Partners in Charity, Inc. v. Commissioner

PARTNERS IN CHARITY, INC., PETITIONER v. COMMISSIONER

OF INTERNAL REVENUE, RESPONDENT

Docket No. 1701–11X. Filed August 26, 2013.

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-pay-

ment 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 retro-

actively revoked his determination, and P filed for a declara-

tory 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 determina-

tion 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 peti-

tioner, 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 rev-

ocation was retroactively effective to the date of PIC’s incor-

poration 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 exam-

ination years PIC was operated exclusively for a charitable

purpose (we hold that it was not); and (2) whether, in retro-

actively 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).

1 Unless otherwise indicated, all section references are to the Internal

Revenue Code (26 U.S.C.), and all Rule references are to the Tax Court

Rules of Practice and Procedure.

151

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00001 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

152 141 UNITED STATES TAX COURT REPORTS (151)

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 Wash-

ington, 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 contribu-

tions 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 offi-

cers have personal relationships.’’ In addition PIC reported

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00002 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 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 assur-

ances (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 commu-

nity-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 rec-

ognition 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 incor-

poration 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 pay-

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00003 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

154 141 UNITED STATES TAX COURT REPORTS (151)

ment 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 prop-

erty’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 Participa-

tion 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) deliv-

ered 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 assist-

ance 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.

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00004 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 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’’.

‘‘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 the purchase of your new home.

The terms of the grant application are consistent with PIC’s

practices that its payment of a DPA grant was subject to the

condition precedent that PIC receive a ‘‘Seller Participation

Agreement’’, pursuant to which the seller agreed to con-

tribute to PIC the grant amount plus a fee if a home buyer

using the PIC program purchased the seller’s house.

If the buyer was unsuccessful in obtaining a loan (or if the

lender did not actually provide the loan proceeds shortly

after PIC’s funds were received by the closing office), then

the buyer agreed that the escrow agent would return the

down payment funds to PIC. If the purchase transaction con-

cluded successfully, then the buyer was under no obligation

to repay the DPA grant to PIC.

The flow of funds at closing

The record contains several HUD–1 settlement statements

for transactions in which PIC participated. The HUD–1 lists

PIC’s DPA grant as an ‘‘amount paid by or on behalf of bor-

2 PIC also donated a small portion of each seller’s contribution to other

charitable organizations.

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00005 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

156 141 UNITED STATES TAX COURT REPORTS (151)

rower’’, and it lists the seller’s contribution and fee to PIC as

a ‘‘reduction in amount due to the seller’’. An escrow agent

generally transferred the seller’s payments to PIC at closing

or shortly thereafter. Thus, the essence of the arrangement

was that the buyer was excused from having to come up with

the money to make a down payment; and the down payment

was instead indirectly paid by the seller 3 out of the sales

proceeds that were provided by the lender.

The buyers’ incomes

Although PIC collected information about grantee buyers’

annual incomes and ethnicities, PIC did not use this or any

other information to assure that a grantee was a member of

the class described in the policy statement (‘‘families earning

60% or less of the area’s median income as adjusted for

family size’’) that PIC provided when the IRS was consid-

ering its application. PIC did not collect any information con-

cerning the buyer’s marital or parental status (and so could

not know ‘‘family size’’). PIC made the DPA program avail-

able indiscriminately to a broad range of buyers, not just

those with low incomes or in under-served populations. 4 Mr.

Konkus testified at trial about an example of an $85,000

home (‘‘certainly a modest house, Your Honor’’) that was

financed by a loan from the Federal Housing Authority

(‘‘FHA’’) 5 that required a down payment of 3%—calling for

3 As

we noted above, the seller’s contribution did not directly fund the

down payment in his own transaction, which came instead from funds ad-

vanced to the escrow agent by PIC. However, since 99.8% of the sellers

participating in the PIC DPA program ‘‘contributed’’ at closing an amount

equal to the down payment plus PIC’s fee, it is clear that a given seller

indirectly provided the down payment for his own transaction.

4 One of PIC’s fliers advertised: ‘‘If you can get the mortgage, we’ll give

you the down payment. It’s extremely easy to receive your FREE gift from

PIC. In fact, there is only one requirement you must meet. You must qual-

ify for any eligible loan program with your lender. Don’t worry; they have

many programs to meet your needs.’’ Another flyer advertised: ‘‘No Income,

Asset or First Time Buyer Restrictions’’.

5 Congress created the FHA through the National Housing Act of 1934,

ch. 847, sec. 2, 48 Stat. at 1246 (codified as amended at 12 U.S.C. sec. 1709

(2006)). FHA was established primarily for the purpose of insuring mort-

gage lenders against default by borrowers. Id. sec. 1709(b)(9). Before FHA

can insure a single-family home mortgage, the loan must meet certain eli-

gibility requirements set forth in the National Housing Act. 12 U.S.C. sec.

1709. One of these eligibility requirements involves the 3% down payment

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00006 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 157

PIC to make a DPA grant of $2,550. However, throughout

2002 and 2003 almost 600 of PIC’s DPA grants exceeded

$10,000; and PIC made at least two DPA grants of $100,000

or more to assist buyers purchasing property priced over $1

million.

