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IRS ruling endangers down-payment charities

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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, but didn't.

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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 status.

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 charities."

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."

Bankrate.com's corrections policy -- Posted: May 25, 2006
 
 
More stories by Holden Lewis
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