Monday, January 4, 2010
An interesting article in yesterday's Sacremento Bee raises the question whether down-payment assistance activities still constitute a charitable activity for which tax exemption may be granted. As many of you may recall, we previously blogged on a provision in the 2009 Foreclosure Prevention Act that effectively shut down most down payment assistance nonprofits. Many people argued, and Congress agreed, that downpayment assistance contributed to meltdown in the real estate market by making it possible for people who could not afford to buy a home take the dive anyway only to later suffer a foreclosure. The IRS, too, ruled that down payment assistance programs, at least those that are seller-funded, are not charitable activities. The Sacremento Bee article describes one nonprofit, Nehemiah Corp, that continues to hold a tenuous grip on its nonprofit status, primarily by restructuring and arguing that it is engaged in economic and community development:
Profit is important to us, but we have a larger purpose," said Syphax, 46, who was paid $486,000 in 2008 through Nehemiah's for-profit real estate arm, ranking him among the region's highest paid nonprofit executives. "The bigger purpose is economic empowerment and transformative community development. The jury is still out on whether the Internal Revenue Service agrees . . .
Syphax said Nehemiah needs to produce profits to pay for its charitable programs. In several years of its Form 990 filings, Nehemiah reported to the IRS that it recycled much of the money it earned from downpayment assistance – more than $55 million – for purposes such as construction of affordable housing and grants to community groups.
Still, the group's spending on charitable grants and contributions in the fiscal year ending June 30, 2008, was relatively small – $267,992 – compared with its $13.6 million in revenue, nearly all of which came from down payment assistance.
As far as I can tell from just the article, Nehemiah is a nonprofit holding company whose claim to tax exemption is based on the fact that it uses the profits derived from its for-profit subsidiaries to fund down payment assistance to people who would otherwise not be able to afford to buy a home. The facts present an interesting case study with regard to creative lawyering in the tax exempt field. Does Nehemiah's placement of seller-funded portion of its activities in taxable subs provide immunity against a private benefit based attack on its tax exempt status. Revenue Ruling 2006-27 held that seller-funded downpayment assistance programs were not charitable. What to do? Nehemiah apparently decided that it should peel off its taxable activities into separate taxable corporations and thereby retain its tax exempt status for its other activities. My initial "feel" is that this works. It seems to me that so long as Nehemaih is really engaged in economic and community development, the placement of its apparently taxable activities in taxable subs makes immune from a challenge to its tax exempt status. The bigger question I have is "why?" What is the benefit that Nehemiah retains from taking this route rather than simply operating as a for-profit? And assuming there is some benefit to taking this route, what must Nehemiah do to ensure that the activities of its for profit subs do not taint Nehemiah's activities.