PIC also collected information about buyers’ financing

arrangements. In most cases buyers using PIC’s DPA pro-

gram obtained FHA loans. This fact, however, does not show

that the PIC buyers are members of a charitable class. Con-

trary to Mr. Konkus’s assertions, there does not appear to

have been a maximum income level that would have dis-

qualified a borrower from receiving an FHA loan; rather, the

only limitations on FHA loans appear to have been related

to a borrower’s credit-worthiness and the value of the pur-

chased house. 6 In addition, PIC did not limit its program to

buyers who used FHA financing. Any financing (including

conventional mortgages) was permissible.

Payment by and benefits to sellers

PIC advertised that its DPA program financially benefited

sellers by: (1) providing sellers with ready buyers, (2)

enabling the sellers to sell for higher prices, 7 and (3)

allowing them to sell faster because of the larger pool of

of the home’s acquisition cost. Id. sec. 1709(b)(9).

6 See 12 U.S.C. sec. 1709; 24 C.F.R. secs. 203.17–203.26 (2012) (Mortgage

provisions). PIC points to no specific rule, regulation, or guideline that re-

stricts FHA loans to the poor.

7 Several of PIC’s promotional materials claimed that PIC’s DPA pro-

gram generally increased sellers’ net proceeds. One particular flyer listed

step-by-step instructions for sellers; and, after stating that sellers were re-

quired to pay PIC the down payment amount and a fee, the flyer stated:

To make the transaction fair for you, the buyer will most likely offer full

value on your property. This benefits you dramatically. To illustrate this,

you need to know that on average, sellers take a reduction in the price

to sales price of 5–7%. This means that a home listed at $100,000 would

normally sell for $93,000 to $95,000 if the buyer didn’t use the PIC Pro-

gram. If they use the program, you will most likely sell your home for

the list price of $100,000 and contribute $3,000 of the downpayment plus

a fee of only .75% of the sales price to PIC. This means you’ll net

$96,250 instead of $93,000-$95,000.

That’s $1,250-$3,250 MORE FOR USING PIC! We’re Helping You PIC

Your Future!

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00007 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

158 141 UNITED STATES TAX COURT REPORTS (151)

potential buyers. 8 Consistent with the language in the

‘‘Seller Participation Agreement’’ that PIC’s benefits to

sellers were ‘‘in consideration for’’ sellers’ contributions and

fees, we find that in PIC’s transactions with sellers, the

seller paid PIC a fee for a service. PIC received virtually all

of its funding from payments by sellers for the services it

provided to them; and when considered in combination with

PIC’s marketing strategy, commission-like fee structures,

and significant revenues, we find that PIC’s commercial

activity with sellers was a substantial part of PIC’s oper-

ation. This commercial activity was in fact PIC’s primary

purpose.

PIC’s other activities

In conjunction with the DPA program, PIC educated poten-

tial buyers about purchasing a home and about various

responsibilities associated with home ownership. The edu-

cational materials provided by PIC also helped buyers to

develop action plans for buying a home. PIC’s educational

programs were evidently informative and, we assume, bene-

ficial to prospective home buyers. However, we find that pro-

viding education to home buyers was neither PIC’s exclusive

nor its primary purpose.

PIC contends that by requiring a copy of an FHA appraisal

report before making a DPA grant, it assured that prospec-

tive houses were habitable, clean, and decent properties suit-

able for low-income buyers. In addition, PIC alleges that it

examined HUD–1 settlement statements to assure that

buyers were not paying inappropriate fees. Collecting the

appraisal report and the HUD–1 might have provided PIC

with information that, if examined carefully, might have

helped enable it to protect buyers from uninhabitable or

unsafe property or inappropriate lender fees; but we find

that PIC did not use information from the appraisal reports

8 Another PIC flyer that was directed to sellers and builders stated:

Participating in the PIC program opens up the seller’s market by 30–

40% because more buyers qualify. * * * There are no restrictions, like

many bond or local affordable housing programs: NO First Time Home-

buyer Requirements; NO Income Asset Restrictions; NO Recapture

Clauses (the borrower never needs to pay it back); NO Reserved Re-

quired; NO Geographic Boundaries; Use With Any Program.

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00008 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 159

and the HUD–1 statements for these purposes. PIC

requested only the first two pages of appraisal reports, and

this limited excerpt would not provide adequate information

for evaluating the habitability of a house. For instance,

information about adverse environmental conditions that the

property might have (e.g., lead-based paint) or repairs that

the property might need would often be omitted from those

two pages or would be discussed in an addendum or addi-

tional comments to the appraisal report not provided to or

examined by PIC. PIC did not require or request a home

inspection report on a house before making a DPA grant. In

addition, PIC received the HUD–1 only after the purchase

was already completed, and any review of lender fees

reported on the HUD–1 would have come too late to provide

any benefit to buyers. PIC thus did not protect buyers from

hazardous fees or uninhabitable properties.

With regard to ‘‘other affordable housing efforts’’ men-

tioned in PIC’s Form 1023, PIC’s financial statements

indicate that PIC lent $513,478 to ‘‘Partners in Charity Mar-

keting’’, which Mr. Konkus owned and which in 2003 he

renamed ‘‘Restoration America’’; but we cannot tell from the

record how these funds were used nor whether the loan had

a charitable purpose. PIC did not persuade us that excess

PIC funds were used to develop low-income apartments for

seniors and families or to acquire and rehabilitate single-

family homes for low-income individuals.

