IRS ruling endangers down-payment charities
Concerns surfaced early
Critics had concerns from the beginning. Numbers-crunchers from
the Department of Housing and Urban Development and the Government
Accountability Office concluded that borrowers were more likely
to end up falling behind on their monthly payments if they had accepted
down-payment money from sellers through nonprofits. They said some
buyers ended up paying more than market value for their houses.
HUD, of which FHA is a part, made noises about closing the loophole,
On May 4, the IRS stepped in with Revenue
Ruling 2006-27, which says that a nonprofit which transfers
down-payment money from seller to buyer "is not operated exclusively
for charitable purposes, and, consequently, does not qualify for
exemption from federal income tax."
The ruling doesn't name names, but sets forth guidelines
that pin a target on nonprofit down-payment-assistance programs.
The IRS says it is examining 185 nonprofits. Anticipating the ruling,
a small player, Houston-based United
American Housing and Education Foundation, announced that it
was terminating its down-payment program to take "a new direction."
Most of the nonprofits -- including AmeriDream, Buyers
Fund and Nehemiah -- continue to operate because they still have
tax-exempt status while the IRS examines them. In a letter on Nehemiah's
Web site, president Scott Syphax writes:
"The administrative ruling does not have an instantaneous impact
on the tax-exempt status of an entity," and adds that "the
ruling is the beginning, not the end of the discussion."
An IRS spokesman confirms that the ruling does not
revoke any organization's tax-exempt status. Rather, it serves as
guidance for examiners who will decide whether to revoke tax-exempt
If the IRS revokes an organization's tax-exempt status,
the nonprofit may appeal administratively and in federal courts.
The presidents of Nehemiah and Buyers Fund say they will appeal,
if it comes to that. A spokesman for AmeriDream says, "We are
still in business."
IRS uses the S word: Scam
In a news release announcing the ruling, the IRS refers to the nonprofits
as "down payment assistance scams," and quotes IRS commissioner
Mark W. Everson as saying: "The IRS is increasingly concerned
with organizations that are taking advantage of home buyers who
need assistance for a down payment to realize the American dream
of homeownership. So-called charities that manipulate the system
do more than mislead honest home buyers and ultimately jack up the
cost of the home. They also damage the image of honest, legitimate
Ahrens says such rhetoric surprises him, because
"this administration has placed so much importance on housing."
President Bush wants 5.5 million minority households to become homeowners
this decade. There has been progress on that front, "and I
think we've played a huge role in that," Ahrens says. "They
wanted the private sector to step up and provide some solutions,
and I think we've done that."