IRS revoked a credit counseling organization's exemption after finding its fee-based services were not charitable

View official IRS release (PDF)

Plain-English summary

The IRS revoked an organization's exemption under IRC § 501(c)(3), effective January 1, 2005. The organization provided debt management plans and related credit counseling. The IRS concluded that the organization's primary activity was offering debt management plans to the general public for fees, that it did not limit its services to a charitable class, and that its educational purpose was insubstantial and secondary. The determination states that the organization relied solely on debt management plan revenue and did not show that its claimed free seminars had occurred.

Ruling snapshot

• Question: Did the organization operate exclusively for charitable or educational purposes under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501, 6104(c), and 7428; Treas. Reg. §§ 1.501(c)(3)-1(c)(1), (d)(1)(ii), (d)(2), (d)(3)(i), and (e)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

TEGE Appeals Programs
300 N. Los Angeles Street
Los Angeles, CA 90012

Release Number: 201043052
Release Date: 10/29/10

Date: August 2, 2010
Taxpayer Identification Number:

Person to Contact:
Eric M. Wong
Employee ID Number: .
Tel:
Fax:

Refer Reply to:
AP:LA:EMW

in Re:

Tax Years ending:

UIL Index:
501.03-00
501.36-00

CERTIFIED MAIL

Dear

This is a final adverse determination as to your exempt status under section
501(a) as an organization described under section 501(c)(3) of the Internal Revenue
Code. Our adverse determination was made for the following reason(s):

You did not establish that you were operated exclusively for educational,
charitable or other exempt purposes as required by section 501(c)(3) of the Internal
Revenue Code. You did not engage primarily in activities which accomplish one or more
of the exempt purposes specified in section 501(c)(3). Treas. Reg. § 1.501(c)(3)-1(c)(1).

Contributions to your organization are not deductible under Code § 170 for all
years beginning on or after January 1, 2005. You are required to file federal Form 1120
for the year(s) shown above.

If you decide to contest this determination under the declaratory judgment
provisions of Code section 7428, a petition to the United States Tax Court, the United
States Court of Claims, or the district court of the United States for the District of
Columbia must be filed before the 91st (ninety-first) day after the date this determination
was mailed to you. Contact the clerk of the appropriate court for rules for filing petitions
for declaratory judgment. To secure a petition form from the United States Tax Court,
write to the United States Tax Court, 400 Second Street, N.W., Washington, D.C.

20217.

You 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 your tax information and can help you get answers. You
can Call 1-877-777-4778, and ask for Taxpayer Advocate assistance.

Taxpayer Advocate assistance cannot be used as a substitute for established
IRS procedures, formal appeals procedures, etc. The Taxpayer Advocate is not able to
reverse legal or technically correct tax determinations, or extend the time fixed by law
that you have to file a petition in the United States Tax 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 final adverse determination of
your exempt status, as required by Code section 6104(c).

If you have any questions, please contact the person whose name and telephone
number are shown in the heading of this letter.

Sincerely,

Karen A. Skinder
Appeals Team Manager

cc:

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE: EO Examinations
1100 Commerce Street, MS 4900-DAL
TAX EXEMPT AND Dallas, TX 75242-1027

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

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,

Sunita B. Lough
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F

Form 886A Department of the Treasury.- Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/ Period Ended
December,
ORG 20XX
thru
December
20KXK
LEGEND
ORG = Organization name ORG-1 = ORG-1 XX = Date Address = address
City = City State = state website = website President = president
Secretary = secretary DIR-1, DIR-2 & DIR-3 = 157, 2™ & 3° DIRECTORS
HS-1, HS-2, HS-3 & HS-4 = 1T, 2"? 382 « 4™ HYGH SCHOOL CO-1, CO-2, CO-3,

CO-4, CO=5 & CO-6 = 157, 2™>. 3°>. 4T TH g 67 COMPANIES

ISSUES

Should ORG's Federal tax exempt status under IRC section 501(c)(3) be revoked for
failure to operate exclusively for exempt purposes described under such section?

FACTS

Background of ORG
ORG (hereinafter is referred to as ORG) was formed on January __, 20XX in City, State
by President. ORG was formerly known as ORG-1 In its Form 1023 Application for
Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, ORG
States, “This organization was formed for the purpose of providing credit counseling,
negotiation, and debt management services to the public at no cost.”

