IRS denies section 501(c)(3) exemption to a mortgage counseling organization

View official IRS release (PDF)

Plain-English summary

The IRS denied section 501(c)(3) exemption to an organization providing mortgage mitigation and credit counseling services. The organization charged fees, shared operations and personnel with a related for-profit company, and focused on negotiating loan modifications rather than providing broad educational or charitable services. The IRS found that the organization failed the organizational and operational tests, served private rather than public interests, and did not satisfy section 501(q) credit-counseling requirements. Contributions were not deductible under section 170, and the organization could protest the determination within 30 days.

Ruling snapshot

• Question: Did the organization qualify for exemption under IRC § 501(c)(3), including the section 501(q) requirements?
• Outcome: Revocation, exemption denied
• Key authorities: IRC §§ 501(c)(3), 501(q), and 170; Treas. Reg. §§ 1.501(c)(3)-1(a), (b), (c), and (d)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Release Number: 201213031 Contact Person:
Release Date: 3/30/2012
Date: January 6, 2012 Identification Number:
UIL Code: 501.32-00
501.32-01 Contact Number:
501.33-00
Employer Identification Number:
Form Required To Be Filed:
Tax Years:
Dear

This is our final determination that you do not qualify for exemption from federal income
tax as an organization described in Internal Revenue Code section 501(c)(3). Recently,
we sent you a letter in response to your application that proposed an adverse
determination. The letter explained the facts, law and rationale, and gave you 30 days
to file a protest. Since we did not receive a protest within the requisite 30 days, the
proposed adverse determination is now final.

Since you do not qualify for exemption as an organization described in Code section
501(c)(3), donors may not deduct contributions to you under Code section 170. You
must file federal income tax returns on the form and for the years listed above within 30
days of this letter, unless you request an extension of time to file.

We will make this letter and our proposed adverse determination letter available for
public inspection under Code section 6110, after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the
two attached letters that show our proposed deletions. If you disagree with our
proposed deletions, you should follow the instructions in Notice 437. If you agree with
our deletions, you do not need to take any further action.

Letter 4038(CG) (11-2005)
Catalog Number 47632S

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In accordance with Code section 6104(c), we will notify the appropriate State officials of
our determination by sending them a copy of this final letter and the proposed adverse
letter. You should contact your State officials if you have any questions about how this
determination may affect your State responsibilities and requirements.

If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter. If you have any questions
about your federal income tax status and responsibilities, please contact IRS Customer
Service at 1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-
829-4933. The IRS Customer Service number for people with hearing impairments is 1-
800-829-4059.

Sincerely,

Lois Lerner
Director, Exempt Organizations

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

Letter 4038(CG) (11-2005)
Catalog Number 47632S

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: November 9, 2011 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
LEGEND: UIL:
B = date 501.32-00
C = state 501.32-01
D = individual 501.33-00
E = individual
F = individual

G = business

H= business

J = individual

K = state fund

L = business

m = number

n = dollar amount
p = dollar amount
q = dollar amount
r= dollar amount
s = dollar amount
t = year

Dear

We have considered your application for recognition of exemption from federal income
tax under Internal Revenue Code section 501(a). Based on the information provided,
we have concluded that you do not qualify for exemption under Code section 501(c)(3).
The basis for our conclusion is set forth below.

Letter 4036(CG) (11-2005)
Catalog Number 47630W

Issues

Do you qualify for exemption under section 501(c)(3) of the Code? No, for the reasons
described below.

Do you meet the requirements under Section 501(q) of the Code? No, for the reasons
described below.

Facts

You were incorporated on B as a non-profit under C law. Your Articles of Incorporation
(“Articles”) state, in Article III, that:

“The purpose for which the corporation is organized is: to assist
individuals and families with financial problems by providing credit
counseling services and other services including but not limited to,
housing and home mortgage counseling, advice on payment of debts,
assistance in negotiating with lenders, and assistance with setting up debt
repayment plans and mortgage workout or restructuring plans and
agreements.”

Your Bylaws state in Article II that your specific purposes are:

The following are the purposes for which this organization has been
organized: to assist individuals and families with financial problems by
providing credit counseling services and other services including, but not
limited to, housing and home mortgage counseling, advice on payment of
debts, assistance in negotiating with lenders, and assistance with setting
up debt repayment plans and mortgage workout or restructuring plans and
agreements.”

Your Form 1023 (“application”) indicates that you offer financial education to your
clients, tailored to meet their specific needs, which is offered through both housing and
credit counseling services. In addition, you work with lenders and homeowners in crisis
to secure more affordable terms enabling families to remain in their homes. Based upon
a detailed cost price analysis your fees are lower than the current market rates and are
not based in whole or in part on a percent of the client’s debt. Individuals that need
counseling services will not be turned away due to an inability to pay and contributions
will not be solicited during the counseling process.

