IRS determination 200808036: Debt management plan business loses tax exemption

Plain-English summary

The IRS revoked a debt management organization's exemption under section 501(c)(3). Its examination found that enrolling clients in fee-based debt management plans was the organization's main activity. The organization served people regardless of financial need, did not waive its fees, and offered little counseling or education beyond gathering information needed for the plans. The IRS concluded that the commercial activity was a substantial nonexempt purpose and that the organization served private rather than public interests. The final letter makes the revocation effective on a redacted January 1 date, ends the deductibility of contributions from that date, and requires corporate income tax returns. The examination report says a director agreed to the revocation.

Ruling snapshot

• Question: Did the organization's debt management plan business satisfy section 501(c)(3)'s charitable operating requirements?
• Outcome: Revocation, effective on the redacted January 1 date.
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(e)(1); B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978).

Full text (IRS public release)

200808033
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

1100 Commerce Street
Dallas, TX 75242

TAX EXEMPT AND

GOVERNMENT ENTITIES Date: April 30. 2007
DIVISION
UIL: 501.03-01
Legend
ORG = Organization name Address = address XX = Date
Release Date: 2/22/08
ORG Person to Contact:
Address Badge Number:
Contact Telephone Number:
Contact Address:

Employer Identification Number:
Deadline to Petition Tax Court:

CERTIFIED MAIL
Dear

This is a final notice of adverse determination that your exempt status under section 501(c) (3) of the Internal Revenue Code is revoked. Recognition of your exemption

under Internal Revenue Code section 501(c)(3) is retroactively revoked to January 1, 20XX for the following reason(s):

You are not operated exclusively for charitable, educational, or other exempt purposes. You did not engage primarily in activities which accomplish one or more of the exempt purposes specified in section 501(c)(3).

Contributions to your organization are no longer deductible effective January 1, 20XX.

Since your exempt status has been revoked, you are required to file Form 1120, U.S. Corporation Income Tax Return, for all years beginning on or after January 1, 20XX. The Forms 1120 for the years ended December 31, 20XX, December 31, 20XX and December 31, 20XX must be filed with this office within 30 days of the date of this letter unless a request for an extension of time is granted. Send these returns to the following address:

Income tax returns for subsequent years are to be filed with the appropriate Service Center identified in the instructions for those returns.

It is further determined that your failure to file a written appeal constitutes a failure to exhaust your available administrative remedies. However, if you decide to contest this determination in court, you must initiate a suit for declaratory judgment in the United

200808033

Dy

States Tax Court, the United States Claims Court, or the district court of the United States for the District of Columbia before the (ninety-first) 91st day after the date that this determination was mailed to you. Contact the clerk of the appropriate court for rules for initiating suits for declaratory judgment. To secure a petition form, write to the following address:

Please understand that filing a petition for a declaratory judgment under IRC section 7428 will not delay the processing of subsequent income tax returns and assessment of any taxes due.

The last day for filing a petition for declaratory judgment is July 30, 20XX.

You also have the right to contact the Office of the Taxpayer Advocate. However, you should first contact the person whose name and telephone number are shown above since this person can access you tax information and can help you get answers. You can call 1-877-777-4778, and ask for the Taxpayer Advocate assistance or you can contact the Advocate from the site where this issue was determined by writing to:

Taxpayer Advocate assistance cannot be used as substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determination, nor extend the time fixed by law that you have to file a petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling.

We will notify the appropriate State officials of this action, as required by section 6104(c) of the Internal Revenue Code.

This letter should be kept within your permanent records.
If you have any questions, please contact the person whose name and telephone

number are shown above.

Sincerely,

Marsha A. Ramirez

Director, EO Examinations
Enclosures:
Publication 892

200808033

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit: 990 Name of Taxpayer: ORG Year/Period Starting: January 1, 20XX Legend

ORG = Organization name Address = address XX = Date City = city XYZ = State Director1 = 1st director Director2 = 2nd director Director3 = 3rd director

ISSUES PRESENTED:

Whether ORG, is operated exclusively for exempt purposes described within Internal Revenue Code section 501(c)(3):

a. Whether ORG is engaged primarily in activities that accomplish an exempt purpose?

b. Whether more than an insubstantial part of ORG’ s activities are in furtherance of a non-exempt purpose?

c. Whether ORG, was operated for the purpose of serving private rather than public interests?

