Determination 1142028: IRS revokes a credit-counseling organization's tax exemption

View official IRS release (PDF)

Plain-English summary

The IRS revoked a credit-counseling organization's section 501(c)(3) exemption after finding that its main activity was servicing debt-management plans rather than providing substantial educational or charitable counseling. The organization received fees and creditor “fair share” payments, had limited public support, and had a closely related governing body and staff. The IRS concluded that the organization operated in a commercial manner and did not satisfy the operational test. Contributions were no longer deductible, and the organization was required to file taxable returns after the effective date of revocation.

Ruling snapshot

• Question: Did the organization continue to operate exclusively for exempt purposes when debt-management plans became its primary activity?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(3), 170, 509(a)(2), 6104(c), and 7428; Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

TAX EXEMPT AND
GOVERNMENT ENTITIES DALLAS, TEXAS 75242 501.03-00

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TE/GE EO EXAMINATIONS
1100 COMMERCE ST. MAIL CODE 4920 DAL

DIVISION

Number: 201142028
Release Date: 10/21/2011

LEGEND Date: July 28, 2011
ORG - Organization name XX - Date Address - address
ORG Employer Identification Number:
ADDRESS Person to Contact/ID Number:
Contact Numbers:
Voice:
Fax:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear

In a determination letter dated January 20XX, you were held to be exempt from Federal income
tax under section 501(c)(3) of the Internal Revenue Code (the Code).

Based on recent information received, we have determined you have not operated in
accordance with the provisions of section 501(c)(3) of the Code. Accordingly, your exemption
from Federal income tax is revoked effective January 1, 20XX. This is a final adverse
determination letter with regard to your status under section 501(c)(3) of the Code.

We previously provided you a report of examination explaining why we believe revocation of
your exempt status is necessary. At that time, we informed you of your right to contact the
Taxpayer Advocate, as well as your appeal rights. On May 5, 20XX, you signed Form 6018,
Consent to Proposed Action — Section 7428, agreeing to the revocation of your exempt status
under section 501(c)(3) of the Code, effective January 1, 20XX.

Contributions to your organization are no longer deductible under section 170 of the Internal
Revenue Code.

You have filed taxable returns on Forms 1120 U.S. Corporation Income Tax Return, for the
years ended December 31, 20XX, December 31, 20XX and December 31, 20XX with us. For
future periods, you are required to file Form 1120 with the appropriate service center indicated
in the instructions for the return.

Processing of income tax returns and assessment of any taxes due will not be delayed
should a petition for declaratory judgment be filed under section 7428 of the Internal
Revenue Code.

If you decide to contest this determination in court, you must initiate a suit of declaratory
judgment in the United States Tax Court, the United States Claims Court or the District
Court of the United States for the District of Columbia before the 91st day after the date this
determination was mailed to you. Contact the clerk of the appropriate court for rules for
initiating suits for declaratory judgment. You may write to the Tax Court at the following
address:

You also have the right to contact the Office of the Taxpayer Advocate. You may call toll-free,
1-877-777-4778, and ask for Taxpayer Advocate Assistance. Or, if you prefer, you may contact
your local Taxpayer Advocate at:

Taxpayer Advocate assistance cannot be used as a substitute for established IRS procedures,
formal appeals processes, 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 action, as required by IRC §6104(c).

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

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Internal Revenue Service Department of the Treasury
TE/GE Exempt Organizations Examinations
915 Second Avenue M/S W540
Seattle, Washington 98174

October 8, 2009
Taxpayer Identification Number:
Form:
Tax Period(s) Ended:
Person to Contact/ID Number:

ORG Contact Numbers:
ADDRESS Telephone:

Fax:
Dear '

We have enclosed a copy of the preliminary findings of our examination, explaining why we
believe revocation of your exempt status under section 501(c)(3) of the Internal Revenue Code
(Code) is necessary. Please respond within 30 days of the date of this letter.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to
Proposed Action - Section 7428, to the individual listed above. We will then send you a final
letter revoking your exempt status. Please also file Federal income tax returns (Forms 1120 or
1041) for tax year ending , with the individual listed above.