You have five directors, of which two are positioned officers. Those two officer/directors,
D and E, are married; and another director, F, is D’s mother. D and E are also listed as

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your initial members in your Bylaws, and per your Bylaws, existing members can only
vote in new ones. D and E will be compensated for their services. D, your President and
Treasurer, will provide counseling and education services to clients including
negotiating mortgage modifications. He has been assisting financially distressed
families and individuals for over eight years. E, your Vice President and Secretary, also
has over eight years of similar experience and will perform accounting, payroll,
marketing and IT services as well as managing and supervising employees. You have
not had any board meetings to date; the day-to-day operations are carried out by D and
E.

D and E own and operate G, a for-profit company that was formed in 2002. G has been
in the business of providing housing counseling, foreclosure mitigation and money
management for eight years, servicing over 300 clients on a monthly basis. The m
homeowners referenced in your brochure were actually assisted by G, not by you.

You intend on closing down the operations of G, no later than the end of 2010. You
expect to service the same number of clients, and offer the same services as G, once
you take over G’s operations and client base. G is no longer accepting new clients; all
new clients are being accepted through you. You also share a facility with G paying 5%
of the monthly rent.

You stated that your members (employees) have been helping homeowners for almost
eight years. “It is the same people, only a different organization name for the purpose of
establishing tax exempt status, to better position the organizations ability to provide the
services the members deliver.” You perform regular follow-ups with your clients and the
lender/servicer through e-mail, fax and telephone. Through G you have provided up to
six clients a year services free of charge due to the inability to pay. You track your
success rate of mortgage loan negotiations and do not close a file until after your client
has agreed to the new terms of the loan and are in receipt of the modified agreement.
All clients have the option to contact you up to 90 days after file completion.

Your submitted budgets include revenue from gifts, grants and contributions as well as
related activity income. Approximately % of your revenue is expected to be derived
from fees for services provided to clients. Approximately % of your expected
expenses are devoted towards compensation of officers/directors. Discretionary
bonuses may be offered to employees. Currently, for each successful outcome, an
employee receives n dollars as a bonus. Finally, you submitted a Conflict of Interest
policy; however, the policy shows no evidence of being adopted.

The primary service you provide is loss mitigation with respect to residential foreclosure.
You do offer basic credit counseling, however, if a client needs credit counseling outside
your expertise you refer them to local counseling agencies. You plan to offer debt
management plans (DMP) and down payment assistance (DPA) in the future based

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upon grant funding as well as establishing a credit counseling/debt management
department. Funding for programs will be pursued after receiving your section 501(c)(3)
approval. You are considering small group sessions as well as one-on-one training on
the basics of budgeting

Your intake process for credit counseling begins with an initial interview by a staff
member to determine eligibility for assistance. Information collected during the interview
includes general client information, financial information and a hardship explanation. A
discussion includes whether or not the client can benefit from your services or services
available through outside agencies as well as a detailed review of monthly expenses
and income, including better budgeting habits. A written budget analysis is then
provided to clients. If an individual does not sign up for your services you do not provide
any materials. You have not conducted any workshops, classes or seminars on financial
planning, budgeting, credit/debt relief or other educational programs offered to the
general public. You generally spend one hour with individuals during the initial inquiry
and 45 minutes during subsequent calls. You estimate spending at least $4,000.00 on
direct mail and at least $2,000.00 on internet advertising per month. You submitted
samples of your advertising materials.

Your initial counseling session for mortgage mitigation is a one-on-one interview,
usually conducted over the phone. If the individual is deemed qualified, you request an
enrollment contract be signed and returned within three days. The initial presentation
includes a discussion of the hardship that caused the mortgage delinquency as well as
available options such as loan modifications, partial claims, special forbearance plans,
repayment plans, principal reductions, deed in lieu of foreclosure or a short sale. You
consider various criteria when determining which services your clients qualify for
including: total numbers of payments delinquent, monthly budget surplus/deficit, current
interest rate, type of loan, previous workout options that were offered, homeowners
insurance and property tax information, employment status, and liens against the
property. The initial inquiry usually takes 45 minutes to 1 hour and subsequent follow-
ups take 10-15 minutes per phone call for file processing and document preparation.
You recommend that your clients participate in ongoing educational programs that may
be available in their area, however, you do not provide the educational programs.
Instead, you will assist a client in researching programs for debt consolidation, credit
counseling and/or HUD in their area.

Your review process for a solution is generally 90-120 days. On average, you speak to
clients once a week to discuss any changes in their finances or changes to their
monthly budget. In addition, you are in contact with lenders regarding the modification.
You are considering providing a financial success tool kit to new clients to reinforce the
basic elements of budgeting. Each client receives written educational materials that

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include the foreclosure laws for their state as well as an action plan that includes a crisis
budget.