Whether ORG conducted commercial activities in such a manner that these activities became its primary purposes?

FACTS
Background

ORG whose Employment Identification number was incorporated by the organizations directors Director 1, Director 2 and Director 3 on September 15, 19XX, under the State laws of XYZ. ORG applied for exemption on January 6 , 19XX and filed Amended Articles of Incorporation to adopt proper Limited Powers, Purpose and Dissolution language required of organization exempt under the Federal Internal Revenue Code sections 501(c)(3). In a determination letter dated May 25, 19XX, ORG was recognized as an organization exempt from federal income tax as described in IRC Section 501(C)(3). Because ORG, was a newly created organization and not operational, the Internal Revenue Service did not make a final determination of its foundation status under IRC section 509(a). ORG was provided with an advance ruling under IRC section 509(a) and treated as publicly supported and not as a private foundation from September 15, 19XX until December 31, 20XX when a final determination of public support would be made. On May 22, 20XX, the organization received Letter 1050, which classified the organizations foundation status, at the end of the advanced ruling period, as an organization of the type described in Section 509(a)(2) of the Internal Revenue Code.

Revenue Agent interviewed Secretary/Treasurer Director 2 and employee to find that the

organizations primary sources of revenue are generated by its primary activity, which is providing debt management plans to its clients. The employee and volunteer who meet with the

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200808038

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit: 990 Name of Taxpayer: ORG Year/Period Starting: January 1, 20XX Legend

ORG = Organization name Address = address XX = Date City = city XYZ = State Director1 = 1st director Director2 = 2nd director Director3 = 3rd director

clients received no formal credit counseling education or training. The organization has no formal training / education program for its clients. The organization does not limit it services to the poor and distressed, but offers their services to anyone having a problem meeting their financial obligations. The organization charges an $ initial fee to sign up for the debt management plan. If the client is unable to pay the fee, the $ fee is spread over several months to make the plan more affordable. This fee is never waived for the client. The organization also charges a monthly processing fee that ranges from $ to $ per month depending on the amount of the clients debt. If the client is successful in making all required monthly payments, their unsecured debt should be paid in full within five years. The organization also receives a small amount of fare share payments from the client’s creditors, but these payments are diminishing drastically. Credit card companies are now making the organization apply for a grant instead of making a regular fare share payment to the organization. The organization has applied for these type of grants but was never successful in obtaining any funds for the organization. Debt management plans are typically the only option given to the client as a means of solving their financial problems. The organization never recommends bankruptcy as an option to the client debt problems. The organization printed one flyer / pamphlet as a means of making the public aware of their services. The pamphlet only mentions debt management plan arrangements as a solution to debt problems.

Since the organization primary activity is selling debt management plans to the public, and does not limit it services to the poor and distressed class of people, the organization is operating in a commercial manner. The organization offers no formal education programs to its clients, and offers only debt management plans as a solution their financial obligations. The organization primary activity does not qualify as an exempt activity as described in IRC, section 501(c)(3). Revenue Agent discussed the issues with the Treasurer / Secretary Director 2 and she agreed to revocation of the organization as of January 1, 20XX. A signed Form 6018 is being sent forward with this recommendation of revocation.

LAW

Section 501(a) of the Internal Revenue Code provides that an organization described in section 501(c)(3) is exempt from income tax. Section 501(c)(3) of the Code exempts from federal income tax corporations organized and operated exclusively for charitable, educational, and other purposes, provided that no part of the net earnings inure to the benefit of any private shareholder or individual. The term charitable includes relief of the poor and distressed. See section 1.501(c) (3)-1(d) (2), Income Tax Regulations.

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200808038

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit: 990 Name of Taxpayer: ORG Year/Period Starting: January 1, 20XX Legend ORG = Organization name Address = address XX = Date City = city XYZ = State Director1 = 1st director Director2 = 2nd director Director3 = 3rd director

The term educational includes (a) instruction or training of the individual for the purpose of improving or developing his capabilities and (b) instruction of the public on subjects useful to the individual and beneficial to the community. Treas. Reg. § 1.501(c)(3)-1(d)(3). In other words, the two components of education are public education and individual training.

Section 1.501(c)(3)-1(a)(1) of the regulations provides that, in order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt.

Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as “operated exclusively” for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. The existence of a substantial nonexempt purpose, regardless of the number or importance of exempt purposes, will cause failure of the operational test. Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (1945).

