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FEDS SUE 'DOWN PAYMENT ASSISTANCE' OUTFIT

November 09, 2005

Some things just don't smell right. Still, when you need to close a home sale, sometimes you'll hold your nose.

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. The IRS and the Justice Department disagree:

The suit alleges that in marketing and operating this scheme, PIC falsely advises house sellers and others that the sellers may claim charitable deductions on their federal income tax returns for amounts they are contractually obligated to pay PIC. According to the court filing, seller’s payments are not deductible charitable contributions, because they do not proceed from "detached and disinterested generosity," but rather the payments are made in order to "facilitat[e] the sale of the seller’s house."

Partners in Charity helpfully has put the contract terms on their website:

click image to enlarge, or click here for the full document.

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.

More from the Justice Department press release:

According to the government complaint, a significant portion of house sellers participating in the PIC program have improperly claimed a charitable deduction on their federal income tax returns. The suit asks the court to order PIC to provide the government with a complete list of the sellers’ names, addresses, telephone numbers, e-mail addresses, and Social Security numbers.

Once they get the Social Security numbers, they will walk back to all of PIC's home sellers and look for outsized charitable deductions. PIC can also look forward to maybe losing its exempt status.

The tax deduction issue isn't even close. Common sense tells you that running a downpayment through a charity isn't really a gift to charity. The documents make it clear that you are getting something for your contribution, and the tax law says that you don't get charitable deductions when that happens.

There are a number of "charities" doing these deals (see here, for example). Unless they have been scrupulous about denying that they provide a charitable deduction for sellers, it's likely that they, too, will be getting unwelcome visits from Justice Department process servers.

THE MORAL?As a wise judge once said: " Some people believe with great fervor preposterous things that just happen to coincide with their self-interest." If it's preposterous, don't expect it to work. And if you've sold a house in one of these deals and you claim a charitable deduction for the "contribution," you can look forward to a certified letter from the IRS.

Link: Copy of injunction request.

UPDATE: Today's Wall Street Journal has a story on this topic today. Online Journal subscribers can access it here; dead-tree WSJ readers will find it below the fold on page D-1 in the "Personal Journal" section. The article says the down-payment industry is aware that they have a problem:

Ann Ashburn, chief executive officer and president of AmeriDream Inc., a Gaithersburg, Md., nonprofit organization that offers a down-payment-assistance program, said that a few months ago it posted on its Web site an opinion from its attorney saying that claiming a charitable deduction was not legal. She said that AmeriDream, started in 1999, always said from the beginning in its literature that services weren't tax deductible.

"We have a good program, but when stuff like this happens, it tends to cast some shadow on it," she said.

UPDATE 11-10-05: The TaxProf has more.

UPDATE, 5-5-2006: The IRS rules that seller-financed down-payment assistance causes the charity to lose its exempt status.

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