                                           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




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                                     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




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                                     (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-




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                                     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.




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                                     (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.




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                                     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




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                                     (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!




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                                     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.




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                                     (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.




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                                       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.




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                                     (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




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                                     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.




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                                     (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.




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                                     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




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                                     (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




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                                     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.




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                                     (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




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                                     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




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                                     (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




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                                     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).




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                                     (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.




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                                     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




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                                     (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




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