If you disagree with our findings, please provide in writing any additional information you believe
may alter the findings. Your reply should include a statement of the facts, the applicable law,
and arguments that support your position. Please also include any corrections to the facts that
have been stated, if in dispute.

Upon receipt of your response, we will evaluate any additional information you have provided
prior to issuing any final report of examination.

Alternatively, you may have the option of entering into a Fast Track settlement agreement.
Please refer to the information enclosed regarding the possibility of this option.

Thank you for your cooperation.

Sincerely,

Terry Kino
Revenue Agent

Enclosure: ;

Form 886-A, Explanation of Items

Publication 4167, Appeals - Introduction to Alternative Dispute Resolution
Form 6018, Consent to Proposed Action - Section 7428

Schedule number or exhibit

Form 886-A

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG. EIN 12/31/20XX
LEGEND

ORG - Organization name XX - Date City - city State - state President -
president Secretary - secretary DIR-1, DIR-2 & DIR-3 - 157, 2” & 3” DIR

EMP-1, EMP-2, EMP-3, EMP-4, EMP-5 & EMP-6 - 187, 2, 3™, 4™, 5™, «& 67 EMPLOYEES
CO-1, CO-2, CO-3, CO-4 & CO-5 — 187, 2™, 37°, 4™ & 5™ COMPANIES

ISSUE

Whether ORG'ss 501(c)(3) status should be revoked on the grounds that it has not been operated
exclusively for exempt purposes within the meaning of Internal Revenue Code section 501(c)(3).

FACTS

ORG. (“ORG's) was incorporated in the State of State on May 10, 19XX. The IRS gave ORG an
advance ruling period from May 11, 19XX to December 31, 20XX. The IRS issued a final
determination letter on March 17, 20XX granting ORG tax-exemption under section 501(c)(3) of
the Code. The determination letter advised that ORG was not a Private Foundation because it is
an organization described in section 509(a)(2) of the Code.

Articles of Incorporation

In its Articles of Incorporation, ORG states the purposes for which the Corporation is organized
and operated as follows:

(a) To engage in the business of credit counseling, including counseling for financial
distressed individuals, debt consolidation, and related items and generally to engage in any
lawful business or activity for which corporations may be organized under the State Non-
profit corporation act and which may, in the judgment of the board of directors, be
necessary, useful or advantageous to the Corporation in furthering the purposes of the
Corporation.

(b) Charitable, religious, educational, or scientific within the meaning of Section 501(c)(3) of
the Internal Revenue Code of 1986, as amended from time to time, including, for such
purposes, the making of distributions to organizations that qualify as exempt under such
Section 501(c)(3).

(c) To exercise all powers granted by law necessary and proper to carry out the foregoing
purposes, including, but not limited, the power to accept donations of money, property,
whether real or personal, or any other things of value.

Application for Recognition of Tax Exempt Status

In the Form 1023 application packet that ORG filed June 30, 19XX, they stated that their activities
were going to consist of the following:

Form 886-A (1-1994) Catalog Number 20810W Page_1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG. EIN 12/31/20XX

1) Debt Elimination Service

Working with individuals to help them plan a budget, paying their bills for them, negotiating
payment arrangements with their creditors. Asking creditors to reduce payments and
interest so that clients will be able to make arranged payments to all their creditors.
Handling problems and discrepancies that arise between the creditor and client. Working
with the creditor to come to an agreement to resolve any problems that may occur. Most —
clients are unable to negotiate solutions on their own with their creditors. Many creditors are
unwilling to negotiate with individuals, but they will with this organization.

2) Financial Protection Service

A new service that was developed to handle the financial affairs of the elderly that are
physically / mentally challenged. Many of these people are on fixed incomes and cannot
regulate fluctuating expenses, which occur largely to being taken advantage of (sic).

These people need caregivers to regulate their day to day living routine but have not been
successful in finding organizations that will handle and mange their finances. A monthly
budget is set up for each client. All bills come directly to this organization and are carefully
scrutinized and prepared for payment. The clients’ monthly income is deposited into a trust
account. They cannot over spend their budget and no one can get to their money without
authorization. The Social Security Administration has recognized this organization to be a
very dependable payee for those who require social security benefits. Many of these
clients will not receive social security payments unless they have a reliable payee to
manage their finances.

