Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

DOWN PAYMENT ASSISTANCE OUTFITS FIGHT BACK

May 30, 2006

Tax Analysts reports ($link) that the down payment assistance industry isn't going down without a fight.

Earlier this month the IRS shocked the industry with Rev. Rul. 2006-27. The ruling holds that organizations that funnel money from home sellers to finance the down payments of their home buyers are not tax-exempt charities.

Now the industry has formed a coalition to fight for its right to continue its activities on a tax exempt basis. The coalition (www.supportdownpaymentassistance.org) has asked Treasury Secretary Snow to suspend Rev. Rul. 2006-27. From the Tax Analysts story:

Still, the revenue ruling did not sit well with down payment assistance organization heads such as Kelly Schwedland, president of the Genesis Foundation and a spokesperson for the alliance. In a May 18 letter to Snow, Schwedland said Rev. Rul. 2006-27 jeopardizes economic growth and fails to consider previous IRS rulings. The IRS has "approved and recognized downpayment assistance organizations as 501(c)(3) organizations for almost a decade," Schwedland wrote. "In our original application to the IRS, we clearly stated our intentions of providing downpayment assistance and having seller fees provide for our funding source to future homebuyers. We received not only [IRS] approval in an advance ruling letter but also our final determination letter as recently as 2005."

If this is true, it's really an assertion that once the IRS screws up, it can't reverse the screwdriver.

HELPING THE POOR, OR HELPING THE SELLER?

The down-payment assistance folks (DPAs) come into a home sale when the buyer can't come up with a down payment. To get the sale closed, the seller "contributes" the needed down payment to the DPA, which then gives it to the buyer, net of its own fees. The lender, wanting to get a mortgage on its books, pretends this is a real down payment and the house sale closes.

The tax law requires tax-exempt entities to operate "exclusively" for charitable purposes. They say their purpose is to help people without down payments buy houses. The IRS says - I think reasonably - that their real purpose is to help sellers get their houses sold.

Consider this actual document pulled from a DPA's website:

The contract terms look more like a fee-based money-laundering service than a charity. Worse still, some DPAs have apparently asserted that the seller's "contribution" qualifies as a charitable gift, or at least hinted at it. That would be an egregious error.

Obviously the down payment assistance industry has a lot at stake. It will be interesting to see whether they can to convince the tax authorities, or Congress, that facilitating the issuance of substandard home mortgages with seller money is truly an exempt purpose.

Prior Coverage:

IRS: DOWN-PAYMENT ASSISTANCE OUTFITS AREN'T CHARITIES
FEDS SUE 'DOWN PAYMENT ASSISTANCE' OUTFIT

      Bookmark: del.icio.us • Digg • reddit