You purchase leads on an as-needed basis from a subcontracted individual, however,
you do not have a formal contract to purchase the leads. You also receive mortgage
default referrals through your website and from previous clients, attorneys, realtors and
mortgage brokers. You also provide referrals to attorneys and realtors for clients
needing legal advice or seeking to make a short sale of the property. You do not pay or
receive referral fees, other than paying a $.30 per lead fee to the subcontractor. You will
seek funding from the National Foreclosure Mitigation Counseling program administered
by NeighborWorks. You applied to HUD for funding, however, you have retracted your
application due to the fact that you do not want to limit yourself to your county only,
instead planning to provide services nationwide.

You charge fees for your services. You charge an enrollment fee of p dollars and a
monthly fee of q dollars (not to exceed r dollars) regardless of the duration of time for
the final product of service. The fee is refundable if the client terminates the contract
within three business days, after that the client must show just cause for any refund
request. If a workable solution to avoid foreclosure is not obtained, the client is entitled
to a full refund less the p dollars enrollment fee. You submitted a copy of your fee
waiver policy which states that your fees are automatically waived for individuals at

% of the federal poverty level. Fees may also be waived on a case-by-case basis for
those individuals between %- % of the federal poverty level. Clients are provided
a copy of the policy prior to enrollment. You submitted copies of your enrollment
agreement and your fee schedule. The fee is broken down into four monthly payments
of q dollars, a fifth month payment of s dollars as well as the p dollars enrollment fee.
Your fee schedule includes the following statement:

“Pending approval, of tax exempt status, all contribution amounts are tax deductible..”

Your counseling agreement states that a certificate of contribution for tax deduction will
be provided to the client. Your clients are being advised that their fees are considered
contributions for tax deductibility purposes. Contributions will not be required for clients
eligible for state or federal programs such as K. You will receive compensation for these
clients through the federal or state program. You have found that % of the time the
client cannot afford a small contribution the homeowner does not meet the lender's
criteria for enrollment as a “qualified candidate.” You provide the HUD national hotline
number for the homeowners not considered qualified candidates.

Assistance with fees or down payments required for loan workouts may be provided in
the future. If awarded a grant/contract you will determine on a case-by-case basis which
clients qualify for assistance. In addition, assistance with delinquent personal loans

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and/or unsecured debt may also be provided to clients. In most cases, home equity
loans can be negotiated through traditional modification methods. You negotiate to have
the delinquency added to the unpaid balance and lower the rate to a fixed term.
Currently, clients are referred to local debt settlement agencies but you plan to integrate
this service once you obtain funding from grants and contract awards.

You submitted a copy of your lease agreement. The lessor is H, a for profit entity owned
by E. E signed the lease as lessor and D signed the lease as lessee. Recently you
moved to a new facility that is being leased from an unrelated third party. You also
submitted a copy of an employment contract for J, which includes services to be
provided to you and to G. The employment contract also provides for payment of a 15%
commission on sales. In addition, you submitted copies of your website pages and a
brochure. The brochure includes the following statements:

“In t, (you) successfully negotiated m work-out solutions for homeowners with
delinquent mortgages.”

“(You) parent company — G”

Your website includes your phone number, which is identical to the number used by G.
Also depicted on your website is L’s logo and a link to L’s website. L’s website states
that they are your “partner.” You stated that you do not have a formal written agreement
with L, they only serve as a source of referrals of homeowners. Referrals may arise in
circumstances where the homeowner is considering a short sale. If the homeowner
decides not to use your services the short sale will proceed through L. You do not pay
or receive any fees through your contact with L. You receive a fee from homeowners
that you assist in getting approval for and processing the short sale.

You plan to establish a credit counseling/debt management department in the future.
Funding for the program will be pursued after receiving your section 501(c)(3) approval.
You are considering small group sessions as well as one-on-one training on the basics
of budgeting. You do not anticipate beginning these programs for a period of 6-9
months after approval of tax-exempt status.

Law

Section 501(c)(3) of the Code provides that corporations may be exempted from tax if
they are organized and operated exclusively for charitable or educational purposes and
no part of their net earnings inures to the benefit of any private shareholder or
individual.

Section 501(q) of the Code provides that organizations which provide “credit counseling

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services” as a substantial purpose shall not be exempt from taxation under section
501(a) unless they are described in sections 501(c)(3) or 501(c)(4) and they are
organized and operated in accordance with the following requirements:

(A)

The organization--

(i)

(iv)

provides credit counseling services tailored to the specific needs and
circumstances of consumers,

makes no loans to debtors (other than loans with no fees or interest)
and does not negotiate the making of loans on behalf of debtors,

provides services for the purpose of improving a consumer's credit
record, credit history, or credit rating only to the extent that such
services are incidental to providing credit counseling services, and

does not charge any separately stated fee for services for the
purpose of improving any consumer's credit record, credit history, or
credit rating.