Employee Handbook
The mission statement in the employee handbook for ORG states:

“ORG, Inc was developed to help creditors and clients work together for the best possible
solution to financial difficulties and credit delinquencies. We are constantly searching for
new and better ideas to help our clients resolve their financial difficulties. We are in the
process of becoming the BEST processing center in America.”

Board of Directors
The board of directors for ORG consists of the following people:

President: President, City, State.

Secretary / Treasurer: Secretary, City, State.
Director: DIR-1, City, State.

Director: DIR-2, City, State.

Director: DIR-3, City, State.

Form 886-A (1-1994) Catalog Number 20810W — Page__2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG. EIN 12/31/20XX

The only board members with credit counseling experience are President and Secretary. DIR-1 is
a contractor supervisor for a firm called CO-2. DIR-2 is the sole proprietor of a company called
CO-1. DIR-3 is a retired former business owner.

Website
As of the year 20XX, ORG's website contained the following statements:

ORG's Mission Statement:

ORG. was formed to help creditors and clients work together for the best possible solution
to financial difficulties and credit delinquencies. It is very possible in this day and age to
live free of unnecessary debt and related stress. We are committed to helping our clients
achieve and maintain this desirable and worthy lifestyle.

ORG Debt Elimination Service:

Consolidates your debts.

Saves you hundreds of dollars in interest.

Lowers your monthly payments.

No refinancing required.

Reduces your debts faster - Be Free.

Stops Creditor's calls and harassment.

Helps both Creditors and Clients work together.
Provides the best solution to financial difficulties.
Avoids bankruptcy.

Preserves integrity of your credit history.

Reduces individual and marriage money stress issues.
ORG offers clients complete relief and peace of mind relative to all their money matters.

ORG provides the following debt-elimination services:

Credit Cards-As a 501 (c)(3) non-profit organization we are able to negotiate with all credit
card companies.

Financial Institutions- We negotiate loans secured with household goods.
Settlements have been offered when the client is in a position to do so.

We have been able to get delinquent loans re-written in order to re-age the account,
resulting in a current status on the credit report.

Medical -We request that all interest be frozen. Settlements may be offered if applicable.
Medical write-off — If we can prove that a client is unable to pay this bill in full we will ask
for a charitable write-off which allows a tax benefit to the creditor, as opposed to
bankruptcy, where the creditor will receive nothing.

Form 886-A (1-1994) Catalog Number 20810W Page_3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax identification Number Year/Period ended

ORG. EIN 12/3 1/20XX

IRS- We set up negotiated payment arrangements
e Offer of Compromise
e Abatements

| State Taxes - Negotiate payment arrangements

Student Loans - If a client is unable to pay on this loan we will request deferments or
extensions.

Collections -We negotiate accounts that are in collections. Request is made for payments
to go to the original creditor. Forms are available for cease and desist letters if necessary.

Legal Garnishments — If we cannot get the garnishment removed, we negotiate a reduced
amount rather than the 25% allowed by law.

Court Fines — Negotiate payment arrangements

Check and Title Loan companies - We negotiate any balance, no matter how large or

small.

e Pay Deferment Plan

e Small Business Debt

e All above procedures apply
Additional Services

Dispute delinquencies on credit reports

Do not report CCCS status to credit reporting agencies

Credit reference for secured loan purchases Example; Automobile, Mortgage,

All payments can be included on the program, such as car, mortgage, and other non
negotiated payments, for an additional fee.

Mortgage Referrals

If you are someone that is usually behind on paying bills, hounded by collectors, can not
see any way out of debt, and feel that bankruptcy is your only option - Contact ORG - we
can help you get out of debt without a loan.

ORG helps clients become debt free, eliminating financial stress.
We are constantly searching for new and better ideas to help our clients resolve their

financial difficulties. We are in the process of becoming the BEST processing center in
America.