PIC’s finances

PIC’s income and expenditures greatly exceeded the

expectations it reported on its Form 1023. According to

annual financial reports, PIC received payments from home

sellers participating in the DPA program totaling

$28,644,173 in 2002 and $32,439,723 in 2003. Revenues from

home sellers were PIC’s primary source of income in 2002

and 2003, 9 and PIC did not receive any charitable contribu-

tions, gifts, or grants in those years.

In 2002 PIC made 5,743 DPA grants totaling $25,206,041.

Similarly, in 2003 PIC made 5,704 DPA grants totaling

$29,058,724.

9 PIC also reported revenue from interest on cash investments, divi-

dends, and gain from the sales of securities.

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00009 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

160 141 UNITED STATES TAX COURT REPORTS (151)

Apart from its DPA grant obligations, PIC incurred

expenses in 2002 totaling $1,641,125. Of this amount

$564,933 was for marketing expenses paid to Royale

Dynamics, Inc. (RDI), a company (discussed below) that was

wholly owned by Mr. Konkus’s wife. Similarly, in 2003 PIC

incurred expenses totaling $2,266,831, which included

$580,234 paid to RDI. Apart from DPA grants, PIC’s aggre-

gate payments to RDI accounted for its largest expenditures

in both 2002 and 2003.

By the end of 2003, PIC had accumulated unrestricted net

assets totaling $3,592,271.

Royale Dynamics, Inc.

RDI is a for-profit Illinois corporation, wholly owned by

Mr. Konkus’s wife, Tammy Butler. RDI was created in 1983,

and by 2001 Ms. Butler had developed experience marketing

in the mortgage industry. Mr. Konkus decided to use his

wife’s company to promote PIC’s DPA program to lenders

who offered mortgage products to low-income borrowers most

likely to benefit from PIC’s services. In 2001 PIC entered into

an exclusive marketing agreement with RDI, under which

RDI would design all marketing, Web site, and advertising

materials, and would promote the PIC Program in the mort-

gage and real estate industry. PIC’s contracts with RDI

stated that RDI’s objective was to enable PIC to ‘‘close the

highest possible number of [t]ransactions’’ and ‘‘quickly

obtain market share and a national presence in the delivery

of the PIC program services’’. To this end, RDI created mate-

rials marketing the PIC program to buyers, sellers, and

home builders, as well as marketing materials and sales

technique training for real estate agents and lenders, to help

them generate business and close transactions.

In exchange for its service obligations, RDI was to receive

30% of PIC’s fees generated from each transaction that used

a PIC DPA grant, subject to the following limitations: RDI’s

annual compensation could not exceed $567,000 in 2002 and

$581,000 in 2003. RDI’s compensation from PIC was similar

to that of other firms in the DPA industry. PIC provided

substantially all of RDI’s revenue in 2002 and 2003.

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00010 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 161

IRS’s revocation

The IRS examined PIC’s activities during the years 2002

and 2003, and on October 22, 2010, the IRS issued a final

adverse determination, revoking its recognition of PIC’s tax-

exempt status. The IRS concluded that PIC did not operate

exclusively for an exempt purpose, as required under section

501(c)(3). The IRS’s conclusion was based on its findings

that: (1) PIC’s net earnings inured to the benefit of private

individuals or shareholders; (2) more than an insubstantial

part of PIC’s activities was not in furtherance of an exempt

purpose; (3) PIC operated for the benefit of private interests;

and (4) PIC operated for the primary purpose of carrying on

an unrelated trade or business.

The final adverse determination letter states in a header

that the applicable tax years are ‘‘12/31/02 and subsequent’’;

however, the text states that the IRS made its adverse deter-

mination retroactive to PIC’s incorporation date, July 10,

2000.

OPINION

I. Procedural issues

Section 7428(a) confers jurisdiction on the Tax Court ‘‘[i]n

a case of actual controversy’’ to ‘‘make a declaration’’ with

respect to an organization’s ‘‘continuing qualification’’ as an

organization described section 501(c)(3) that is exempt from

tax under section 501(a). For purposes of section 7428, ‘‘a

determination with respect to continuing qualification * * *

includes any revocation of or other change in a qualification’’.

Sec. 7428(a).

The parties have tried this case under Rule 217(a), which

provides: ‘‘Disposition of an action for declaratory judgment

involving a revocation * * * may be made on the basis of the

administrative record alone only where the parties agree that

such record contains all the relevant facts and that such

facts are not in dispute.’’ (Emphasis added.) Since PIC does

not agree that the administrative record contains all the rel-

evant facts, we do not limit the evidence to that which is con-

tained in the administrative record. Furthermore, Rule

217(b) provides that, in an action involving a revocation, ‘‘the

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00011 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

162 141 UNITED STATES TAX COURT REPORTS (151)

Court may, upon the basis of the evidence presented, make

findings of fact which differ from the administrative record.’’