In February 20XX, ORG applied for Federal tax exempt status and was subsequently
recognized as an organization exempt from Federal income tax under IRC section
501(c)(3) and 509(a)(2). ORG serves residence of City County and surrounding areas.

Board of Directors

ORG's Board of Directors include:

President, President and Counselor.

» Secretary, Secretary. Secretary is a registered nurse with CO-1.

DIR-1, a PhD in clinical psychology.

DIR-2, a nurse.

Of the Directors above, only President is trained in the financial and credit counseling

fields. President is certified by the |
. In addition to holding the office of the president, President also runs the

day-to-day activities of ORG. The other Directors do not get involved in ORG's
activities. The Directors meet twice a year.

Form 386-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: --

Department of the Treasury - Internal Revenue Service Schedule No. or

Form 886A : a
om Explanation of Items Exhibit
Year/ Period Ended

Name of Taxpayer December |,
20XX
ORG 7
thru
December ',
20XXK

During the tax years under audit, ORG had two employees, President and a
receptionist. President performed debt management and counseling activities while the
receptionist performed office duties and processing debt management clients’
applications. Currently, ORG has four employees:

» One certified counselor (President).

» One non-certified/in-training counselor.

Two receptionists.

Debt Management Program (Debt Consolidation Program)

According to President, debt management program (DMP) services accounted for
percent of ORG's total activities. ORG enrolled 240 DMP clients during the tax years

ended December |, 20XX.

The DMP service begins with an individual calling ORG. If the individual needs to talk
to the Counselor, the receptionist will transfer the call to the Counselor.

If the individual did not know what ORG does, the receptionist would describe what
ORG does using a telephone scrip. The following is the content of the telephone scrip:
We lower your interest rate

We lower your finance charges

We lower your monthly payments

You only make a single monthly payment

We stop over limit fees, if there are any

We stop collection calls, if there are any

We also offer free seminars on budgeting and how to establish/re-establish your

credit.

VVVVVVV

According to the receptionist, she never had to go to the last bullet point of the
telephone script advising the individual of the free seminars. If the individual wants to
make an appointment, the receptionist would make an appointment to have the
individual come to the office. The receptionist would provide the individual with a
budget form and instruct the individual to fill it out and bring it to the appointment. She
further informs the individual on what to bring to the appointment, credit cards
statements, etc. Once the individual got to ORG’s office, the session will begin.

Step 1 — Gathering Income and Expense Information

If the individual did not fill out the budget form or only partially filled out the form, the
Counselor will ask for the missing information to complete the form. The Counselor
asks for information such as:

Income and expenses

tN

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: --

Department of the Treasury - Internal Revenue Service

Form 886A Explanation of Items

Schedule No. or
Exhibit

Name of Taxpayer

ORG

Year/ Period Ended
December
20XX
thru
December ,
20XX

Balance of debt
Debt information
Any underlying reasons, etc.

Step 2 — What Are the Options

Once the Counselor gathered all income and expense information, he will recommend

one of the following options:

1. Debt Management Program - If the individual has sufficient income to repay debts,
   the Counselor will offer DMP. The Counselor will go over the benefits of the DMPs,
   such as lower interest rate, lower finance charges, lower monthly payment, stop
   over limit and late fees, stop collection calls, and shorter pay off time. If the
   Counselor believes the individual is over-spending on an item (paying too much for
   phone bills) or paying for unnecessary expenses (cell phone for a 12 year-old kid),
   the Counselor will recommend cutting down or getting rid of these expenses
   accordingly. The Counselor also provides the client with a 8-page brochure. The

contents of the brochure are as follow:

» Important Information (4 pages) — discusses the benefits of DMP and covers

questions and answers about DMPs.

» Tips About Spending (1 page) — contains 10 tips on spending.

» Mission Statement (1 page) — describes ORG’s mission, which is also available
on ORG's web site. The mission statement almost exclusively discusses DMP.

At the end of the page, a phrase

was disclosed.