Form 886-A (1-1994) Catalog Number 20810W Page_4 —_—publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer Tax Identification Number Year/Period ended

ORG.

EIN 12/3 1/20XX

Frequently Asked Questions

What is the ORG Debt Elimination Program?

This program is designed to help people who are having difficult financial problems. These
people usually are behind on bills, are hounded by collectors, can't see any way out of debt,
and feel that bankruptcy is their only option. Through this program, creditors offer lower
monthly payments and often greatly reduce or eliminate interest and late fees, in an effort
to help you meet your financial obligation with them.

How do | know if this program can benefit me?

Every prospective client is offered a free, no-obligation consultation with a certified,
licensed counselor. At the consultation, your financial situation is discussed in detail, and
benefits to the program are explained. Although every situation is unique, this program
can be tailored to fit most people's needs.

How does the program work?

Your counselor contacts all creditors and offers them a new repayment plan with lower
interest rates. Since many people are considering bankruptcy at this point, the creditors
find this offer more appealing than the alternative. Most creditors are willing to accept the
offer, and a repayment plan is initiated with lower interest rates and reduced monthly
payments. You pay a pre-determined amount each month to ORG, which is put into a trust
account. From this account, ORG pays all your creditors each month, relieving you of this
time-consuming task.

Are you really able to negotiate with my creditors, or should | contact them myself?

Our professional staff is trained in the "negotiation language " They know the special terms
that are available, and what solutions have been successful for others in similar situations.
Your counselor explains to your creditors that you are honorably trying to pay your debts,
and that they will receive 100% of what you owe them. Unless you have the necessary
negotiation skills and experience, you will never know if the creditor is giving you the best
terms available.

Will my creditors and collection agencies stop calling me?
Yes! Once the negotiations are finalized and confirmed by your creditors, these distressing
calls will stop.

How will this program affect my credit?

Your creditors may choose to make a comment on your credit report, indicating that you are
working with a counseling agency or are involved in a payment plan. ORG is not required
to report our clients to any credit bureau and we never do. If you keep making your
payments as scheduled with us, you may use ORG as a good credit reference.

Should | consider a consolidation loan?

Form 886-A (1-1994) Catalog Number 20810W = Page_5 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1994)

Schedule number or exhibit

EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG.

EIN 12/31/20XX

You cannot borrow your way out of debt! A consolidation loan will not reduce the amount
you owe. It will only place your assets at risk or extend your debt farther into the future and
place you deeper in debt. This only extends your difficulties and does not solve them.

Is bankruptcy an option?

Bankruptcy is appropriate in certain situations, but it is not the "easy, quick fix" that it is
often advertised to be. Your debt might vanish ovemight, but the emotional side effects will
last a lifetime. Before you consider bankruptcy, we ask that you visit with our counselors
first. With smaller monthly payments and lower interest rates, most people are able to
avoid bankruptcy by honorably eliminating their debts. This allows them to feel proud of the
choice they made.

The development of ORG., (located in City, State and City, State) was founded in 19XX in
City, State. At that time there was limited access for debt-bound individuals to gain relief
from their burden except by filing bankruptcy. There was a large, unfulfilled need for
financial counseling among the population in State and the United States. The local
economy, as well as the nation, was forcing many honest and sincere families into difficult
financial situations. With State having the highest unemployment rate in the nation, it was
obvious people were going into debt faster and faster. President and Secretary decided to
move the company to State where their parents still lived. While in City, ORG gained status
with the Social Security Administration to become a Representative Payee to serve the
public who received Social Security benefits (monthly income from Social Security). These
people are typically elderly, Veterans, mentally-handicapped, physically-handicapped,
children, etc. These people all needed assistance in handling their income to pay their bills
(rent, cable, phone, garbage, etc).

President and Secretary started the foundation. President is a trained and certified financial
consultant for CO-3 and holds a certificate for NIFCE (National Institute for Financial
Counseling Education). Her ability in dealing with people, recognizing their individual
needs, and negotiating successful agreements has played an important part in the direction
ORG has taken. Secretary's dedication and desire to follow all necessary rules and
regulations pertaining to the business keeps ORG in perfect financial shape. Secretary is
responsible for all licensing, bonding, and financial affairs for ORG.

