreement

6. Closing Office Wire Instructions

PIC will wire Gift Funds to the closing office, in the amount of * * * [the down payment] to assist you in...