Budgeting, Credit Re-establishment / Establishment, and Credit Report
Information (1 page) — informs the clients about how bill consolidation can
improve their situation in renting an apartment or qualifying for employment.
ORG also informs the clients of classes on budgeting and improving credit FICO

scores.

» Budget Form (1 page) — fill-in-the-blank income and expense items.

2. Bankruptcy — if the individual did not have sufficient income to repay debts, the
   Counselor will inform the individual there is nothing ORG can do for them. If there is
   no other alternatives, the Counselor will advise the individual to consider filing
   bankruptcy and refer him or her to a bankruptcy attorney. The Counselor also
   recommends to the individual to cut down spending. The Counselor further provides
   the individual with the same brochure provided to DMP clients. With this, the
   session ends. The counselor does not refer the individual to other organizations for

assistance.

Step 3 —- Processing DMP Clients

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: --

Department of the Treasury - Intemal Revenue Service Schedule No. or

Form 886A ; oa
Explanation of Items Exhibit
Year/ Period Ended

Name of Taxpayer
December
ORG 20KX
thru
December ,
20XX

Once the client signs up for the DMP, the Counselor will enter the client's information
into the database. The data base will assign a client number. The application package
will go to the Receptionist for processing. The Receptionist will send the proposal to
the client's creditors. If the client's accounts are not in collection status or if the creditor
is one of the law firms, the proposal will be sent electronically via email to CO-2. CO-2
will forward the proposal to the client’s creditors. If the client's accounts are in
collections or if the creditor is a law firm, the proposal will be faxed to the creditor. If the
creditors accepted the proposal, they will respond accordingly.

If the creditors wanted the terms of the proposal changed, such as higher monthly
payment amounts, etc., they will inform ORG of the changes. Either the Counselor or
the Receptionist will contact the client to inform the client of the changes and ask
whether or not the client wants to proceed with the DMP. If the client agreed to the
changes, the Receptionist will send the modified proposal to the creditors for approval.

Once the client is admitted into the program, the Administrator will send a welcome

package that includes the following 3 letters:

1. Credit Counseling Bureau of City County Inc Guidelines.

2. A letter informing the client that a proposal has been sent to their creditors.

3. A letter advising the client of the responsibilities once admitted into the DMP.

The Counselor makes no further contact with the clients. If the client contacts the
Counselor for questions, the Counselor addresses them accordingly. A review of 10
client files obtained during the examination discloses no evidence of the Counselor
following up with the clients after they signed on to the DMP program.

Step 4 — Receiving Payment from Client and Disbursing Payments to creditors
The client selects a date where he or she wants the fund to be withdrawn from his or

her bank account for the purpose of repaying debts and paying the monthly DMP
management fee to ORG. ORG contracts with CO-3 to withdraw the fund from the
client's account. CO-3 holds the client's fund for five days after it withdraws the funds
and then forwards the funds to ORG’s bank account. Once ORG receives the funds, it
will forward the funds to CO-2 the next day. CO-2 will disburse the funds to the client's
creditors accordingly. Once a month, ORG sends an invoice to the client informing the
client of the amount ORG has paid to the client’s creditors.

ORG charges DMP clients an initial set up fee of $ and a monthly management fee of
$. The monthly management fee is included in the scheduled monthly payment and is
automatically withdrawn from the client's bank account.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: --

E 886A Department of the WEST 72 Intemal Revenue Service Schedule No. or
= Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
pay December
20KX
ORG
thru
December
20XX

Counseling Activities
According to President, the counseling activities account for percent of ORG’s total
activities. The counseling activities include people calling ORG with questions about
their credit card problems, credit report, etc. If the caller qualified for DMP, the
Counselor will sign the caller up. If not, the Counselor will advise them on considering
bankruptcy and refer them to a bankruptcy attomey.

During the field audit on April 30, 20XX, the Agent listened to a live face-to-face
counseling session between the Counselor and a client. The client came in with the
budget form filled out and credit card statements ready. The client is currently working.
She has been current with her credit card payments. However, her concem was that
once Medicare stops paying for her benefits and she has to pay the costs on her own,
she will not be able to keep up with the credit card payments. Once she’s behind, the
interest rate will go up, and she won't be able to pay off the credit card debt balances.
The counselor went over the budget form to clarify the client's responses. The following
is a partial conversation between the client and the Counselor.