ORG started in a one room office, sharing counseling by President, and bill paying by
Secretary. There was a short time when bills for clients were paid from their kitchen table,
but very rapidly the clientele grew faster than they could write! After one year, they moved
to an office with a separate counseling office, new computers, hired personal, bought office
furniture and continued to assist people from surrounding areas to become debt-free. Every
year they moved to a new and larger office, hiring more people, buying more equipment,
and helping people throughout the state. New counselors were trained to assist with the
volume of new inquiries.

Form 886-A (1-1994) Catalog Number 20810W Page_ 6 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

ORG.

Tax Identification Number

EIN

Year/Period ended

12/3 1/20XX

The Revenue Agent found no educational content on the website, such as the literature or any

links to other educational resources.

Federal Returns

ORG filed all required tax returns for the tax year of 20XX. Its Form 990 reported as follows:

20XX Form 990

Gross Receipts

Revenues

Program Service Revenue
Cost of Goods Sold

Total Revenue

Expenses

Compensation of Officers, Directors
Other Salaries and Wages
Payroll Taxes

Accounting Fees

Supplies

Telephone

Postage and Shipping
Occupancy

Equipment Rental and Maintenance
Travel

Conferences, Meetings
Depreciation

Misc.

Taxes, Licenses
Insurance

Advertising

ACH Bank Fees

Contract Labor

Total Expenses

Excess (deficit)

Assets

Cash

Land, Buildings, and Equipment
Other Assets

Total Assets

Form 886-A (1-1994) | Catalog Number 20810W

Page 7

publish.no.irs.gov

Department of the Treasury-Internal Revenue Service

Schedule number or exhibit
Form 886-A

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG. EIN 12/31/20XX
Liabilities

Mortgages and Other Notes Payable
Total Liabilities

ORG's paid officers and employees were as follows:

Officers Compensation
President
Secretary
Employees
EMP-1
EMP-2
EMP-3
EMP-4
EMP-5
EMP-6
EMP-7

EMP-1, EMP-2, EMP-4, and EMP-5 are President and Secretary's sons. EMP-3 is their daughter-
in-law.

The program service income consists of client contributions of $, “fair share” contributions from the
credit card companies and banks of $, and initial enrollment fees of $. There was no income
reported on the Form 990 from any of the representative payee plans in which ORG's Form 1023
stated it would become involved.

Part VIII of the Form 990, Relationship of Activities to the Accomplishment of Exempt Purposes,
reads as follows:

“Credit counseling (sic) and assisting public with meeting their financial obligations by
working out a reduction of expenses and negotiating a repayment schedule and collecting
and remitting those payments.”

ORG's Activities

Secretary and President, stated on 05/14/20XX that during 20XX ORG discontinued credit
counseling as its primary activity. Instead, ORG focused on processing DMPs, and trying to
become a representative payee organization for the Social Security Administration (“SSA”),
Railroad Retirement Board, and Veterans benefit recipients.

At December 31, 20XX, ORG had 875 DMPs. As of the initial audit appointment May 14, 20XX,
ORG was still accepting DMP clients.

Form 886-A (1-1994) Catalog Number 20810W Page_ 8 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG. EIN 12/31/20XX

Representative payees for the SSA work with those individuals that are unable to manage their
own finances. When an adult is unable to manage or direct the his or her own funds, SSA may
need to appoint a representative payee. SSA usually looks for a payee among the beneficiary’s
family and friends. In some cases, these traditional networks of support are not available, so SSA
looks to state, local, or community sources to fill the need. SSA requires that an organization
serving as a representative payee that is not a state or local government must be tax-exempt.
Representative payees are required to determine the SSA recipients’ current needs for day-to-day
living (e.g., food, clothing, housing, and medical expenses) and use the recipient's payments to
meet those needs.