The organization does not refuse to provide credit counseling services to a
consumer due to the inability of the consumer to pay, the ineligibility of the
consumer for debt management plan enrollment, or the unwillingness of
the consumer to enroll in a debt management plan.

The organization establishes and implements a fee policy which--

(i)

(ii)
(iii)

requires that any fees charged to a consumer for services are
reasonable,

allows for the waiver of fees if the consumer is unable to pay, and

except to the extent allowed by State law, prohibits charging any fee
based in whole or in part on a percentage of the consumer's debt, the
consumer's payments to be made pursuant to a debt management
plan, or the projected or actual savings to the consumer resulting
from enrolling in a debt management plan.

At all times the organization has a board of directors or other governing
body--

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(i) which is controlled by persons who represent the broad interests of
the public, such as public officials acting in their capacities as such,
persons having special knowledge or expertise in credit or financial
education, and community leaders,

(ii) not more than 20 percent of the voting power of which is vested in
persons who are employed by the organization or who will benefit
financially, directly or indirectly, from the organization's activities
(other than through the receipt of reasonable directors’ fees or the
repayment of consumer debt to creditors other than the credit
counseling organization or its affiliates), and

(iii) not more than 49 percent of the voting power of which is vested in
persons who are employed by the organization or who will benefit
financially, directly or indirectly, from the organization's activities
(other than through the receipt of reasonable directors’ fees).

(F) The organization receives no amount for providing referrals to others for
debt management plan services, and pays no amount to others for
obtaining referrals of consumers.

Section 501(q)(4)(A) defines, for purposes of section 501(q), the term “credit counseling
services” to mean (i) the providing of educational information to the general public on
budgeting, personal finance, financial literacy, saving and spending practices, and the
sound use of consumer credit; (ii) the assisting of individuals and families with financial
problems by providing them with counseling; or (iii) a combination of the activities
described above.

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

Section 1.501(c)(3)-1(b)(1)(i) of the regulations provides that an organization is
organized exclusively for one or more exempt purposes only if its articles of
organization:

(a) Limit the purposes of such organization to one or more exempt purposes; and

(b) Do not expressly empower the organization to engage, otherwise than as an
insubstantial part of its activities, in activities that in themselves are not in
furtherance of one or more exempt purposes.

Letter 4036(CG) (11-2005)
Catalog Number 47630W

Section 1.501(c)(3)-1(b)(4) of the regulations provides that an organization's assets
must be dedicated to an exempt purpose, either by an express provision in its governing
instrument or by operation of law.

Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be
regarded as “operated exclusively” for one or more exempt purposes only if it engages
primarily in activities that accomplish one or more of such exempt purposes specified in
section 501(c)(3) of the Code. An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose.

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides an applicant organization must
establish it serves a public rather than a private interest and specifically 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)(3)-1(d)(2) of the regulations provides that the term “charitable,” is used
in section 501(c)(3) in its generally accepted legal sense and includes the relief of the
poor and distressed or of the underprivileged.

Section 1.501(c)(3)-1(d)(3)(i) of the regulations provides that the term “educational,” as
used in section 501(c)(3) of the Code, 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.

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

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

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

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

The Service compared this holding with the holding of Rev. Rul. 65-299, which holds
that a nonprofit organization formed to advise, counsel, and assist individuals in solving
their financial difficulties by budgeting their income and expenses and effecting an
orderly program for the payment of their obligations qualifies for exemption from federal
income tax under section 501(c)(4) of the Code (rather than under section 501(c)(3)).

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. 178 (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.

Rev. Proc. 86-43, 1986-2 C.B. 729, describes the methodology test the Internal
Revenue Service uses to determine when the advocacy of a particular viewpoint or
position is educational under sections 501(c)(3) of the Code and 1.501(c)(3)-1(d)(3) of
the regulations. The revenue procedure states that the focus of section 1.501(c)(3)-
1(d)(3) is on the method the organization uses to communicate to others, not the
content of its communication. The method of communication is not educational "if it fails
to provide a development from the relevant facts that would materially aid a listener or
reader in a learning process." One factor indicating the method is not educational is as
follows: "[t]he approach used in the organization's presentations is not aimed at
developing an understanding on the part of the intended audience or readership
because it does not consider their background or training in the subject matter." The

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remaining factors relate specifically to advocacy organizations and the “full and fair
exposition" part of the regulation.

In Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279, 283, 66 S. Ct.
112, 90 L. Ed. 67 (1945), the Supreme Court held that the “presence of a single... .
[nonexempt] purpose, if substantial in nature, will destroy the exemption regardless of
the number or importance of truly . . . [exempt] purposes.”

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

In Consumer Credit Counseling Service of Alabama, Inc. v. United States, 78-2
U.S.T.C. 9660 (D.D.C. 1978), the court held that an organization that provided free
information on budgeting, buying practices, and the sound use of consumer credit
qualified for exemption from income tax because its activities were charitable and
educational.