Counselor: You pay $ for cable.

Client: Yes. | got the maximum. | also have phone bill included in it.

Counselor: you put down $ for food.

Client: | went to CO-4.

Counselor: How much do you spent?

Client: Few hundred. | buy dried stuff at CO-4. They last for months.

Counselor: How often do you buy groceries?

Client: Weekly.

Counselor: You spend $ a month on clothes.

Client: Yes. | spend at least $ on clothes. | buy nice things. | put them on credit cards.

Counselor: You spent $ on entertainment.

Client: | belong to the . We play cards and go out for dinner.
Client: | am on. . | will not be soon. | have to pay $/month for my prescriptions.
| have to make a decision, to pay for or get behind.

Counselor: Let me see how much you owe altogether.

The Counselor went over the balance of each credit card and came up with
approximately $ in credit card debt.

The Counselor offered DMP to the client and informed her that she will pay $ per month
under the program and it will take her 30 months to pay off the balance.

Client: So it is not much lower than what | am paying now.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: --

Department of the Treasury - Internal Revenue Service Schedule No. or

Form 886A . ;
= Explanation of Items Exhibit
Year/ Period Ended

Name of Taxpayer
al December
ORG 20XX
thru
December
20KX

Counselor: Yes. But the advantages are:
You cut only one check.
We send out an invoice to you to notify you how much we pay the credit card

companies.
The credit card companies will send statements to you to show the payment balance.

Client: What's about the interest rate?
Counselor: The interest rate will be lower, except for the CO-5. It will be about 15%.

They only lower it by %. Right now, your interest rate is '%.
Client: How much does it cost me to do this?
Counselor: We charge a $ set up fee and a $ monthly fee.

The client agreed to sign up for the DMP. The Counselor instructed the client to pick a
date where she wants the funds withdrawn from her bank account. The client signed
the debt consolidation agreement and direct payments authorization agreement;
selected a withdrawal date and paid the $ setup fee.

Client: | don't want to give up all of my credit cards. Can | keep one?
Counselor: Yes. You can keep the one with the lowest interest rate.
Counselor: You need to find a way to cut down your entertainment and clothes. You

can save lots of money.
Client: Yes. | already began cutting back. My prescription is killing me. The Advair is the

most expensive one, $/month. They will be switching to a generic drug. That will save
me some.

Counselor: Use credit cards wisely. Some people buy things they don’t need. | will give
you two business cards. Give one to your friend. | will give you some paper to bring
home. If you have nothing to do, read them. The credit card companies make money

on interest. Call me if you have questions.
The Counselor cut up the credit cards and ended the session.

: Education Activities
According to President, ORG conducts educational seminars both in-house and

outside.

In-House Seminars
According to President, the in-house seminars accounted for percent of the total

activities during 20XX. In 20XX, ORG conducted seminars once a month.
Approximately 10-12 people attended each seminar and 8 on average. In a written
response received by the Revenue Agent (Agent) on July _, 20XX, President

Department of the Treasury - Internal Revenue Service

Form 886-A (Rev.+68)
Page: --

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Year/ Period Ended

December

ORG 20XX
thru

December

20XX

Name of Taxpayer

disclosed that ORG also conducted educational seminars in April, June, September
and December 20XX.

The seminars were conducted by President. President sent letters to City residences
and business establishments to notify them of the seminars. President got the
addresses from the Yellow Page. President, however, did not produce the list of the
individuals whom he contacted to offer the seminars. ORG also states on its web site
that it offers free seminars. President also informs the callers of the classes when they

called in for counseling. The subjects for the seminars included:

» Credit report

Establish and re-establish credit

Budgeting

Financial management

The materials used for these seminars are taken from the Financial Guide book and

other books that President used in the face-to-face counseling sessions.

ORG also provided no documentation such as sign-up and attendance sheets for the

seminars. According to President, when people attended the seminars, he did not ask
them to sign-in or take their name and contact information. Each seminar lasted from 1
to 1% hours. President did not think that he had to prove to anyone that he conducted

these seminars.

