Tax Court - Down-payment assistance program found not to be operating for charitable purposes 

August 26:  The U.S. Tax Court today issued an opinion concluding that a down-payment assistance program was not operated for a charitable purpose; that the entity engaged in substantial commercial activities that did not further an exempt purpose; that the entity was not an organization described in section 501(c)(3); and that the IRS Commissioner did not abuse his discretion in making his adverse determination retroactive to the date of incorporation. Partners in Charity, Inc. v. Commissioner, 141 T.C. No. 2 (August 26, 2013)

Read the Tax Court’s opinion [PDF 137 KB]

Summary

An entity was established as a nonprofit corporation, and applied for recognition of tax-exempt status because its primary activity was to provide down-payment assistance grants to home buyers.


The IRS determined that the entity was a charitable organization under section 501(c)(3).


During a later IRS examination of the entity’s activities, it was discovered that the entity required each home seller to pay to it the down-payment amount along with a fee. The IRS, for 2002 and 2003, issued a final adverse determination letter (dated October 22, 2010) revoking recognition of the entity’s tax-exempt status. The revocation was retroactively effective to the date of incorporation (July 10, 2000).


The entity filed a petition with the Tax Court, seeking a declaratory judgment that the entity was an organization described in section 501(c)(3) during 2002 and 2003 (the examination years) and requesting that the IRS’s revocation of the tax-exempt status be declared null and void.


The Tax Court today concluded that the down-payment assistance program was not operated for a charitable purpose, and that the entity engaged in substantial commercial activities that did not further an exempt purpose.


Accordingly, the Tax Court held that the entity was not an organization described in section 501(c)(3) and that the IRS Commissioner did not abuse his discretion in making his adverse determination retroactive to the date of incorporation.



For more information, contact:


Rick Speizman, Partner-in-Charge of KPMG's Washington National Tax Exempt Organizations Tax group

+1 (202) 533-3084





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