The Consumer Credit Counseling Service of Alabama is an umbrella organization made
up of numerous credit counseling service agencies. These agencies provided
information to the general public through the use of speakers, films, and publications on
the subjects of budgeting, buying practices, and the sound use of consumer credit. They
also provided counseling on budgeting and the appropriate use of consumer credit to
debt-distressed individuals and families. They did not limit these services to low-income
individuals and families, but they did provide such services free of charge. As an adjunct
to the counseling function, they offered a debt management plan. Approximately 12
percent of a professional counselor's time was applied to the debt management plan as
opposed to education. The agencies charged a nominal fee of up to $10 per month for
the debt management plan. This fee was waived in instances when payment of the fee
would work a financial hardship.

The professional counselors employed by the organizations spent about 88 percent of
their time in activities such as information dissemination and counseling assistance

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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. An
incidental amount of their revenue was from service fees. Thus, the court concluded
that “each of the plaintiff consumer credit counseling agencies was an organization
described in section 501(c)(3) as a charitable and educational organization.” See also,
Credit Counseling Centers of Oklahoma, Inc, v. United States, 79-2 U.S. Tax Case.
9468 (D.D.C. 1979), in which the facts were virtually identical and the law was identical
to those in Consumer Credit Counseling Service of Alabama, Inc. v. United States,
discussed immediately above.

In Solution Plus, Inc. v. Commissioner, T.C. Memo. 2008-21, the Tax Court held that a
credit counseling organization was not exempt under section 501(c)(3) because it was
not organized and operated exclusively for educational or charitable purposes and
impermissibly served private interests. The organization was formed by an individual
with experience selling debt management plans. The founder and his spouse were the
only member's of the organization’s board of directors. The organization did not have
any meaningful educational program or materials for providing to people who contacted
the organization, and its financial education seminars for students constituted an
insignificant part of the organization’s overall activities.

The Court held that the organization's purposes were not educational because its
"activities are primarily structured to market, determine eligibility for, and enroll
individuals in DMPs."_ Its purposes are not to inform consumers “about understanding
the cause of, and devising personal solutions to, consumers’ financial problems,” or "to
consider the particular knowledge of individual callers about managing their personal
finances." The Tax Court also held that the organization's purposes were not charitable
because "its potential customers are not members of a [charitable] class that are
benefited in a 'non-select manner * * * because they will be turned away unless they
meet the criteria of the participating creditors."

The Tax Court further held the organization would operate for the private interests of its
founder because the founder and spouse were the only directors, the founder was the
only officer and employee, and his compensation was based in part on the
organization's DMP sales activity levels. The organization was “a family-controlled
business that he personally would run for financial gain, using his past professional
experience marketing DMPs and managing a DMP call center.” The Court further held
that the organization’s principal activity of providing DMP services, which were only
provided if approved by a caller's creditors, furthered the benefit of private interests.

Finally, the Tax Court held that the facts in Credit Counseling Services of Alabama v.
United States, 78-2 U.S.T.C. 9660 (D.D.C. 1978) “stand in stark contrast” because “the

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sale of DMPs is the primary reason for [Solution Plus's] existence, and its charitable and
educational purposes are, at best, minimal.”

Application of Law

Section 501(c)(3) of the Code sets forth two main tests for an organization to be
recognized as exempt. An organization must be both organized and operated
exclusively for purposes described in section 501(c)(3). Section 1.501(c)(3)-1(a)(1) of
the regulations. Based on the information you provided in your application and
supporting documentation, we conclude that you fail both tests.

Organizational Test

To satisfy the organizational test, an organization must have a valid purpose clause and
a valid dissolution clause. Section 1.501(c)(3)-1(b)(1)(i) and 1.501(c)(3)-1(b)(4) of the
regulations. A valid purpose clause limits the organization’s purposes to one or more
exempt purposes and does not expressly empower the organization to engage,
otherwise than as an insubstantial part of its activities, in activities that in themselves
are not in furtherance of one or more exempt purposes.

Your Articles do not limit your purposes to one or more exempt purposes. Specifically,
providing assistance to individuals and families with financial problems by providing
credit counseling and other services, including, but not limited to, housing and home
mortgage counseling, advice on payment of debts, assistance in negotiating with
lenders, and assistance with setting up debt repayment plans and mortgage workout or
restructuring plans and agreements, is not an exempt purpose. Therefore, you do not
have a valid purpose clause. Accordingly, you are not organized for exempt purposes.

Operational Test

To satisfy the operational test, an organization must establish that it is operated
exclusively for one or more exempt purposes. Section 1.501(c)(3)-1(c)(1) of the
regulations. The actual purposes of an organization may be discerned by the activities it
conducts. B.S.W. Group, 70 T.C. 352 (1978). You failed to establish that you are
operated exclusively for one or more exempt purposes.