Out-Side Seminars

President also conducted seminars and presentations to schools and other

organizations. In 20XX, President conducted 5 presentations to the following high

schools and organizations:

HS-1-—on the use of credit cards

HS-2-on the use of credit card

» HS-3 — re-establishing credit

» HS-4 — organized by the City to get people off welfare and get back to work. Part of
the program is establishing credit for employment purposes

Mental institution for people who can function with medication

Half-way houses

President did not take the name of the participants. He also did not take the contact
information of the individuals who requested him to conduct the presentations.
According to President, he did not think that he had to prove to anyone that he
conducted these classes. Each presentation lasted from 1 to 1% hours. The Agent
requested the name of the individuals whom President contacted to offer the seminars

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: --

Department of the Treasury - Internal Revenue Service Schedule No. or

roma See’ Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December ~
20XK
thru
December
20XX

ORG

for the purpose of confirming whether these seminars took place. To the date of this
report, such information has not been provided.

Hiring Practices, Employee’s Training and Evaluation

Other than President, ORG has not hired another counselor. During 20XX, President
trained the only Receptionist to take on the duties of a counselor. This Receptionist is
no longer with ORG. Presently, President is training his son, DIR-3, to become a
counselor. DIR-3 has not yet been certified. President trained the Receptionist in

general areas such as:

Customer services

Processing DMP clients

Reading credit reports

» Basics of bankruptcy (chapter 7, 11, or 13, etc.)

The training is provided for the purpose of handling callers’ questions. As for
President's on-going training, he takes CPE classes once every 3-4 years. In addition,
he also reads books to educate himself on credit counseling matters. Some of the
books include:

The ABC's of Getting Out of Debt

Planning and Protecting Your Financial Planning

Making Cents — Money, Debt, and Credit

American Credit and Financial Guide

» Foreclosure Preventing Counseling — Reserving the American Dream

Advertising Practices

ORG primarily advertises its debt consolidation program in the Yellow Pages and Penny
Saver. The following is ORG’s advertising in the PennySaver and Yellow Pages:

DEBT CONSOLIDATION
CREDIT CARD BILLS
LOWER single monthly payment.
LOWER interest rates. SAVE
$’s on finance charges.
STOP Collection Calis!

Credit Counseling Bureau of City County
DEBT CONSOLIDATION

Lower Monthly Payments
Lower Interest Rates

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: --

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December
ORG 20XX
thru
December
20XKX
Save Thousands of $$$
In Finance Charges
Stop Harassing Phone Calls
Member B.B.B.

ORG also advertises in the Spanish Yellow Pages. The following is the translation of a
Spanish ad:

Credit Counseling Bureau Inc.
DEBT CONSOLIDATION
Lower Monthly Payments

Lower Interest Rates
Save Thousands of $$$
In Finance Charges
Stop Those Annoying Calls

website
CO-6
Address, City, State
City, State

ORG maintains a web site. According to President, the web site has not been an

effective advertising channel. The clients cannot sign up for DMP online. The web site
brings in about 2 DMP clients per month. The following are ORG’s web pages.

(ADVERTISEMENT DELETED)

Financial Information

ORG's Form 990 shows the following financial information.
-Dec-XX -Dec-XX

Income

Program service revenue
Interest income

Total Income

Expenses

Officer compensation

Department of the Treasury - Internal Revenue Service

Form 886-A (Rev.4-68)
Page: --

Department of the Treasury - Internal Revenue Service Schedule No. or
jie Explanation of Items Exhibit -
Year/ Period Ende
Name of Taxpayer December
20XX
ORG vhra
December
20XX
Salaries & other compensations
Employee benefits
Payroll taxes
Accounting fees
Legal fees
Supplies
Telephone
Postage and shipping
Occupancy
Equipment rental and maintenance
Travel

Service charges
Miscellaneous expenses
Credit report

Advertising

Insurance

Other professional fees
Internet & website expenses
Customer refund

Excess program payments
Contributions

Other taxes

Printing and publication
Depreciation

Total Expenses

Excess (deficit) for the year

The program service revenue was made up of DMP initial set up fees and monthly
management fees from DMP clients and DMP related revenue.