Section 1.501(c)(3)-1(e)(1) of the regulations provides that an organization may meet the requirements of section 501(c)(3) although it operates a trade or business as a substantial part of its activities, if the operation of such trade or business is in furtherance of the organization’s exempt purpose or purposes and if the organization is not organized or operated for the primary purposes of carrying on an unrelated trade or business.

In Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court held that the presence of a single non-exempt purposes, if substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt purposes. The Court found that the trade association had an “underlying commercial motive” that distinguished its educational program from that carried out by a university.

In American Institute for Economic Research v. United States, 302 F. 2d 934 (Ct. Cl. 1962), the Court considered the status of an organization that provided analyses of securities and industries and of the economic climate in general. The organization sold subscriptions to various periodicals and services providing advice for purchases of individual securities. Although the court noted that education is a broad concept, and assumed for the sake of argument that the organization had an educational purpose, it held that the organization had a significant non-

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200808038

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit: 990 Name of Taxpayer: ORG Year/Period Starting: January 1, 20XX Legend

ORG = Organization name Address = address XX = Date City = city XYZ = State Director1 = 1st director Director2 = 2nd director Director3 = 3rd director

exempt commercial purpose that was not incidental to the educational purpose and was not entitled to be regarded as exempt.

An organization must establish that it serves a public rather than a private interest and “‘that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.” Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii). Prohibited private interests include those of unrelated third parties as well as insiders. Director 3 Stewardship Assistance, Inc. v. Commissioner, 70 T.C. 1037 (1978); American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989). Private benefits include an “advantage; profit; fruit; privilege; gain; [or] interest.” Retired Teachers Legal Fund v. Commissioner, 78 T.C. 280, 286 (1982).

In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the court found that a corporation formed to provide consulting services was not exempt under section 501(c)(3) because its activities constituted the conduct of a trade or business that is ordinarily carried on by commercial ventures organized for profit. Its primary purpose was not charitable, educational, nor scientific, but rather commercial. The court found that the corporation had completely failed to demonstrate that its services were not in competition with commercial businesses. The court found that the organization’s financing did not resemble that of the typical 501(c)(3) organization. It had not solicited, nor had it received, voluntary contributions from the public. Its only source of income was from fees from services, and those fees were set high enough to recoup all projected costs, and to produce a profit. Moreover, it did not appear that the corporation ever planned to charge a fee less than “‘cost.” And finally, the corporation had failed to limit its clientele to organizations that were section 501(c)(3) exempt organizations.

An organization formed to educate people in Hawaii in the theory and practice of “est” was determined by the Tax Court to a part of a “franchise system which is operated for private benefit,” and, therefore, should not be recognized as exempt under section 501(c)(3) of the Code. est of Hawaii v. Commissioner, 71 T.C. 1067, 1080 (1979). Although the organization was not formally controlled by the same individuals who controlled the for-profit entity that owned the license to the “est” body of knowledge, publications, and methods, the for-profit entity exerted considerable control over the applicant’s activities by setting pricing, the number and frequency of different kinds of seminars and training, and providing the trainers and management personnel who are responsible to it in addition to setting price for the training. The court stated that the fact that the organization’s rights were dependent upon its tax-exempt status showed the likelihood that the for-profit entities were trading on that status. The question for the court was not whether

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2008938038

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit: 990 Name of Taxpayer: ORG Year/Period Starting: January 1, 20XX Legend

ORG = Organization name Address = address XX = Date City = city XYZ = State Director1 = 1st director Director2 = 2nd director Director3 = 3rd director

the payments made to the for-profit were excessive, but whether the for-profit entity benefited substantially from the operation of the organization. The court determined that there was a substantial private benefit because the organization “was simply the instrument to subsidize the for-profit corporations and not vice versa and had no life independent of those corporations.”

Section 1.513-1(d)(4)(iv) of the regulations recognizes that in certain cases, activities carried on by an organization in the performance of exempt functions may generate good will or other intangibles, which may be exploited in commercial endeavors. Where an organization exploits such an intangible in commercial activities, the mere fact that the resultant income depends in part upon an exempt function of the organization does not make it gross income from related trade or business. In such cases, unless the commercial activities themselves contribute importantly to the accomplishment of an exempt purpose, the income, which they produce, is gross income from the conduct of unrelated trade or business. Example 7 of this section describes advertising by business firms in an exempt organization’s journal that promotes only products that are within the general area of interest of the organization’s members. The Example indicates that the advertising is not an educational activity of the kind contemplated by the exemption statute and that, therefore, the organization’s publication of advertising does not contribute importantly to the accomplishment of its exempt purposes.