Your Activities Are Not Educational

You are distinguishable from the organizations in Consumer Credit Counseling Service
of Alabama, supra, and Rev. Rul. 69-441 by the methodology you use to conduct your
counseling activities. You stated that both your credit counseling and mortgage
mitigation programs entail an initial interview, lasting approximately one hour, to

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determine eligibility that includes a discussion of your services and a review of the
client's financial situation. Clients that do not sign up for any of your services do not
receive any educational materials or budgeting information. However, unlike the
organizations in Consumer Credit Counseling Service of Alabama, supra, and Rev. Rul.
69-441, supra, you do not offer counseling sessions that are structured primarily to
improve your clients’ understanding of their financial problems or their skills in solving
them. You provided no evidence that your employees do anything other than sit down
with your clients to fill out the information that is needed to submit a statement of their
financial condition to the lender. Two of your directors have previously owned and
operated a for-profit credit counseling and mortgage mitigation corporation, G. G
conducted the same activities and uses the same facility and phone number. Loss
mitigation is your primary service, after the initial interview your follow-ups are with the
lender and the client regarding negotiating the modification. Finally, you stated that you
do not provide ongoing educational programs to your clients. Communicating with a
homeowner to fill out a financial worksheet and an intake sheet is not an educational
activity because the communication does not provide a development from the relevant
facts that would materially aid a listener or reader in a learning process. Rev. Proc. 86-
43, supra. Therefore, you failed to establish that your interactions with clients provide
instruction or training “useful to the individual and beneficial to the community” within the
meaning of section 1.501(c)(3)-1(d)(3)(i) of the regulations.

You do not operate a substantive on-going educational program. You have not
conducted any seminars or workshops to date, nor do you require your mortgage
mitigation clients to participate in an ongoing educational program. You may utilize
alternative educational methods in the future, however, you are considering small group
sessions as well as one-on-one training in the basics of budgeting. You have not
submitted any educational materials or other evidence of an educational program. You
do not dedicate any revenue to activities involving educational programs. You do not
allocate any expenses to training employees. Like the organization in Solution Plus,
supra, you did not provide evidence that you help clients develop an understanding of
the cause of their financial problems or a plan to address their financial problems. You
provided no evidence that you intend to establish long-term counseling relationships
with your clients.

Your Activities Are Not Charitable

All of your time and resources are devoted to providing mortgage modification services
to individuals who are not part of a charitable class. Helping homeowners at risk of
foreclosure negotiate a modification to the terms of their mortgage does not provide
relief to the poor and distressed within the meaning of section 1.501(c)(3)-1(d)(2) of the
regulations or serve any other purpose recognized as charitable.

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The mortgage mitigation services you provide to individuals do not further charitable
purposes. You represent that everyone is eligible for your services regardless of
income. Therefore, your services are not directed exclusively to low-income individuals.
Accordingly, you are unlike the organizations described in Consumer Credit Counseling
Service_of Alabama, supra and Rev. Rul. 69-441, supra, which aided low-income
individuals and families who have financial problems, thereby relieving the poor and
distressed. Thus, you failed to establish that your activities are charitable within the
meaning of section 501(c)(3) of the Code.

You Have a Substantial Nonexempt Commercial Purpose

The courts have developed guidelines intended to help discern whether an organization
has a substantial nonexempt commercial purpose. See e.g., B.S.W. Group, supra;
Easter House, supra; Airlie, supra; Living Faith, supra. Generally, the factors proffered
by courts focus on the nature of the activities and how an organization conducts its
business.

You charge fees for your services, including an enrollment fee of p dollars and a
monthly fee of q dollars, not to exceed r dollars. The fee is refundable if the client
terminates the contract within three business days; after that, the client must show just
cause for any refund request. In the event fees are paid you are advising individuals
these qualify as deductible contributions. Your operational focus is on generating fees
from your consulting activities through the receipt of grants and donations rather than
fees charged to clients. You did submit a fee waiver policy for individuals at 100% of the
federal poverty level, they may also be waived for those clients between 101-250% of
the federal poverty level on a case-by-case basis. Although you do have a fee waiver
policy, you have found that 100% of the time that a client cannot afford a fee the
homeowner does not meet the lender's criteria as a qualified candidate. Similar to the
organization in Solution Plus, supra, your efforts are focused on informing potential
clients about the mortgage mitigation service available and signing them up for your
services. In fact, your client agreement states that the counselor is only providing
assistance with negotiating a loan modification. Like the organizations described in
Solution Plus, supra, Better Business Bureau, supra, and Easter House, supra, your
activities have an underlying commercial motive that distinguishes your activities from
those carried out by a section 501(c)(3) organization. Thus, your activities are not
educational within the meaning of section 501(c)(3).