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, and any community chest, fund, or foundation,
organized and operated exclusively for religious, charitable, scientific, testing for public
safety, literary, or educational purposes, or to foster national or international amateur
sports competition (but only if no part of its activities involve the provision of athletic
facilities or equipment), or for the prevention of cruelty to children or animals, no part of
the net earnings of which inures to the benefit of any private shareholder or individual,

10

Form 886-A (Rev.+68) Department of the Treasury - Internal Revenue Service
Page: --

Department of the Treasury - Internal Revenue Service Schedule No. or

Form 886A, : ;
= Explanation of Items Exhibit
Year/ Period Ended

Name of Taxpayer
Pay December
ORG 20XX
thru
December
20XX

no substantial part of the activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation (except as otherwise provided in subsection (h)), and
which does not participate in, or intervene in (including the publishing or distributing of
statements), any political campaign on behalf of (or in opposition to) any candidate for

public office.

Section 1.501(c)(3)-1(a)(1) of the Treasury 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. ‘

Treasury Regulations section 1.501(c)(3)-1(c)(1) 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.

Treasury Regulations section 1.501(c)(3)-1(d)(1)(i) states, in general, an organization
may be exempt as an organization described in section 501(c)(3) if it is organized and
operated exclusively for one or more of the following purposes:

(a) Religious,

(b) Charitable,

(c) Scientific,

(d) Testing for public safety,

(e) Literary,

(f) Educational, or

(g) Prevention of cruelty to children or animals.

Treasury Regulations section 1.501(c)(3)-1(d)(2) defines “charitable”. The term
“charitable” is used in section 501(c)(3) in its generally accepted legal sense and is,
therefore, not to be construed as limited by the separate enumeration in section
501(c)(3) of other tax-exempt purposes which may fall within the broad outlines of

“charity” as developed by judicial decisions. Such term includes: relief of the poor and
distressed or of the underprivileged; advancement of religion; advancement of
education or science; erection or maintenance of public buildings, monuments, or
works; lessening of the burdens of Government; and promotion of social welfare by
organizations designed to accomplish any of the above purposes, or (i) to lessen
neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend

human and civil rights secured by law; or (iv) to combat community deterioration and
11

Form §86-A (Rev.+68) Department of the Treasury - Internal Revenue Service
Page: --

Form 886A Department of the Treasury- Intemal Revenue Service Schedule No. or

Explanation of Items Exhibit ,
Name of Tax Year/ Period Ende
Payer December
ORG 20XX
thru
December
20XX

juvenile delinquency. The fact that an organization which is organized and operated for
the relief of indigent persons may receive voluntary contributions from the persons
intended to be relieved will not necessarily prevent such organization from being
exempt as an organization organized and operated exclusively for charitable purposes.
The fact that an organization, in carrying out its primary purpose, advocates social or
civic changes or presents opinion on controversial issues with the intention of molding
public opinion or creating public sentiment to an acceptance of its views does not
preclude such organization from qualifying under section 501(c)(3) so long as it is not
an “action” organization of any one of the types described in paragraph (c)3) of this

section.

Treasury Regulations section 1.501(c)(3)-1(d)(3) defines the term “educational”. (i) In
general, the term “educational”, as used in section 501(c)(3), relates to —

(a) The instruction or training of the individual for the purpose of improving or
developing his capabilities; or

(b) The instruction of the public on subjects useful to the individual and beneficial to the
community.

An organization may be educational even though it advocates a particular position or
viewpoint so long as it presents a sufficiently full and fair exposition of the pertinent
facts as to permit an individual or the public to form an independent opinion or
conclusion. On the other hand, an organization is not educational if its principal function

is the mere presentation of unsupported opinion.

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

exempt.

12

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: --

Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December
ORG 20KX
thru
December
20XX

Form 886A

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 proration 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.

Rev. Rul. 69-441, 1969-2 C.B. 115, granted 501(c)(3) status to an organization with two
functions: it educated the public on personal money management, using films,
speakers, and publications, and provided individual counseling to “low-income
individuals and families.” As part of its counseling, it established budget plans, i.e.,
debt management plans, for some of its clients. The debt management services were
provided without charge. The organization was supported by contributions primarily
from creditors. By virtue of aiding low income people, without charge, as well as
providing education to the public, the organization qualified for section 501(c)(3) status.