The parties did not address the standard of review that we

should apply, although both implicitly tried it under a de

novo standard, with the Commissioner free to make new

arguments at trial. See H.R. Rept. No. 94–658, at 285 (1976),

1976–3 C.B. (Vol. 2) 977 (‘‘The court is to base its determina-

tion upon the reasons provided by the Internal Revenue

Service in its notice to the party making the request for a

determination, or based upon any new argument which the

Service may wish to introduce at the time of the trial’’); cf.

IHC Health Plans, Inc. v. Commissioner, T.C. Memo. 2001–

246, 2001 WL 1103284, at *11, aff ’d, 325 F.3d 1188 (10th

Cir. 2003).

In these circumstances, the burden of proof rests on the

petitioner to demonstrate that the IRS’s determination was

incorrect. Rule 142(a); 10 Rameses Sch. of San Antonio, Tex.

v. Commissioner, T.C. Memo. 2007–85. PIC’s pretrial memo-

randum contends that the burden should shift to the

Commissioner pursuant to section 7491. The Commissioner

argues that section 7491 does not apply in a declaratory

judgment action brought under section 7428. Because we

determine by the preponderance of the evidence the facts in

this case that relate to the revocation of petitioner’s exemp-

tion ruling, we need not determine whether the burden of

proof on the issue of tax-exempt status has shifted. See Mar-

tin Ice Cream Co. v. Commissioner, 110 T.C. 189, 210 n.16

(1998).

On the issue of the retroactivity of the IRS’s adverse deter-

mination, our standard of review is different. Section

7805(b)(8) provides that ‘‘[t]he Secretary [of the Treasury]

may prescribe the extent, if any, to which any ruling

(including any judicial decision or any administrative deter-

mination other than by regulation) relating to the internal

10 Under

the pre-2003 Rule 217, the petitioner in a declaratory judgment

action bore the burden of proof with regard to reasons offered in the deter-

mination (or revocation) letter, and the Commissioner bore the burden of

proof with any new reasons. Rule 217(c), 109 T.C. 661. However, in 2003

we amended Rule 217, deleting paragraph (c) because we did ‘‘not wish to

suggest by Rule that * * * section [7491] does not apply [to declaratory

judgment actions]’’. Rule 217 note, 120 T.C. 641. Thus, we assume the gen-

eral rules in Rule 142(a) apply in this declaratory judgment action.

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00012 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 163

revenue laws shall be applied without retroactive effect.’’

Pursuant to this authority the Secretary has given the IRS

discretion to retroactively revoke exemption rulings or deter-

mination letters where ‘‘the organization omitted or mis-

stated a material fact, [or] operated in a manner materially

different from that originally represented’’. 26 C.F.R. sec.

601.201(n)(6)(i), Statement of Procedural Rules. A retroactive

revocation of a tax-exemption ruling will not be disturbed in

the absence of an abuse of discretion, Auto. Club v. Commis-

sioner, 353 U.S. 180, 184 (1957), and we therefore review

that retroactive determination for abuse of discretion.

II. Section 501(c)(3)

A. In general

In order to be described in section 501(c)(3), an organiza-

tion must be both ‘‘organized and operated exclusively[11] for’’

certain specified exempt ‘‘purposes’’, which include religious,

charitable, educational, and scientific purposes. Sec.

501(c)(3); Am. Campaign Acad. v. Commissioner, 92 T.C. at

1062–1063. The Commissioner does not dispute that PIC is

organized exclusively for exempt purposes (since PIC’s orga-

nizing documents do not fail to so state), see 26 C.F.R. sec.

1.501(c)(3)–1(b), Income Tax Regs., but instead maintains

that PIC failed to operate exclusively for exempt purposes (a

requirement that calls for an examination of PIC’s actual

operations).

Determining whether an organization pursues an exempt

purpose requires more than a superficial observation of its

activities. B.S.W. Grp., Inc. v. Commissioner, 70 T.C. 352,

356–357 (1978) (‘‘the purpose towards which an organiza-

tion’s activities are directed, and not the nature of the activi-

11 26 C.F.R. section 1.501(c)(3)–1(c)(1), Income Tax Regs., provides: ‘‘An

organization will be regarded as operated exclusively for one or more ex-

empt purposes only if it engages primarily in activities which accomplish

one or more of such exempt purposes specified in section 501(c)(3). An or-

ganization will not be so regarded if more than an insubstantial part of its

activities is not in furtherance of an exempt purpose.’’ (Emphasis added.)

That is, under the statute the exempt purposes must be ‘‘exclusive’’, but

the regulation provides that an organization may be tax exempt even if its

operations include activities in furtherance of non-exempt purposes, pro-

vided that those activities are ‘‘insubstantial’’. PIC’s non-exempt purposes

(and associated activities) are very substantial.

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00013 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

164 141 UNITED STATES TAX COURT REPORTS (151)

ties themselves, is ultimately dispositive of the organization’s

right to be classified as a section 501(c)(3) organization’’).

Research may further an exempt scientific purpose, but the

same research undertaken in a different context may be part

of a taxable business. See, e.g., Jockey Club v. Helvering, 76

F.2d 597, 597–598 (2d Cir. 1935), aff ’g 30 B.T.A. 670 (1934).