A substantial part of your activities consists of providing research services to E and
other investors for a fee. Researching borrowers and property in residential mortgage
backed securities portfolios is not an exempt purpose, as recognized by statute or by
case law, but rather a substantial nonexempt commercial purpose.

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Your finance structure further demonstrates that you operate for a substantial
nonexempt commercial purpose. You expect approximately 65% of your revenue to be
derived from fees for services. In addition, 67% of your expected expenses are devoted
to compensation of officers/directors. There is no evidence that you have received
contributions or gifts from disinterested members of the public. Accordingly, you are like
the organization described in B.S.W. Group, supra as its financing did not resemble
that of the typical section 501(c)(3) organizations. It had not solicited, nor had it
received, voluntary contributions from the public. Its only source of income was from
fees for services, and those fees were set high enough to recoup all projected costs and
to produce a profit. Your operations are financed entirely by revenue earned from
selling services to E and other investment firms and donations from E, a related entity.
Receiving support primarily from consulting fees is indicative of a nonexempt purpose.
Easter House, supra.

Like the organizations in Easter House, supra, Airlie, supra, and Living Faith, supra, you
are in direct competition with commercial businesses because you conduct consulting
activities, generally for a profit. In fact, you are a successor to a for-profit organization,
G, that conducts the same services as you for a fee. You utilize the same phone
number as G, and two of your five directors are the owners of the predecessor. In
addition, one of your employees is also an employee of G. G is ceasing operations as
you begin operations. You conduct your consulting activities in the same manner as
commercial enterprises. For example, you use similar pricing, financial structure, and
relationships with other for-profit companies. Accordingly, your activities evidence a
substantial nonexempt commercial purpose. The activities you identify as “charitable”
are merely incidental to your business of providing consulting services for a fee. Your
operational focus is on generating consulting fees from your consulting activities. Like
the organizations described in Better Business Bureau, supra, and Easter House,
supra, your activities have an underlying commercial motive that distinguishes your
activities from those carried out by a charitable organization. Thus, more than an
insubstantial part of your activities are in furtherance of a nonexempt purpose, in
contravention of section 1.501(c)(3)-1(c)(1) of the regulations. Therefore, you are not
operated for an exempt purpose.

Inurement

An organization is not operated exclusively for one or more exempt purposes if its net
earnings inure in whole or in part to the benefit of private shareholders or individuals.
Section 501(c)(3) of the Code; Section 1.501(c)(3)-1(c)(2) of the regulations.

You do not have adequate safeguards to protect assets since three related members of
your Board of Directors control you. Your conflict of interest policy (COI) was not
executed by your governing body. Regardless, under the terms of your purported COI,

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three of your directors are prevented from determining whether a conflict exists with
regards to transactions or arrangements regarding your lease agreement with H and
compensation of C and D. Thus, you failed to demonstrate that insiders will not benefit
from your operations now or in the future.

Private Benefit

An organization is not organized or operated exclusively for exempt purposes unless it
serves a public rather than a private interest. Section 1.501(c)(3)-1(d)(1)(ii) of the
regulations. The mortgage mitigation services that you provide to homeowners do not
serve a public interest. Nor are the beneficiaries of your services poor or distressed
individuals. Your services benefit the private interests of individual homeowners by
relieving them of the burden of negotiating a modification with their lender. In addition,
you make referrals for short sales to L, a for-profit organization. Therefore, you have not
demonstrated that your operations serve a public, rather than a private, interest as
required by section 1.501(c)(3)-1(d)(1)(ii).

Section 501(q) of the Code

An organization that provides educational information on financial topics or financial
counseling to homeowners who are at risk of foreclosure is providing “credit counseling
services” within the meaning of section 501(q)(4)(A) of the Code. Thus, even if you had
established that you engage in such activities as a substantial purpose, to be exempt
from taxation you must, in addition to complying with the requirements of section
501(c)(3), comply with the provisions of section 501(q).

You do not comply with certain provisions of section 501(q) of the Code. An exempt
credit counseling organization must establish and implement a fee policy which requires
that any fees charged to a consumer for services are reasonable and allows for the
waiver of fees if the consumer is unable to pay. Section 501(q)(1)(C). You charge your
clients fees for your services, however, you failed to establish that you have a fee
waiver policy for those clients that cannot afford to pay the fee. While you did submit a
fee waiver policy you also stated that you have found that individuals who cannot afford
to pay a fee are not considered qualified candidates by lenders and therefore would not
be eligible for your services.

You do not provide credit counseling services tailored to the specific needs and
circumstances of consumers. Section 501(q)(A)(i). You do not provide educational
information to the public on budgeting, personal finance, financial literacy, saving and
spending practices, and the sound use of credit. Nor do you assist individuals and
families with financial problems by providing them with counseling. Section 501(q)(4)(A).
You have provided no educational seminars or workshops to the general public and no

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educational materials distributed to your clients. You spend most of your time
negotiating with lenders and only the initial session on your meeting with clients.
Therefore, you do not meet the requirements under section 501(q).

