                            141 T.C. No. 2



                  UNITED STATES TAX COURT



        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-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.
                                         -2-

       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 74281 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).

       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.
                                       -3-

                              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.
                                        -4-

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 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
                                       -5-

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.
                                         -6-

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 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.
                                        -7-

“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. PIC would then use

the current seller’s payments to fund future grants and to cover PIC’s operating
                                         -8-

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 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 contribute

to PIC the grant amount plus a fee if a home buyer using the PIC program

purchased the seller’s house.




      2
       PIC also donated a small portion of each seller’s contribution to other
charitable organizations.
                                         -9-

      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 concluded 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 borrower”, 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 seller3 out of the sales proceeds that were provided by the lender.




      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 advanced 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.
                                        - 10 -

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 considering its application. PIC did not collect

any information concerning the buyer’s marital or parental status (and so could not

know “family size”). PIC made the DPA program available 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


      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 qualify 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 mortgage lenders
against default by borrowers. Id. sec. 1709(b)(9). Before FHA can insure a
single-family home mortgage, the loan must meet certain eligibility requirements
                                                                       (continued...)
                                        - 11 -

for 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 program obtained FHA loans. This fact,

however, does not show that the PIC buyers are members of a charitable class.

Contrary to Mr. Konkus’s assertions, there does not appear to have been a

maximum income level that would have disqualified 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 purchased house.6 In addition,

PIC did not limit its program to buyers who used FHA financing. Any financing

(including conventional mortgages) was permissible.




      5
        (...continued)
set forth in the National Housing Act. 12 U.S.C. sec. 1709. One of these
eligibility requirements involves the 3% down payment 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 restricts
FHA loans to the poor.
                                          - 12 -

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 potential

buyers.8 Consistent with the language in the “Seller Participation Agreement” that


      7
       Several of PIC’s promotional materials claimed that PIC’s DPA program
generally increased sellers’ net proceeds. One particular flyer listed step-by-step
instructions for sellers; and, after stating that sellers were required 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 Program. 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!
      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
      Homebuyer Requirements; NO Income Asset Restrictions; NO
      Recapture Clauses (the borrower never needs to pay it back); NO
                                                                     (continued...)
                                        - 13 -

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

operation. This commercial activity was in fact PIC’s primary purpose.

PIC’s other activities

      In conjunction with the DPA program, PIC educated potential buyers about

purchasing a home and about various responsibilities associated with home

ownership. The educational 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, beneficial to prospective home buyers.

However, we find that providing 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 prospective houses were habitable, clean, and

      8
       (...continued)
      Reserved Required; NO Geographic Boundaries; Use With Any
      Program.
                                       - 14 -

decent properties suitable 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

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 additional 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.
                                      - 15 -

      With regard to “other affordable housing efforts” mentioned in PIC’s

Form 1023, PIC’s financial statements indicate that PIC lent $513,478 to “Partners

in Charity Marketing”, 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 contributions,

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, dividends,
and gain from the sales of securities.
                                        - 16 -

        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

aggregate 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 mortgage and real estate industry.

PIC’s contracts with RDI stated that RDI’s objective was to enable PIC to “close
                                        - 17 -

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 materials 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.

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
                                         - 18 -

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 determination 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
                                        - 19 -

administrative record contains all the relevant facts, we do not limit the evidence

to that which is contained in the administrative record. Furthermore, Rule 217(b)

provides that, in an action involving a revocation, “the 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 determination 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

      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 determination
(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
                                                                       (continued...)
                                        - 20 -

Sch. of San Antonio, Tex. v. Commissioner, T.C. Memo. 2007-85. PIC’s pretrial

memorandum 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 the petitioner’s exemption ruling, we need not determine whether the

burden of proof on the issue of tax-exempt status has shifted. See Martin Ice

Cream Co. v. Commissioner, 110 T.C. 189, 210 n.16 (1998).

      On the issue of the retroactivity of the IRS’s adverse determination, 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 determination other than by regulation)

relating to the internal 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 determination letters where “the

organization omitted or misstated a material fact, [or] operated in a manner

      10
        (...continued)
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 general rules in Rule 142(a) apply in this
declaratory judgment action.
                                        - 21 -

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. Commissioner, 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 organization 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 organizing documents do not fail to so state), see 26 C.F.R.