Distributing religious literature may further an exempt reli-

gious purpose, or in a different context it may be part of a

taxable enterprise. Scripture Press Found. v. United States,

285 F.2d 800 (Ct. Cl. 1961). Teaching may further an exempt

educational purpose, but the same sort of teaching under-

taken in a different context may be part of a taxable, for-

profit enterprise. See, e.g., Underwriters’ Labs. v. Commis-

sioner, 135 F.2d 371, 373–374 (7th Cir. 1943), aff ’g 46 B.T.A.

464 (1942); Rameses Sch. of San Antonio, Tex. v. Commis-

sioner, T.C. Memo. 2007–85. One may feed the hungry in a

soup kitchen or in a four-star restaurant; one may heal the

sick in a Third-World clinic or in a lucrative medical practice;

one may build a chapel in apostolic poverty with St. Francis

or in a construction business. Likewise, one may contribute

down payments in order to house the homeless poor, or in

order to facilitate a commercial real estate business. Even in

a commercial, profit-motivated context, such activities may

be wholesome and commendable; but they will not support

tax-exempt status unless they are undertaken to further an

exempt purpose.

Moreover, the requisite ‘‘purpose’’ does not consist simply

of a charitable motive (i.e., a desire that charitable benefit

ultimately result from one’s activities). Someone’s main

subjective motive for engaging in an activity may be, for

example, religious, but his religious organization will be tax

exempt only if the organization is operated to accomplish a

religious purpose. In Scripture Press Found., 285 F.2d at 804,

an organization that published and sold Sunday School mate-

rials was held not exempt, notwithstanding the sincere reli-

gious motives of its principals:

We think that plaintiff ’s assertion that its instructional activities are

more important to plaintiff than its selling activities is entirely sincere.

The evidence in this case * * * shows that throughout its history Scrip-

ture Press has been led by people of devout and intense religious convic-

tion. However, the intensity of the religious convictions of the plaintiff ’s

members and officers cannot operate to exempt them from the tax law

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00014 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 165

if the activities of the plaintiff cannot in themselves justify such an

exemption. * * *

Likewise, a founder’s subjective motive to educate poor

people or facilitate their housing will not support tax-exempt

status for his organization if it is not actually operated to

accomplish a tax-exempt purpose.

To determine PIC’s ‘‘purpose’’ within the meaning of sec-

tion 501(c)(3), we therefore examine not Mr. Konkus’s subjec-

tive motives but PIC’s activities in their context.

B. Charitable class

PIC contends that it operated to serve charitable purposes

by providing to low-income individuals both DPA grants and

financial counseling seminars and other educational pro-

grams designed to prepare potential home buyers for the

responsibility of home ownership. PIC made over 5,700

grants in both 2002 and 2003 (about 16 a day) totaling over

$25 million per year. Of its proffered activities, PIC’s DPA

program was certainly its primary activity during 2002 and

2003, with the educational programs either secondary or

supplemental to the DPA program. The Commissioner argues

that PIC’s DPA program was not operated to achieve a chari-

table purpose. Accordingly, our first inquiry is whether PIC’s

DPA program served a charitable purpose.

The term ‘‘charitable’’ for purposes of section 501(c)(3)

includes: (1) relief of poverty; (2) advancement of education

or science; (3) advancement of religion; and (4) other pur-

poses that are beneficial to the public or the community at

large. 26 C.F.R. sec. 1.501(c)(3)–1(d)(2); see also Columbia

Park & Recreation Ass’n, Inc. v. Commissioner, 88 T.C. 1, 18–

21 (1987), aff ’d without published opinion, 838 F.2d 465 (4th

Cir. 1988). It would be possible to provide home-purchase

down payment grants in such a manner that they further

charitable purposes, see Rev. Rul. 2006–27, 2006–1 C.B. 915;

but merely inducing home sellers to pay a fee and to provide

funds for home buyers’ down payments does not establish a

charitable purpose. For the purpose of the program to be

charitable, the recipients of the down payment grants must

be members of a charitable class so that their receipt of the

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00015 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

166 141 UNITED STATES TAX COURT REPORTS (151)

grants helps to relieve the poor and distressed 12—or furthers

some other charitable purpose. See Am. Campaign Acad. v.

Commissioner, 92 T.C. at 1076–1077. PIC’s grants were not

targeted to a charitable class.

PIC contends that it relieved the poor and distressed by

following the guidelines set forth in Rev. Proc. 96–32, 1996–

1 C.B. 717. That revenue procedure describes a situation

involving organizations that provide low-income housing

assistance that the IRS considers to be ‘‘charitable’’, because

the organizations ‘‘relieve the poor and distressed’’. The rev-

enue procedure’s first requirement is that—

[t]he organization establishes for each project that (a) at least 75 percent

of the units are occupied by residents that qualify as low-income; and

(b) either at least 20 percent of the units are occupied by residents that

also meet the very low-income limit for the area or 40 percent of the

units are occupied by residents that also do not exceed 120 percent of

the area’s very low-income limit. Up to 25 percent of the units may be

provided at market rates to persons who have incomes in excess of the

low-income limit. [Id. sec. 3.01(1), 1996–1 C.B. at 717.]