ORG, for tax years after 20XX was charging a monthly fee for payee services equal to the lesser
of 10% of the monthly payment or $. ORG only charged the fee if, after meeting the SSA
recipient's needs, there were any funds left in the account. At the time of the examination in May
of 20XX, ORG was acting as the organizational representative for over 100 recipients of SSA,
Railroad Retirement Board, and Veterans’ benefits.

As of the date of this report, ORG has 89 active DMPs. ORG no longer operates as an SSA
representative payee due to new bonding requirements that it can not meet.

Educational Activities
During 20XX, ORG conducted several educational seminars, as follows:

e Seminar 1 — February 9, 20XX. The seminar was given at the CO-4 Center from 2:00pm to
3:30 pm. The subject of the seminar was to make students aware of the importance of
credit to their financial future.

e Seminar 2—June 16, 20XX. The seminar was given at a private home from 6:45pm to
9:00pm. The seminar covered how credit affects one’s financial future, how to read a credit
report and what to do if there has been inaccurate reporting, how to repair credit if it has
been damaged, and protecting against identity theft. There were 12 participants for this
seminar.

e Seminar 3 — July 22, 20XX. The seminar was given at CO-5. This was the first in a 6-part
series at this location. It covered budgeting on a fixed income. The seminar was an hour-
and-a-half in duration.

e Seminar 4 — August 19, 20XX at CO-5. This seminar covered how to prevent and recover
from identity theft. The seminar was an hour-and-a-half in duration.

e Seminar 5 — September 16, 20XX at CO-5. This seminar covered how to negotiate with
creditors. The seminar was an hour-and-a-half in duration.

_ Form 886-A (1-1994) Catalog Number 20810W = Page__Q publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG. EIN 12/31/20XX

e Seminar 6 — September 30, 20XX at CO-5. The subject of this seminar was building a
better credit report and the importance of understanding credit. This seminar was an hour-
and-a-half in duration.

e Seminar 7 — October 14, 20XX at CO-5. This seminar covered information on programs
available to first time homebuyers. This seminar was one hour in duration.

e Seminar 8 — November 4, 20XX at CO-5. This was the final seminar in the series. The
subject matter was money management, budgeting, and credit reporting and scoring. This
seminar was an hour-and-a-half in duration.

There were 10-20 participants in each of the CO-5 seminars.

ORG's other educational activity was a monthly newsletter e-mailed to clients with internet access.
The newsletters covered the following topics:

Identity theft,

Understanding credit,

After care plan for those individuals finished with their DMPs ,
5 factors of credit scoring,

The importance of watching statements,
Budgeting income correctly,

Educating youth about credit responsibility,
White card fraud,

ACH Awareness,

New bankruptcy laws,

Making extra money, and

Your Holiday budget.

During the examination visit to the organization on May 14 — 18 of 20XX, the Revenue Agent
listened to approximately 25 phone calls taken by ORG's personnel. All of these calls dealt with
either maintenance of the DMP accounts or the SSA representative payee program. The
Revenue Agent did not observe any educational content in any of the calls.

LAW

Section 501(c)(3) of the Code describes certain organizations exempt from taxation under section
501(a) of the Code as follows:

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 for the prevention of cruelty to children or animals, no part of the

Form 886-A (1-1994) Catalog Number 20810W Page_10 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG. EIN 12/31/20XX

net earnings of which inures to the benefit of any private shareholder or individual, no
substantial part of the activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation, and which does not participate in, or intervene in
(including the publishing or distributing of statements), any political campaign on behalf of
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) of the Code, the organization must be one that is both

organized and operated exclusively for one or more of the purposes specified in that section. If an
organization fails to meet either the organizational or operational test, it is not exempt.

Section 1.501(c)(3)-1(c)(1) of the Regulations provides that an organization will not be regarded
as operated exclusively for exempt purposes if more than an insubstantial part of its activities is
not in furtherance of exempt purposes.

Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations provides that an organization is not organized or
operated exclusively for one or more exempt purposes unless it serves a public rather than a
private interest. Thus, 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.

Section 1.501(c)-1(d)(3) of the Regulations defines the term “educational” as including the
instruction or training of the individual for the purpose of improving or developing his capabilities,
or the instruction of the public on subjects useful to the individual and beneficial to the community.