The Service has issued two rulings holding credit counseling organizations to be tax exempt. Rev. Rul. 65-299, 1965-2 C.B. 165, granted exemption to a 501(c)(4) organization whose purpose was to assist families and individuals with financial problems and to help reduce the incidence of personal bankruptcy. Its primary activity appears to have been meeting with people in financial difficulties to “analyze the specific problems involved and counsel on the payment of their debts.” The organization also advised applicants on pro-ration and payment of debts, negotiated with creditors and set up debt repayment plans. It did not restrict its services to the needy. It made no charge for the counseling services, indicating they were separate from the debt repayment arrangements. It made “‘a nominal charge” for monthly prorating services to cover postage and supplies. For financial support, it relied upon voluntary contributions from local businesses, lending agencies, and labor unions.

In Rev. Rul. 69-441, 1969-2 C.B. 115, the Service found that a nonprofit organization formed to help reduce personal bankruptcy by informing the public on personal money management and aiding low-income individuals and families with financial problems was exempt under section 501(c)(3) of the Code. Its Board of Directors was comprised of representatives from religious organizations, civic groups, labor unions, business groups, and educational institutions.

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900808033

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit: 990 Name of Taxpayer: ORG Year/Period Starting: January 1, 20XX Legend ORG = Organization name Address = address XX = Date City = city XYZ = State Director1 = 1st director Director2 = 2nd director Director3 = 3rd director

The organization provided information to the public on budgeting, buying practices, and the sound use of consumer credit through the use of films, speakers, and publications. It aided low- income individuals and families who have financial problems by providing them with individual counseling, and if necessary, by establishing budget plans. Under the budget plan, the debtor voluntarily made fixed payments to the organization, holding the funds in a trust account and disbursing the funds on a partial payment basis to the creditors. The organization did not charge fees for counseling services or pro-ration services. The debtor received full credit against his debts for all amounts paid. The organization did not make loans to debtors or negotiate loans on their behalf. Finally, the organization relied upon contributions, primarily from the creditors participating in the organization’s budget plans, for its support.

The Service found that, by aiding low-income individuals and families who have financial problems and by providing, without charge, counseling and a means for the orderly discharge of indebtedness, the organization was relieving the poor and distressed. Moreover, by providing the public with information on budgeting, buying practices, and the sound use of consumer credit, the organization was instructing the public on subjects useful to the individual and beneficial to the community. Thus, the organization was exempt from federal income tax under section 501(c)(3) of the Code.

In the case of Consumer Credit Counseling Service of Alabama, Inc. v. U.S., 44 A.F.T.R.2d 78- 5052 (D.D.C. 1978), the District Court for the District of Columbia held that a credit counseling organization qualified as charitable and educational under section 501(c)(3). It fulfilled charitable purposes by educating the public on subjects useful to the individual and beneficial to the community. Treas. Reg. § 1.501(c)(3)-1(d)(3)(i)(b). For this, it charged no fee. The court found that the counseling programs were also educational and charitable; the debt management and creditor intercession activities were “an integral part” of the agencies’ counseling function and thus were charitable and educational. Even if this were not the case, the court viewed the debt management and creditor intercession activities as incidental to the agencies’ principal functions, as only approximately 12 percent of the counselors’ time was applied to debt management programs and the charge for the service was “nominal.” The court also considered the facts that the agency was publicly supported and that it had a board dominated by members of the general public as factors indicating a charitable operation. See also, Credit Counseling Centers of Oklahoma, Inc. v. United States, 79-2 U.S.T.C. 9468 (D.D.C. 1979), in which the facts and legal analysis were virtually identical to those in Consumer Credit Counseling Centers of Alabama, Inc. v. United States, discussed immediately above.