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

13

Form 886-A (Rev.4-68) Department of the Treasury - Intemal Revenue Service
Page: --

Department of the Treasury - Internal Revenue Semvice ] Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December
ORG 20K
thru
December
20XXK

Form 886A

identical to those in Consumer Credit Counseling Centers of Alabama, Inc. v. United
States, discussed immediately above.

In Solution Plus, Inc. v. Commissioner, T.C. Memo. 20XX-21, the United States Tax
Court held that an organization whose principal activity was to market and process
consumer debt management plans was not entitled to exemption under section
501(c)(3) because the organization was not organized or operated exclusively for
exempt purposes and failed to establish that it did not operate for a substantial non-

exempt purpose.

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.

Treasury Regulations section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not
organized or operated exclusively for one or more of the purposes specified in
subdivision (i) of this subparagraph unless it serves a public rather than a private
interest. Thus, to meet the requirement of this subdivision, it is necessary for an
organization to establish 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.

TAXPAYER’S POSITION

On March 20XX, the Service issued a preliminary report of examination proposing
revocation of ORG's Federal tax exempt status under IRC section 501(c)(3) effective
January 1, 20XX. In the preliminary report, the Service also solicited ORG's positions
on the proposed actions. To the date of this report, ORG has not responded to the

Service's proposed actions.

GOVERNMENT’S POSITION
The Government determines that ORG was not operated exclusively for one or more

exempt purposes specified under IRC section 501(c)(3). An organization will be
regarded as operated exclusively for one or more exempt purposes only if it engages

14

Form 886-A (Rev.4-68) Department of the Treasury - Intemal Revenue Service
Page: --

Department of the Treasury - Intemal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December

ORG 20KX
thru

December

20XXK

Form 886A

primarily in activities that accomplish one or more of such exempt purposes specified
under IRC section 501(c)(3).

Whether ORG was operated for an educational purpose

The term “education” as specified in IRC section 501(c)(3) includes (a) instruction or
training of an individual for the purpose of improving his capabilities and (b) instruction
of the public on subjects useful to the individual and beneficial to the community.

When an individual contacts ORG and is not aware of what ORG does, the receptionist
would immediately follow a telephone script to inform the individual of all the benefits
that ORG can provide if the individual enrolls in the DMP; benefits such as lower
interest rate, lower finance charges, lower monthly payments, one single monthly
payment, stopping of over limit fees, and stopping of collection calls. The telephone
script did not provide for determining the individual's broader financial situation or
proposing any alternatives to the DMP. Of the entire telephone script, one bullet point
was devoted to informing the individual of free seminars. Even then, according to the
receptionist, this point is rarely mentioned to the individual.

There is also no evidence indicating that the ORG’s Counselor attempts to devise a
personal and specific solution to each client. During the counseling session, ORG's
Counselor obtains enough information from the individual to determine whether he or
she is qualified for DMPs. If the individual is qualified for DMPs, the Counselor will offer
DMPs. If the individual did not have sufficient income to repay debts, the Counselor
informs the individual that there is nothing the Counselor can do for them and ends the
session. This is evidenced during the live counseling session that the Counselor
conducted on April 20XX (refer to Fact section for details). While the client has
been current with her credit card payments and has sufficient income to make credit
card payments, the client was concerned with her future once Medicare ceases paying
for her prescription drugs. The Counselor, however, offered only one solution to the
client after gathering necessary income and expense information. The option the
Counselor offered was a debt management plan. When the client showed signs of
resistance to the DMPs, the
Counselor immediately listed the advantages of enrollment in the DMPs, advantages
such as cutting only one check, having ORG manage the account, and lower interest
rate, to entice the client to sign up for the DMP. The Counselor did not attempt to find
out what the client needed or present the client with other options such as following a
Strict budget that would include cutting down or getting rid of unnecessary expenses or
contacting other agencies that offer prescription drug assistance, or both. Although the
Counselor noted that the client has been overspending on entertainment and clothes,

the Counselor only advised the client of cutting down on these two items at the end of
15

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: --

Departmert of the Treasury- Intemal Revenue Service Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
December
ORG 20XX
thru
December
20XX

Form 886A

the counseling session after the client signed up for the DMPs and paid the initial set up
fee.