In Revenue Ruling 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 composed of representatives from
religious organizations, civic groups, labor unions, business groups, and educational institutions.

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 proration 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 voluntary contributions, primarily from the creditors
participating in the organization’s budget plans, for its support.

Form 886-A (1-1994) Catalog Number 20810W Page_11 —_publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG. EIN 12/31/20XX

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. Income Tax Regulation section 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.

The organizations included in the above decision waived the monthly fees when the payments
would cause 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 primary
sources of revenue for these organizations were provided by government and private foundation
grants, contributions, and assistance from labor agencies and United Way.

In Easter House v. United States, 846 F. 2d 78 (Fed. Cir. 1988), affg 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 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 traditional attributes of
a charity. First, the agency’s operation made substantial profits, and there was a substantial

Form 886-A (1-1994) Catalog Number 20810W = Page_ 12 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG. EIN 12/31/20XX

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 to 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 ruled that the taxpayer failed
to show that no part of its earnings inured to the benefit of any private individual or shareholder as
defined by sections 1.501(c)(3)-1(c)(2) and 1.501(a)-1(c) of the regulations. The court found the
organization provided a source of credit (i.e. loans) to companies in which the private shareholder
was either employed or owned. The fact that the loans were made showed that the companies
controlled by the private shareholders had a “source of loan credit” in the organization and the
ability to use the organization's assets for their personal benefit.

in B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352, 356-57 (1978), the court stated, in part, that
the focus of the issues should be “toward which an organization’s activities are directed, and not
the nature of the activities.”

Taxpayer's position

ORG will be allowed to review the preliminary examination report and respond.

Government's position

ORG has not operated exclusively for purposes provided in section 501(c)(3) of the Internal
Revenue Code. ORG therefore does not qualify for tax-exempt status under section 501(c)(3) the
Code. Secretary and President stated on May 14, 20XX that during 20XX ORG discontinued
credit counseling as its primary activity. This was tantamount to an announcement that ORG no
longer wished to operate as a 501(c)(3) organization.

ORG's operating as a representative payee for SSA had the potential to bring its activities into
accordance with section 501(c)(3) of the Code. The facts gathered for the year 20XX suggest that
ORG intended to make this a primary activity. However, the facts do not indicate that this ever
came to fruition. Virtually all of the income reported on the 20XX Form 990 is related to DMPs.
Whatever success ORG may have had as a representative payee during 20XX and 20XX, it has
since had to discontinue this activity, due to a failure to meet bonding requirements. It therefore
cannot rely on this activity or purpose as a basis for 501(c)(3) status.

Form 886-A (1-1994) Catalog Number 20810W Page 13 __ publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG. EIN 12/3 1/20XX

ORG's year 20XX Form 990 shows a disproportionate amount of DMP activity. Of ORG's $ of
reported revenue, % ($ = $) came from “fair share” payments from credit cards and banks. The
rest of its revenue came from contributions paid by ORG's clients.

ORG's statement under Part VIII that it assists the public “by working out a reduction of expenses
and negotiating a repayment schedule and collecting and remitting those payments” further
indicates that its focus was on DMPs. DMPs are appropriate in some cases, but when an
organization devotes so much of its activities to them, to the exclusion of true educational credit
counseling, it demonstrates a primary purpose of making money from fair share payments and
acting in the interest of creditors, rather than serving the public.

Of the 25 phone calls that the Revenue Agent observed during May of 20XX, none involved credit
counseling. Instead the primary focus was on DMPs. Given the direct relationship between the
number of DMPs processed and the amount of fair share payments from creditors, this suggests a
conflict of interest on ORG's employees’ part.

The relationships of ORG's employees to one-another warrants discussion. Its principals are
husband and wife, and five of the remaining seven employees are family members. With % of
ORG's total expenses ($ + $) going to payroll and payroll taxes, ORG looks more like a family
business than a 501(c)(3) organization.