      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 exempt
purposes only if it engages primarily in activities which accomplish one or more of
such exempt purposes specified in section 501(c)(3). An organization 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, provided that those activities are “insubstantial”. PIC’s non-
exempt purposes (and associated activities) are very substantial.
                                         - 22 -

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

organization’s activities are directed, and not the nature of the activities

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 religious 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 undertaken in a different context may be part of a taxable, for-profit

enterprise. See, e.g., Underwriters’ Labs. v. Commissioner, 135 F.2d 371, 373-

374 (7th Cir. 1943), aff’g 46 B.T.A. 464 (1942); Rameses Sch. of San Antonio,

Tex. v. Commissioner, T.C. Memo. 2007-85. One may feed the hungry in a soup
                                         - 23 -

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

materials was held not exempt, notwithstanding the sincere religious 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 Scripture Press has been led by people of devout and intense
      religious conviction. However, the intensity of the religious
      convictions of the plaintiff’s members and officers cannot operate to
                                        - 24 -

      exempt them from the tax law 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 section 501(c)(3), we

therefore examine not Mr. Konkus’s subjective 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 programs 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 charitable purpose. Accordingly, our first inquiry is whether PIC’s DPA

program served a charitable purpose.
                                        - 25 -

      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 purposes 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 grants helps to relieve the poor and distressed12--or furthers some




      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 assistance
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.
                                          - 26 -

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 revenue 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
                                        - 27 -

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 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 arguments fail for two reasons:

      First, merely establishing after the fact that grant recipients 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

section 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).
                                        - 28 -

      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 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 recipients are poor people. Section
                                        - 29 -

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 education, 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 overlapping but distinct

forms of activities: (1) activities that ultimately 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 substantial. 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 importance of truly * * *

[exempt] purposes”).
                                        - 30 -

      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. However, 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 section 501(c)(3) provide two

overlapping standards to consider: (1) whether the organization was “organized or

operated 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 purpose. 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
                                        - 31 -

constituting 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 carrying 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.

Important factors indicating a nonexempt commercial purpose include “the

particular manner in which an organization’s activities are conducted, the

commercial hue of those activities, 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 accumulated 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.
                                         - 32 -

      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., 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 transactions 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 transactions 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

      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 policy
allowed down payment funds from a few additional sources: the borrower’s
employer or labor union, a governmental entity, a charitable organization, and a
close friend with a clearly defined and documented interested 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 directly from home sellers or
parties with an interest in the transaction. Penobscot Indian Nation v. HUD, 539
F. Supp. 2d 40, 44 (D.D.C. 2008).
                                        - 33 -

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 to recoup the

costs of its grants, and, therefore, the seller-paid fees furthered the grant-making
                                        - 34 -

purpose.14 This argument 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 purpose.

      D.     Educational and other activities

      PIC also argues that it devoted significant time and resources to financial

counseling seminars and other educational programs designed to prepare potential

home buyers for the responsibility of home ownership, which PIC contends


      14
        PIC argues that its recouping its DPA grants from the sellers is similar 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.
                                        - 35 -

supports a conclusion that it operated for educational purposes. PIC’s efforts to

educate potential buyers were significant 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”.

      Moreover, as the Supreme Court has instructed, “the presence of a single

non-educational [or non-charitable] purpose, if substantial in nature, will destroy

the exemption regardless 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 education to potential buyers, the

presence of its other substantial 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 charitable class and that

a substantial amount of its activity did not further a charitable purpose (but
                                         - 36 -

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 an “the organization omitted or

misstated a material fact, [or] operated 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 assistance 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
                                        - 37 -

area’s median income. Despite these representations, both the administrative

record and the trial record show that PIC did not have any income limitations for

its grantees, nor did it screen buyers for down payment 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 relationships.” 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 relationships with sellers. Instead, those receipts were in

consideration 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 retroactively.


                                                 Decision will be entered for

                                        respondent.