The Commissioner does not dispute that an organization like

PIC, which provides down payment assistance, could rely on

Rev. Proc. 96–32, supra; but the Commissioner argues that

PIC fails to satisfy the requirements set out therein. While

PIC ostensibly adopted a policy similar to the requirement of

Rev. Proc. 96–32, supra, quoted above, PIC’s policy was only

nominal. PIC did not implement any internal controls to

assure that it accomplished its stated policy. To the contrary,

PIC offered its DPA grants to anyone who qualified for a

mortgage and requested down payment assistance, and there

were no income limits.

PIC argues that in fact it served low-income individuals,

pointing to PIC’s requirement that grant recipients report

12 Relying

on Government Accountability Office Publication No. 06–24,

‘‘Mortgage Financing, Additional Action Needed To Manage Risks of FHA-

Insured Loans With Down Payment Assistance’’ (November 2005), the

Commissioner alternatively contends that seller-funded down payment as-

sistance programs do not actually benefit buyers. PIC’s literature indicates

that its ‘‘contribution’’ of the down payment discourages the buyers from

negotiating the price and consequently results in substantially higher sale

prices—thus possibly causing a net reduction in the amount of equity that

the typical buyer has in the house. However, since we find other bases for

our holding that PIC did not operate exclusively for charitable purposes,

we do not reach this alternative argument.

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00016 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 167

their annual income. PIC argues that examination of those

income figures indicates that grant recipients were in fact

low-income individuals. PIC also cites the fact that almost all

of its grant recipients qualified for FHA loans. These argu-

ments fail for two reasons:

First, merely establishing after the fact that grant recipi-

ents generally had low incomes, when the program

indiscriminately offered the grants to anyone who wanted

them, does not establish that the organization was operated

for an exempt purpose. As we noted above, the key factor for

exemption under section 501(c)(3) is the purpose of the

activity and not the nature of the activity. B.S.W. Grp., Inc.

v. Commissioner, 70 T.C. at 356–357. PIC’s assertions, if

true, might enable one to say that the PIC’s activities had a

charitable effect, which would be commendable; but such an

effect does not alone warrant tax-exempt status under sec-

tion 501. While evidence of an organization’s effect is often

indicative of the organization’s purpose, the effect per se may

not carry the day (as the founders of Scripture Press learned

when the religious effects of their publications did not result

in tax-exempt status, Scripture Press Found., 285 F.2d at

805–806).

Second, PIC’s evidence does not establish that in fact its

grants went to persons with low incomes. PIC did not use

grantees’ income and family size as qualification criteria in

its grant approval process (though it represented to the IRS

that it would do so). Rather, PIC approved grants without

regard to grantees’ incomes. Moreover, PIC did not provide

any analysis or statistics that would support a finding: (1)

that its grantees were poor, distressed, or underprivileged or

(2) that providing down payment assistance to them would

constitute relief to such classes. See 26 C.F.R. sec.

1.501(c)(3)–1(d)(2). PIC merely asserts, without evidence,

that it served ‘‘low and moderate income buyers’’.

Similarly, showing that many PIC grantees had been

approved for FHA loans does not establish that PIC operated

to relieve poverty. As we noted above, there do not appear to

have been any income limitations that would have prevented

upper-income individuals from qualifying for an FHA loan.

More important, even if FHA rules did restrict FHA loans to

individuals with low incomes, PIC did not limit its program

to buyers that used FHA financing. Rather, PIC’s DPA

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00017 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

168 141 UNITED STATES TAX COURT REPORTS (151)

grants were available to individuals with any type of

financing, not just financing often used by low-income

buyers.

Indiscriminately giving money away to anyone who will

take it is not a charitable purpose, even if some of the recipi-

ents are poor people. Section 501(c)(3) requires more; it

requires that the money be given away in such a way that

it furthers a purpose of reducing poverty, promoting edu-

cation, science, or religion, or promoting another public good.

We conclude that, during 2002 and 2003, PIC’s DPA program

did not operate for a charitable purpose.

C. Commerciality

During the examination years, PIC engaged in two over-

lapping but distinct forms of activities: (1) activities that ulti-

mately benefited the buyers (e.g., DPA grants and home

owner education) and (2) activities that ultimately benefited

the sellers (e.g., providing ready buyers, and promoting

faster sales at generally higher prices). PIC’s transactions

with sellers generated significant revenues (over $28 million

in 2002 and $32 million in 2003) and were clearly substan-

tial. Even assuming, arguendo, that PIC’s buyer-benefiting

activities served an exempt purpose, PIC’s seller-benefiting

activities failed to further an exempt purpose and defeat the

contention that PIC was operated exclusively for a charitable

purpose. See Better Bus. Bureau of Wash., D.C. v. United

States, 326 U.S. 279, 283 (1945) (‘‘the presence of a single

* * * [non-exempt] purpose, if substantial in nature, will

destroy the exemption regardless of the number or impor-

tance of truly * * * [exempt] purposes’’).

An organization is not necessarily disqualified from tax-

exempt status solely because it generates fees in exchange

for goods or services, or because it conducts a business. How-

ever, if an organization conducts activity ‘‘with an apparently

commercial character as its primary activity, ‘that fact

weighs heavily against exemption.’’’ Living Faith, Inc. v.