ORG did carry out some educational activities during 20XX by virtue of its seminars at CO-4 and
CO-5 Dept. of Human Services. ORG's seminars amounted to about 13 hours of education.
These events probably required preparation. Assuming an hour of preparation for every hour of
seminar, this would amount to another 13 hours devoted to educational activities. ORG's monthly
newsletter could also be regarded as educational. Assuming approximately one hour to compose
each newsletter, this would amount to another 12 hours of educational activity, for a total of 38
documentable hours (13 + 13 + 12) devoted to educational activities during 20XX. This is an
insignificant amount of educational activity, considering the total hours worked during the year
(and/or) the compensation paid to the DIR’s and EMP’s of roughly $.

The language found on ORG's website is not indicative of credit counseling or education being a
primary purpose. Rather, the language largely promotes and advertises ORG's “debt elimination
service”. The content on the website would have a debtor believe that ORG can solve all of his or
her problems, without educating or instructing the individual on how to avoid problems in the
future.

Lack of public involvement was cited as a factor for denying exemption in Easter House v. United
States, supra, as well as in B.S.W. Group. ORG too has shown a lack of the public involvement
that characterizes public charities. Its Form 990 reports no support from grants or donations,
which suggests a lack of solicitation of public support. Instead, all of its income comes from the
fees it charges clients for setting up DMPs and from the fair share payments from creditors. Its
close-knit governing body and personnel stands in stark contrast to the traditional public charity's
governing body, composed of diverse individuals representing different parts of a community. Like

Form 886-A (1-1994) Catalog Number 20810W Page_ 14 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG. EIN ; 12/31/20XX

Easter House, ORG functions by means of a paid staff with no volunteer help. An exclusively paid
staff is characteristic of a commercial corporation, rather than a charitable non-profit organization.

ORG's case is unlike that of Consumer Credit Counseling Service of Alabama, Inc. v. U.S., 44
A.F.T.R.2d 78-5052 (D.D.C. 1978). CCCS of Alabama’s DMPs were found to be “incidental” to its
principle functions. In ORG's case, the processing of DMPs is its principle function. The
Counselors for CCCS of Alabama spent approximately 12% of their time on DMPs. In ORG' case,
employees spend most of their time on DMPs.

ORG is unlike the organization in Revenue Ruling 69-441. The organization in the Revenue
Ruling sought to help individuals by educating them in matters of personal money management.
The organization also had a diverse governing body. By contrast, ORG's means for helping
individuals is primarily enrolling them in DMPs. ORG's governing body is not diverse, with its core
consisting of a married couple.

ORG has not demonstrated that the services it provides are educational in the sense recognized
by law. A review of ORG's activities discloses no institutional support for education. The
presentation and website material appears to be inadequate to provide financial education as
there is no educational material on the website and no hyperlinks to any educational information.

Section 1.501(c)(3)-1(c)(1) of the Treasury Regulations provides that an organization will be
regarded as operating exclusively for exempt purposes only if it engages primarily in activities that
accomplish one or more of the exempt purposes specified in section 501(c)(3) of the Code.
Servicing DMPs is not a recognized exempt purpose. And, as this is ORG's primary activity, ORG
is in violation of Treasury Regulations section 1.501(c)(3)-1(c)(1), and 501(c)(3) status should be
revoked.

Conclusion

In order to qualify for exemption under section 501(c)(3) of the Internal Revenue Code, an
organization must be both organized and operated to achieve a purpose that is described under
that Code section. ORG has failed to demonstrate that it is operated in accordance with Internal
Revenue Code section 501(c)(3) and the corresponding Treasury Regulations. ORG's principal
activity is the servicing of DMPs. This activity does not achieve charitable or educational
purposes, but is rather a commercial service. Accordingly, ORG's tax-exempt status under section
501(c)(3) of the Code should be revoked effective January 1, 20XX. ORG is required to file
income tax returns on Form 1120 for all years beginning after December 31, 20XX. If the
proposed revocation becomes final, appropriate State officials will be notified of such action in
accordance with §6104(c) of the Internal Revenue Code.

Form 886-A (1-1994) Catalog Number 20810W = Page_15 publish.no.irs.gov Department of the Treasury-Internal Revenue Service