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900808038

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit: 990 Name of Taxpayer: ORG Year/Period Starting: January 1, 20XX Legend

ORG = Organization name Address = address XX = Date City = city XYZ = State Director1 = 1st director Director2 = 2nd director Director3 = 3rd director

The organizations included in the above decision waived the monthly fees when the payments would work a financial hardship. The professional counselors employed by the organizations spent about 88 percent of their time in activities such as information dissemination and counseling assistance rather than those connected with the debt management programs. The participants in the DMP received full credit against their debts for the amounts paid. Moreover, the agencies charged a nominal fee of up to $ per month for the DMP. This fee was waived in instances when payment of the fee would work a financial hardship. The primary sources of revenue for these organizations were provided by government and private foundation grants, contributions, and assistance from labor agencies and United Way.

Outside the context of credit counseling, individual counseling has, in a number of instances, been held to be a tax-exempt charitable activity. Rev. Rul. 78-99, 1978-1 C.B. 152 (free individual and group counseling of widows); Rev. Rul. 76-205, 1976-1 C.B. 154 (free counseling and English instruction for immigrants); Rev. Rul. 73-569, 1973-2 C.B. 179 (free counseling to pregnant women); Rev. Rul. 70-590, 1970-2 C.B. 116 (clinic to help users of mind-altering drugs); Rev. Rul. 70-640, 1970-2 C.B. 117 (free marriage counseling); Rev. Rul. 68-71, 1968-1 C.B.249 (career planning education through free vocational counseling and publications sold at a nominal charge). Overwhelmingly, the counseling activities described in these rulings were provided free, and the organizations were supported by contributions from the public.

Internal Revenue Code section 501(c)(3) specifies that an exempt organization described therein is one in which “no part of the net earnings inures to the benefit of any private shareholder or individual.“ The words “private shareholder or individual” in section 501 to refer to persons having a personal and private interest in the activities of the organization. Treas. Reg. § 1.501(a)-1(c). The inurement prohibition provision “is designed to prevent the siphoning of charitable receipts to insiders of the charity ....” United Cancer Council v. Commissioner, 165 F.3d 1173 (7th Cir. 19XX). Reasonable compensation does not constitute inurement. Birmingham Business College v. Commissioner, 276 F.2d 476, 480 (5th Cir. 1960).

Where an organization provided a source of credit to companies of which a private shareholder was either an employee or an owner, the court found that a portion of the organization’s net earnings inured to the benefit of that private shareholder. Easter House v. United States, 12 Cl. Ct. 476 (1987). That such loans were made showed that the companies controlled by the private shareholder had a “source of loan credit” in the organization. In Easter House v. United States, 846 F. 2d 78 (Fed. Cir. 1988), aff'g 12 Cl.Ct. 476 (1987), the court found an organization that operated an adoption agency was not exempt under section 501(c)(3) of the Code because a

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200808038

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit: 990 Name of Taxpayer: ORG Year/Period Starting: January 1, 20XX Legend

ORG = Organization name Address = address XX = Date City = city XYZ = State Director1 = 1st director Director2 = 2nd director Director3 = 3rd director

substantial purpose of the adoption activity was a non-exempt commercial purpose. It found that the adoption services did not further the exempt purposes of providing educational and charitable services to the unwed mothers and children. Rather, the services for unwed mothers and children were merely provided “incident” to the organization’s adoption service business. Moreover, the court found that “adoption services do not in and of themselves constitute an exempt purpose.”

The court also agreed with the IRS’ determination that the agency operated in a manner not “distinguishable from a commercial adoption agency” because it lacked the following traditional attributes of a charity. First, the agency’s operation made substantial profits, and there was a substantial accumulation of capital surplus in comparison to direct expenditures by the agency for charitable and educational purposes. Second, the agency’s operation was funded completely by substantial fixed fees charged adoptive parents. It relied entirely on those fees and sought no funds from federal, state or local sources, nor engaged in fund raising programs, nor did it solicit contributions. In fact, the agency had no plans, nor intention to seek contributions, government grants or engage in fund raising relative to its operations. Third, the fixed fees the agency charged adoptive parents were not subject to downward adjustment to meet potential adoptive parents’ income or ability to pay. Fourth, the agency’s single life member had near total control of the operations of the agency. And fifth, the agency functioned by means of a paid staff of 15 to 20 persons, with no volunteer help.

In addition to furthering a substantial non-exempt purpose, the court found that a portion of the organization’s net earnings inured to the benefit of a private shareholder or individual as defined by sections 1.501(c)(3)-1(c)(2) and 1.501(a)-1(c) of the regulations. The organization provided a source of credit (i.e. loans) to companies in which the private shareholder were either employed by or owned. The fact that the loans were made showed that the companies controlled by the private shareholder had a “source of loan credit” in the organization.