Commissioner, 950 F.2d 365, 373 (7th Cir. 1991) (quoting

B.S.W. Grp., Inc. v. Commissioner, 70 T.C. at 359), aff ’g T.C.

Memo. 1990–484.

When an organization engages in substantial fee-for-

service or other business activities, the regulations under

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00018 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 169

section 501(c)(3) provide two overlapping standards to con-

sider: (1) whether the organization was ‘‘organized or oper-

ated for the primary purpose of carrying on an unrelated

trade or business, as defined in section 513’’, 26 C.F.R. sec.

1.501(c)(3)–1(e), and (2) whether the activity fails to further

the organization’s exempt purpose, 26 C.F.R. sec. 1.501(c)(3)–

1(c)(1). If the answer to either of those is yes, then the

organization is not operated exclusively for an exempt pur-

pose. PIC fails under both standards.

If a trade or business is not ‘‘substantially related (aside

from the need of such organization for income or funds or the

use it makes of the profits derived)’’ to the performance of a

‘‘charitable, educational, or other purpose or function consti-

tuting the basis for its exemption under section 501’’, then it

is an ‘‘unrelated trade or business’’. Sec. 513(a). A tax-exempt

organization cannot operate for the primary purpose of car-

rying on an unrelated trade or business. 26 C.F.R. sec.

1.501(c)(3)–1(e). We are to ‘‘consider all the circumstances’’ in

deciding whether PIC is operated for the primary purpose of

carrying on an unrelated trade or business or whether PIC’s

fee-generating activity furthered a charitable purpose. Impor-

tant factors indicating a nonexempt commercial purpose

include ‘‘the particular manner in which an organization’s

activities are conducted, the commercial hue of those activi-

ties, and the existence and amount of annual or accumulated

profits’’. B.S.W. Grp., Inc. v. Commissioner, 70 T.C. at 358.

PIC required the payment of fees in more than 99% of its

transactions. By the end of 2003, PIC had generated accumu-

lated profits of $3,592,271. With the small exception of

interest and capital gains from securities, seller fees were

PIC’s only source of revenue in 2002 and 2003. PIC contracts

with RDI encouraged ‘‘clos[ing] the highest possible number

of [t]ransactions’’ and ‘‘quickly obtain[ing] market share’’ and

resulted in significant funds paid to PIC’s director’s wife.

As a purported charitable organization, PIC nominally

satisfied HUD guidelines as a source for down payment

assistance; 13 but in fact PIC’s arrangement with sellers (i.e.,

13 With regard to FHA loans, 12 U.S.C. sec. 1709(b)(9)(B) (2012) allows

borrowers to acquire down payment funds from family members. HUD pol-

icy allowed down payment funds from a few additional sources: the bor-

rower’s employer or labor union, a governmental entity, a charitable orga-

Continued

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00019 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

170 141 UNITED STATES TAX COURT REPORTS (151)

PIC pays down payment money into escrow in advance of

closing and obtains reimbursement of it from the seller

through the closing) was substantially equivalent to trans-

actions that were disallowed under HUD policy, i.e., home

sellers providing potential buyers with down payments to

facilitate sales. See infra note 14. By using its founder’s

expertise and relationships in the real estate business and

using its ability to facilitate otherwise impermissible trans-

actions for the apparent benefit of both sellers and buyers,

PIC was able to create a lucrative fee-generating business.

Apart from funding buyers’ grants for the benefit of sellers,

PIC’s seller-related activities did nothing to further PIC’s

purported charitable goals. See Rev. Rul. 2006–27, supra.

PIC’s primary purpose was to broker as many transactions

as possible and thus to generate significant net profits,

regardless of whether the transactions achieved a charitable

end. Accordingly, even if PIC’s DPA program had served a

charitable class of buyers (it did not), PIC did not operate

exclusively for charitable purposes. See Easter House v.

United States, 12 Cl. Ct. 476, 486 (1987) (holding that an

adoption agency that provided related health and educational

services to pregnant women who agreed to place their

newborns for adoption with the organization was not exempt

because the business purpose was the primary goal of the

adoption agency), aff ’d without published opinion, 846 F.2d

78 (Fed. Cir. 1988). Rather, since PIC’s fee-generating

activity was its primary purpose for operating and that

activity was not ‘‘substantially related * * * aside from the

need of such organization for income or funds’’ to a charitable

end, PIC operated for the primary purpose of carrying on an

‘‘unrelated trade or business’’. See sec. 513; 26 C.F.R. sec.

1.501(c)(3)–1(e).

PIC argues that it did not give seller funds to a buyer—

an important requirement under the HUD guidelines. See

Penobscot Indian Nation v. HUD, 539 F. Supp. 2d 40, 44

(D.D.C. 2008). PIC contends that it received fees from sellers

only after closing and that the fees were necessary for PIC

nization, and a close friend with a clearly defined and documented interest

in the borrower. HUD Handbook 4155.1, Rev. 5, at 2–24 (October 2003).

However, HUD policy did not allow down payment assistance to come di-

rectly from home sellers or parties with an interest in the transaction. Pe-

nobscot Indian Nation v. HUD, 539 F. Supp. 2d 40, 44 (D.D.C. 2008).

