On October 7, the U.S. Internal Revenue Service released a handful of private letter rulings (“PLRs”) addressing tax-exempt issues. Those rulings are briefly summarized below.
PLR 201140031 – REVOCATION OF 501(C)(3) STATUS OF DOWN PAYMENT ASSISTANCE ORGANIZATION – The IRS revoked the 50(c)(3) tax-exempt status of an organization established to provide down payment assistance (“DPA”) in the form of gifts or grants to low income home buyers. A home buyer was entitled to participate in the organization’s DPA program only if he or she purchased a house from a seller who agreed to the organization’s contractual terms. Those terms required the seller to pay to the organization an amount equal to the down payment “gift” or “grant” that the buyer received under the DPA program, plus an additional “processing fee” that ranged from $295 to $450. Although the organization represented that the seller’s payment was not directly provided to the buyer, the IRS determined that “these transactions resulted in a circular flow of money.” The organization provided the funds to the buyer, who used the funds to pay the seller, “thereby returning the funds to the sellers.”
The IRS observed that it has previously held that helping low income persons obtain adequate and affordable housing can constitute a charitable purpose, but that similar activities to assist moderate income home buyers and owners may not serve a charitable class. See Revenue Rulings 67-138 and 78-585. The Service further noted that if a purportedly charitable organization operates in an essentially commercial manner, it may be determined to be operated for a non-exempt commercial purpose, rather than for a tax-exempt purpose. See Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D. DC 2003).
The Service also reviewed in detail Revenue Ruling 2006-27. That ruling described different kinds of DPA organizations that would or would not qualify for the 501(c)(3) exemption. The first example given by the IRS—of an organization that limited participation to low income persons, raised funds from a wide variety of sources, and did not accept contributions contingent on the sale of particular properties—was operated exclusively for charitable purposes and was entitled to the 501(c)(3) exemption. The IRS contrasted this situation with its second example, in which the organization’s DPA assistance directly correlated to the amounts contributed by home sellers, and the organization relied primarily on funds from home sellers and related real estate businesses that stood to benefit from the transactions to finance the organization’s program. According to Revenue Ruling 2006-27, such an organization would not be operated exclusively for charitable purposes and would not qualify for exemption. The IRS has also held that otherwise charitable activities such as providing housing to low income persons may not constitute an exempt function if the organization’s activities primarily serve the founder’s private interest rather than the public interest. See Revenue Ruling 72-147.
In the current case, the Service determined that the organization did not operate exclusively for an exempt purpose as described in IRC § 501(c)(3). The reasons for this conclusion included the following:
- The organization was not operated primarily for the benefit of a charitable class. It did not screen applicants for participation in the DPA program on the basis of income, and did not target the program to areas that were needy of such assistance, such as residential areas experiencing deterioration of living conditions, or suffering from discrimination and prejudice or neighborhood tensions.
- The organization “operated in a manner indistinguishable from a commercial enterprise. The organization’s primary activity was brokering transactions to facilitate the selling of homes…. Alliances were built with the realtors, lenders, home builders, and title companies to assure future business for the mutual benefit of the participants.”
PLR 201140028 – DISPOSITION OF PROPERTY & CONCENTRATION OF ACTIVITIES BY 501(C)(3) ORGANIZATION – The IRS confirmed that a 501(c)(3) organization’s plan to sell a baseball stadium it owns and use the proceeds to continue a college scholarship program will not adversely affect the organization’s tax-exempt status. In its Form 1023 application for recognition of tax-exempt status, the organization had represented that its activities would consist of (1) the making of scholarship grants for higher education; and (2) the construction, operation, and lease of a baseball stadium, whose rents would be used, in part, to fund the scholarship grants. In a letter ruling request, the organization proposed to sell the stadium and use the funds in its scholarship program.
The Service held that even though the operation of the baseball stadium had been one of the bases on which the organization received its tax exemption, it could, without endangering the exemption, cease that activity and focus on the scholarships program, which was itself a charitable educational activity. The Service observed that the sale price of the stadium was represented to be the fair market value, as determined by a qualified appraisal, and the sale transaction would be the product of an arms-length negotiation in which both parties were represented by counsel. The IRS also briefly reviewed the organization’s scholarship program, pointing out that award recipients were selected from a broad class of eligible high school seniors in the organization’s tri-county area, and that award decisions were made on a variety of appropriate factors, including scholastic achievement, financial need, community service, leadership, and special accomplishments.
PLR 201140027 and PLR 201140026 – GRANTS TO INDIVIDUALS BY PRIVATE FOUNDATIONS – The IRS approved two private foundations’ college scholarship programs, concluding that the scholarship grants (1) were excluded from the excise tax on grants by private foundations to individuals under Internal Revenue Code § 4945(d)(3) pursuant to Section 4945(g); and (2) grants made pursuant to the foundations’ procedures would be excludable from the gross income of the scholarship recipients pursuant to IRC § 117.