In Church By Mail, Inc. v. Commissioner, T.C. Memo 1984-349, aff'd 765 F. 2d 1387 (9th Cir. 1985) the tax court found that a church was operated with a substantial purpose of providing a market for an advertising and mailing company owned by the same people who controlled the church. The church argued that the contracts between the two were reasonable, but the Court of Appeals pointed out that “the critical inquiry is not whether particular contractual payments to a related for-profit organization are reasonable or excessive, but instead whether the entire enterprise is carried on in such a manner that the for-profit organization benefits substantially from the operation of the Church.”

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200808038

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit: 990 Name of Taxpayer: ORG Year/Period Starting: January 1, 20XX Legend

ORG = Organization name Address = address XX = Date City = city XYZ = State Director1 = 1st director Director2 = 2nd director Director3 = 3rd director

The Credit Repair Organizations Act (CROA), 15 U.S.C. § 1679 et seq., effective April 1, 19XX, imposes restrictions on credit repair organizations, including forbidding the making of untrue or misleading statements and forbidding advance payment, before services are fully performed. 15 U.S.C. § 1679b. Significantly, section 501(c)(3) organizations are excluded from the regulations under the CROA.

The CROA defines a credit repair organization as:

(A) any person who uses any instrumentality of interstate commerce or the mails to sell, provide, or perform (or represent that such person can or will sell, provide, or perform) any service, in return for the payment of money or other valuable consideration, for the express or implied purpose of—

(1) improving any consumer’s credit record, credit history, or credit rating, or

(ii) providing advice or assistance to any consumer with regard to any activity or service described in clause (i).

15 U.S.C. § 1679a(3). The courts have interpreted this definition broadly to apply to credit counseling agencies. The Federal Trade Commission’s policy is that if an entity communicates with consumers in any way about the consumers’ credit situation, it is providing a service covered by the CROA. In Re National Credit Management Group, LLC, 21 F. Supp. 2d 424, 458 (N.D.N.J. 19XX).

Businesses are prohibited from cold-calling consumers who have put their phone numbers on the National Do-Not-Call Registry, which is maintained by the Federal Trade Commission. 16 C.F.R. § 310.4(b)(1)(iii)(B); 47 C.F.R. § 64.1200(c)(2). Section 501(c)(3) organizations are not subject to this rule against cold-calling. Because 501(c)(3) organizations are exempt from regulation under the CROA and the cold-calling restrictions, organizations that are involved in credit repair have added incentives to be recognized as section 501(c)(3) organizations even if they do not intend to operate primarily for exempt purposes.

GOVERNMENT POSITION

ORG does not meet the operational test, because more than an insubstantial part of its activities are commercial in nature. By definition, IRC section 501(c)(3) organizations will only qualify for tax exempt status if it is organized and operated exclusively for charitable purposes. Thus, to

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20030380338

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit: 990 Name of Taxpayer: ORG Year/Period Starting: January 1, 20XX Legend

ORG = Organization name Address = address XX = Date City = city XYZ = State Director1 = 1st director Director2 = 2nd director Director3 = 3rd director

meet the requirement, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests. ORG is operating in a commercial manner which is not an exempt activity described under Internal Revenue Code section 501(c)(3).

An organization may meet the requirements of section 501(c)(3), although it operates a trade or business as a substantial part of its activities, if the operation of such trade or business is in furtherance of the organization’s exempt purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated trade or business, as defined in section 513. An organization, which is organized and operated for the primary purpose of carrying on an unrelated trade or business, is not exempt under section 501(c)(3).

The purpose of ORG’s activities differs substantially from those of the organizations in Rev. Rul. 65-299, Rev. Rul. 69-441, and Consumer Credit Counseling Service of Alabama, Inc. v. U.S. During the period of exam, ORG engaged in no separate activities, which furthered an exempt purpose. There were no fees waived, the organization was not publicly supported and offered no educational program, or any exempt activity that would meet the requirements as stated under IRC section 501(c)(3). There was no actual counseling beyond taking budget information because it was required. No evidence of any meaningful education or credit counseling was found to take place. Unlike the credit counseling organizations described in the Revenue Rulings referred to above, and in Consumer Credit Counseling Service of Alabama, Inc. v. U.S.. during the period of exam ORG provided very little if any counseling or education to its clients. The facts show, ORG received exemption in order to receive fair-share payments from its credit counseling operations. ORG’s sole purpose was to generate DMP’s for anyone having problems meeting their financial obligation and willing to pay the required fees to be enrolled in the debt management plan.