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00020 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 171

to recoup the costs of its grants, and, therefore, the seller-

paid fees furthered the grant-making purpose. 14 This argu-

ment misses its mark. Before PIC gave funds to a buyer, PIC

required a promise from the seller that, immediately after

closing, the seller would pay PIC the buyer’s grant amount

plus a fee–and the evidence shows that in fact the seller’s

payment was made to PIC from the escrow, i.e., without risk

that the seller would renege. In essence, a DPA grant went

from PIC to the buyer, to the seller, and right back to PIC.

More important, however, PIC’s argument fails to provide an

explanation for its very substantial profits and for its obvious

profit motive. No entity accumulates profits of $3.6 million in

two years by accident. Those profits are strong evidence that

PIC’s commercial activities with sellers were its primary pur-

pose.

D. Educational and other activities

PIC also argues that it devoted significant time and

resources to financial counseling seminars and other edu-

cational programs designed to prepare potential home buyers

for the responsibility of home ownership, which PIC contends

supports a conclusion that it operated for educational pur-

poses. PIC’s efforts to educate potential buyers were signifi-

cant and perhaps even commendable. However, we cannot

analyze PIC’s educational activities in a vacuum; they must

be considered in conjunction with PIC’s other substantial

activities—in particular its DPA program and transactions

with sellers, neither of which furthered exempt purposes.

Many for-profit, non-exempt businesses go to considerable

efforts to educate their potential consumers. Teaching can

further a tax-exempt educational purpose, or it can further

non-exempt purposes. In PIC’s case, its teaching was a

means to the end of ‘‘clos[ing] the highest possible number of

[t]ransactions’’.

14 PIC

argues that its recouping its DPA grants from the sellers is simi-

lar to a tax-exempt hospital’s recouping fees associated with medical care

it provides. A hospital provides medical care, whereas PIC does not, of

course, provide housing, nor does it actually provide down payment funds

for the house sale but merely provides cover for the fact that the seller is

providing the down payment. But even assuming that PIC’s activity is

analogous to that of a tax-exempt hospital, PIC points to no instance of

a tax-exempt hospital’s profiting so handsomely from the recouping of fees.

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00021 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

172 141 UNITED STATES TAX COURT REPORTS (151)

Moreover, as the Supreme Court has instructed, ‘‘the pres-

ence of a single non-educational [or non-charitable] purpose,

if substantial in nature, will destroy the exemption regard-

less of the number or importance of truly educational [or

charitable] purposes.’’ Better Bus. Bureau of Wash., D.C., 326

U.S. at 283. Accordingly, even if PIC provided helpful edu-

cation to potential buyers, the presence of its other substan-

tial non-exempt activities prevents us from concluding that

PIC was operated exclusively for educational purposes.

E. Conclusion

Since we have determined that PIC failed to serve a chari-

table class and that a substantial amount of its activity did

not further a charitable purpose (but furthered instead an

unrelated business), and since either of these determinations

by itself is fatal to PIC’s claim to be an organization

described in section 501(c)(3), we need not address the IRS’s

other reasons for revoking PIC’s exempt status (i.e., private

inurement and private benefit).

III. Retroactive effect

The last issue we must address is the propriety of the

IRS’s making its revocation retroactive. As we explained

above in part I, section 7805(b)(8) and 26 C.F.R. sec.

601.201(n)(6)(i) give the IRS discretion to retroactively

revoke exemption rulings or determination letters where ‘‘the

organization omitted or misstated a material fact, [or] oper-

ated in a manner materially different from that originally

represented’’; and we review that retroactive revocation for

abuse of discretion.

PIC operated in a manner that was different from what it

represented to the IRS in its application. PIC represented

there that its purpose was to ‘‘provide down payment assist-

ance program for low income individuals and families’’, that

its ‘‘down payment assistance will be provided only to

individuals who have a financial need for such services’’, and

that PIC intended to meet the safe harbor guidelines set

forth in Rev. Proc. 96–27, supra, which would assure that

certain percentages of individuals PIC served had incomes at

specified levels below the area’s median income. Despite

these representations, both the administrative record and the

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00022 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE

(151) PARTNERS IN CHARITY, INC. v. COMMISSIONER 173

trial record show that PIC did not have any income limita-

tions for its grantees, nor did it screen buyers for down pay-

ment assistance based on income. Rather, PIC provided a

grant to any home buyer who qualified for a loan.

PIC reported on its Form 1023 that it would ‘‘solicit gifts

from corporations, foundations, and individuals with whom

the members, directors and officers have personal relation-

ships.’’ However, PIC received virtually all of its funding

from sellers; and contrary to PIC’s characterization, seller

payments were not gifts nor did PIC have personal relation-

ships with sellers. Instead, those receipts were in consider-

ation for the services PIC provided the sellers.

For these reasons, we conclude that the IRS did not abuse

its discretion in revoking its initial determination retro-

actively.

Decision will be entered for respondent.

f

VerDate Mar 15 2010 13:26 Feb 02, 2015 Jkt 000000 PO 00000 Frm 00023 Fmt 3857 Sfmt 3857 V:\FILES\BOUNDV~1.WIT\BVACDB~1.141\PARTNE~1 JAMIE