ORG provides a 8-page brochure to all DMP clients as well as those ORG’s Counselor
determined were not qualified for DMPs due to insufficient income to repay debts. Of
the 8 pages, 4 pages were devoted to answering DMP questions; a one-page mission
statement which primarily discusses the benefits of DMPs; one page was devoted to
informing how bill consolidation can improve the clients chance of being able to rent an
apartment or qualify for employment; one-page containing 10 tips on spending; and a
fill-in-the-blank budget form. This indicates that ORG does not tailor its services to
meet the specific needs of each individual. Furthermore, a review of the client files did
not disclose any evidence of ORG’s Counselor contacting the clients after they signed
on to the DMP program to follow up on their situation or to find out if they need further

counseling.

ORG does not appear to have options other than selling DMPs to clients. ORG
received no public and governmental supports. It relies solely on DMP revenue for
survival. ORG generated $ and $ of revenue for the tax years 20XX and 20XX
respectively; 100 percent of which was DMP initial set up, monthly management fees

and DMP related revenue.

ORG'’s web site also primarily promotes DMP, based on size and space devoted.
ORG'’s web site contains 5 tabs, “Home”, “FAQs”, “Services”, “Applications” and
“Contact Us”. While budgeting classes were mentioned, substantially all of the web
pages were devoted to discussing and answering DMP questions.

ORG claimed that in 20XxX< it offered free seminars on the subject of budgeting to the
general public. However, despite repeated verbal and written requests, ORG has not

provided evidence that such seminars had occurred.

In summary, ORG's primary purpose was to offer DMPs to the general public for fees.
The educational purpose, if any, was insubstantial and secondary. Offering DMPs to
the general public for fees did not further an educational purpose as defined by IRC
section 501(c)(3). See also, Better Business Bureau of Washington D.C., Inc. v. United
States, American Institute for Economic Research v. United States, American Institute
for Economic Research v. United States, and Solution Plus, Inc. v. Commissioner.

Whether ORG was operated for a charitable purpose
The term charitable as specified in IRC section 501(c)(3) includes relief of the poor and

distressed or of the underprivileged. ORG, however, does not restrict its DMP services
16

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: --

Department of the Treasury - Internal Revenue Service Schedule No. or

Form 886A 6 Le
Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer
December 31,
ORG 20KX
thru
December 31,
20XXK

to the poor, distressed, or underprivileged. ORG offers its DMP service to anyone who
responds to it advertising.

ORG utilizes the widely distributed directories such as in and

and to market its DMPs to the general public. The contents of
the ads primarily entice debtors to sign up for DMPs by promising them a lower single
monthly payment, lower interest rates, saving of thousands of dollar on finance
charges, and the elimination of harassing phone calls. Once an individual responds to
the ad, ORG makes no determination whether the individual is a member of a
charitable class. The only determination ORG makes is whether the individual has
sufficient income to repay the debt. If the individual has sufficient income to repay the
debts, DMPs service is offered. If the individual does not have sufficient income to
repay the debts, ORG’s Counselor informs the individual there is nothing ORG can do
for them. The Counselor does not refer the individual to other organizations for

assistance such as financial or employment.

In summary, ORG offers DMP services to anyone who is qualified for DMPs without
making a determination whether the individual is a member of a charitable class.
Primarily providing DMP services for a fee does not further charitable purposes. As
such, ORG was not operated exclusively to further a charitable purpose under IRC
section 501(c)(3). See also Better Business Bureau of Washington D.C.. Inc. v. United
States, American Institute for Economic Research v. United States, American Institute
for Economic Research v. United States, and Solution Plus, Inc. v. Commissioner.

CONCLUSION
Since ORG was not operated exclusively for one or more exempt purposes under IRC

section 501(c)(3), its Federal tax exempt status under such section should be revoked
effective January 1, 20XX. ORG is liable for filing Form 1120 U.S. Corporation Income
Tax Return for the tax year ended December 20XX and all years after.

17

Department of the Treasury - Internal Revenue Service

Form 886-A (Rev.4-68)
Page: --