## Facts

- Partners in Charity, Inc. (PIC) was incorporated in Illinois in 2000 and obtained recognition as a tax-exempt charity under I.R.C. § 501(c)(3) based on representations that it would provide down-payment assistance primarily to homebuyers earning 60% or less of area median income and avoid serving private interests.
- PIC operated a down-payment assistance program in which the homebuyer received a “gift” for the down payment.
- As a condition of the transaction, the home seller paid PIC an amount equal to the buyer’s “gift” plus an additional fee, often calculated as a percentage of the purchase price.
- PIC did not, in practice, limit assistance to low-income buyers; grants were available without regard to income.
- PIC accumulated more than $3.5 million in net assets from the program.
- After examining PIC’s activities for 2002–2003, the IRS issued a final adverse determination in 2010 revoking PIC’s § 501(c)(3) recognition retroactive to PIC’s incorporation date.
- PIC petitioned the U.S. Tax Court for declaratory relief under I.R.C. § 7428, challenging both the substantive revocation and its retroactive effective date.

## Issues

1. Whether PIC was operated exclusively for charitable purposes under I.R.C. § 501(c)(3) and Treas. Reg. § 1.501(c)(3)-1(c) given the structure and operation of its down-payment assistance program.
2. Whether PIC engaged in substantial commercial activity and conferred more than insubstantial private benefit on sellers and related market participants, disqualifying it from § 501(c)(3) status.
3. Whether the IRS abused its discretion under I.R.C. § 7805(b) by revoking PIC’s exempt status retroactive to the date of incorporation.

## Decision

- PIC was not an organization described in I.R.C. § 501(c)(3) for the years at issue because its down-payment assistance program was not operated for a charitable purpose and involved substantial nonexempt commercial activity.
- PIC’s operations conferred nonincidental private benefits on home sellers (and other transaction participants) that were inconsistent with charitable operation.
- The IRS did not abuse its discretion in making the adverse determination retroactive to PIC’s incorporation date.

## Legal Principles

- An organization qualifies under § 501(c)(3) only if it is operated primarily to accomplish exempt purposes; exemption is unavailable if more than an insubstantial part of its activities does not further an exempt purpose. Treas. Reg. § 1.501(c)(3)-1(c).
- Actual operations, not stated purposes or prior determination letters, control whether an organization satisfies the § 501(c)(3) operational test.
- Substantial commercial activity and nonincidental private benefit to market participants can defeat § 501(c)(3) status, even when activities are framed as charitable “gifts.”
- The IRS may revoke a favorable exemption determination retroactively under § 7805(b); retroactivity is sustained absent an abuse of discretion, particularly where the organization’s operations materially diverge from representations on which recognition was granted.

## Conclusion

The Tax Court sustained the IRS’s revocation of PIC’s § 501(c)(3) recognition because PIC’s seller-funded down-payment program operated as a commercially structured transactional service that provided significant private benefits and did not primarily further a charitable purpose; the court also upheld retroactive revocation to PIC’s incorporation date as a permissible exercise of the Commissioner’s discretion.


Partners in Charity, Inc. v. Commissioner, 141 T.C. 151 (2013)