One curiosity of the Great Housing Bubble was the emergence of the “down payment assistance” enterprise. These outfits, typically established as “non-profit” entities, purportedly helped home buyers come up with a down payment. Some of these didn’t look quite right.
Back in 2005 we noted an Illinois organization called “Partners in Charity”:
An Illinois organization known as “Partners in Charity” (PIC) has been helping home sellers close deals when the buyer is unable to come up with a down payment. PIC “gives” the down payment to the buyer, and the seller “reimburses” the downpayment to PIC, plus an “administration fee.” If the seller were to pay the down payment directly, that could make the lender walk away; running it through PIC gives everyone a fig leaf that there is a “down payment” and gets the deal closed.
Here’s the fun part, from a tax viewpoint: Partners in Charity claims to be a 501(c)(3) charity, and the Government says they tell house sellers that the “reimbursed” down payment and administrative fee qualify for a charitable contribution.
In other words, a charitable deduction for what amounts to a reduction in the sales price. Sweet. Too sweet. We looked at the documents that they helpfully posted on their website and found the whole thing a stretch:
Note that the seller is “obligated” to make the “contribution,” or PIC doesn’t play. This is an obvious quid pro quo, and the Eddie Haskell-like language “Seller understands that the contribution will not be used to provide down payment assistance to the Buyer of the Participating Home, and that the gift funds provided to the Buyer toward the purchase of the Seller’s home are derived from pre-existing PIC funds” isn’t going to fool anybody. If that worked, the only way you could ever stop somebody from running almost any expense through a purported charity would be if the charity used the exact same dollar bills that you gave them to pay the expense.
The Tax Court yesterday pondered Partners in Charity’s tax-exempt status and arrived at a similar conclusion (my emphasis, citations omitted):
PIC argues that it did not give seller funds to a buyer — an important requirement under the HUD guidelines. PIC contends that it received fees from sellers only after closing and that the fees were necessary for PIC to recoup the costs of its grants, and, therefore, the seller-paid fees furthered the grant-making purpose. This argument misses its mark. Before PIC gave funds to a buyer, PIC required a promise from the seller that, immediately after closing, the seller would pay PIC the buyer’s grant amount plus a fee-and the evidence shows that in fact the seller’s payment was made to PIC from the escrow, i.e., without risk that the seller would renege. In essence, a DPA grant went from PIC to the buyer, to the seller, and right back to PIC.
The Tax Court upheld the revocation of Partners In Charity’s exempt status retroactively to inception. As the company had accumulated over $3.5 million in assets, according to the decision, that will result in an ugly corporate tax bill.
The Moral? If you find yourself sounding like Eddie Haskell when explaining a transaction, maybe it’s not such a great idea.