The Credit Counseling operations during this period, met none of the requirements to be exempt. One hundred percent of the funds received by the organization were from DMP clients or Fair Share payments from creditors.

CROA was enacted to protect consumers by banning certain deceptive practices in the credit counseling industry. If ORG were a for-profit company, CROA would prohibit it from charging fees in advance of fully providing services. In addition, if ORG were for-profit, federal law would prohibit it from purchasing leads and making cold calls to potential customers. Because section 501(c)(3) organizations are exempted from the provisions of CROA, ORG is able to engage in business practices that Congress intended to prohibit when it passed CROA. As such, ORG is operated for a substantial non-exempt purpose--that of carrying on a business while

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200808038

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit: 990 Name of Taxpayer: ORG Year/Period Starting: January 1, 20XX Legend ORG = Organization name Address = address XX = Date City = city XYZ = State Director1 = 1st director Director2 = 2nd director Director3 = 3rd director

avoiding certain federal regulations. In addition, ORG could not collect “fair share” payments from creditors if it did not have exempt status. The entire DMP business depended on an organization having tax-exempt status. ORG was formed for the private benefit of its principals. Substantially all operations were performed as a for-profit corporation.

TAXPAYERS POSITION

The taxpayer concurs with the loss of exemption and has agreed to sign and return a Form 6018.

CONCLUSION

Based on ORG conduct during the examination period and our determination that you do not operate exclusively for exempt purposes, because you do not engage primarily in activities that accomplish an exempt purpose, you are not exempt from Federal Income Tax. Your activities, in light of the applicable law, confirm that ORG does not operate in furtherance of one or more exempt purposes. Your principal activity is the marketing of debt management plans. This activity does not achieve charitable or educational purposes, but is merely a commercial service. ORG is operated for the purpose of serving private rather than public interests. Accordingly, it is determined that ORG, is revoked because it is not an organization described in section 501(c)(3), and exempt from income tax under section 501, effective January 1, 20XX.

Page 11 of 11

9200808038

DEPARTMENT OF THE TREASURY
Internal Revenue Service
7850 SW 6th Court, Stop 7954
Plantation, Fl 33324

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Taxpayer Identification Number:

ORG
Address Form:

Tax Year(s) Ended:
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Certified Mail - Return Receipt Requested

Dear

We have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under section 501(c)(3) of the Internal Revenue Code (Code) is necessary.

If you accept our findings, take no further action. We will issue a final revocation letter.

If you do not agree with our proposed revocation, you must submit to us a written request for Appeals Office consideration within 30 days from the date of this letter to protest our decision. Your protest should include a statement of the facts, the applicable law, and arguments in support of your position.

An Appeals officer will review your case. The Appeals office is independent of the Director, EO Examinations. The Appeals Office resolves most disputes informally and promptly. The enclosed Publication 3498, The Examination Process, and Publication 892, Exempt Organizations Appeal Procedures for Unagreed Issues, explain how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process.

You may also request that we refer this matter for technical advice as explained in Publication 892. If we issue a determination letter to you based on technical advice, no further administrative appeal is available to you within the IRS regarding the issue that was the subject of the technical advice.

Letter 3618 (04-2002)
Catalog Number 34809F

200303038

If we do not hear from you within 30 days from the date of this letter, we will process your case based on the recommendations shown in the report of examination. If you do not protest this proposed determination within 30 days from the date of this letter, the IRS will consider it to be a failure to exhaust your available administrative remedies. Section 7428(b)(2) of the Code provides, in part: "A declaratory judgment or decree under this section shall not be issued in any proceeding unless the Tax Court, the Claims Court, or the District Court of the United States for the District of Columbia determines that the organization involved has exhausted its administrative remedies within the Internal Revenue Service." We will then issue a final revocation letter. We will also notify the appropriate state officials of the revocation in accordance with section 6104(c) of the Code.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may Call toll-free 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

Marsha A. Ramirez
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F