Finally, you indicated that D and E are officers and directors, and both receive
compensation from you as employees. Therefore, more than 20% of the members of
your Board of Directors are also compensated as employees. Section 501(q)(D)(ii).

Had you established that you otherwise met the requirements of section 501(c)(3), your
failure to satisfy the requirements of section 501(q) would prevent you from being
exempt from taxation under section 501(a).

Conclusion

Based on the facts and information provided, you are not organized or operated
exclusively for exempt purposes. You are not organized exclusively for exempt
purposes as required by section 1.501(c)(3)-1(b)(1)(i) of the regulations because your
Articles of Incorporation do not restrict you to section 501(c)(3) purposes. You are not
operated exclusively for an exempt purpose as required by sections 1.501(c)(3)-1(a)(1)
and 1.501(c)(3)-1(c)(1) of the regulations because you are not educating your clients
nor do you provide your services to poor or distressed individuals. You are organized
and operated for commercial purposes in contravention of section 1.501 (c)(3)-1(c)(1) of
the regulations because you provide mortgage modification services for substantial
fees. Any public purposes for which you may operate are only incidental to this primary
nonexempt purpose. You have not demonstrated that you do not allow your net
earnings to inure to private individuals as required by section 1.501(c)(3)-1(b)(2) of the
regulations. You do not serve a public rather than a private interest as required by
section 1.501(c)(3)-1(d)(1)(ii) of the regulations. Therefore, you are not described in
section 501(c)(3).

Accordingly, you do not qualify for exemption as an organization described in section
501(c)(3) of the Code and you must file federal income tax returns. Contributions to you
are not deductible under section 170.

You have the right to file a protest if you believe this determination is incorrect. To
protest, you must submit a statement of your views and fully explain your reasoning.
You must submit the statement, signed by one of your officers, within 30 days from the
date of this letter. We will consider your statement and decide if the information affects
our determination. If your statement does not provide a basis to reconsider our
determination, we will forward your case to our Appeals Office. You can find more
information about the role of the Appeals Office in Publication 892, Exempt Organization
Appeal Procedures for Unagreed Issues.

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Types of information that should be included in your appeal can be found on page 2 of
Publication 892. These items include:

1. The organization's name, address, and employer identification number,

2. A statement that the organization wants to appeal the determination;

3. The date and symbols on the determination letter;

4. A statement of facts supporting the organization’s position in any contested
   factual issue;

5. A statement outlining the law or other authority the organization is relying on; and

6. A statement as to whether a hearing is desired.

The statement of facts (item 4) must be declared true under penalties of perjury. This
may be done by adding to the appeal the following signed declaration:

“Under penalties of perjury, I declare that I have examined the statement of facts
presented in this appeal and in any accompanying schedules and statements and, to
the best of my knowledge and belief, they are true, correct, and complete.”

Your appeal will be considered incomplete without this statement.

If an organization’s representative submits the appeal, a substitute declaration must be
included stating that the representative prepared the appeal and accompanying
documents; and whether the representative knows personally that the statements of
facts contained in the appeal and accompanying documents are true and correct.

An attorney, certified public accountant, or an individual enrolled to practice before the
Internal Revenue Service may represent you during the appeal process. If you want
representation during the appeal process, you must file a proper power of attorney,
Form 2848, Power of Attorney and Declaration of Representative, if you have not
already done so. You can find more information about representation in Publication
947, Practice Before the IRS and Power of Attorney. All forms and publications
mentioned in this letter can be found at www.irs.gov, Forms and Publications.

If you do not file a protest within 30 days, you will not be able to file a suit for declaratory
judgment in court because the Internal Revenue Service (IRS) will consider the failure
to appeal as a failure to exhaust available administrative remedies. Code section
7428(b)(2) provides, in part, that a declaratory judgment or decree shall not be issued in
any proceeding unless the Tax Court, the United States Court of Federal Claims, or the
District Court of the United States for the District of Columbia determines that the
organization involved has exhausted all of the administrative remedies available to it
within the IRS.

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If you do not intend to protest this determination, you do not need to take any further
action. If we do not hear from you within 30 days, we will issue a final adverse
determination letter. That letter will provide information about filing tax returns and other
matters.

Please send your protest statement, Form 2848, and any supporting documents to the
applicable address:

Mail to: Deliver to:
Internal Revenue Service Internal Revenue Service
EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008
P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201
You may fax your statement using the fax number shown in the heading of this letter. If
you fax your statement, please call the person identified in the heading of this letter to
confirm that he or she received your fax.

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

Sincerely,

Lois G. Lerner
Director, Exempt Organizations
Rulings & Agreements

Enclosure, Publication 892

Letter 4036(CG) (11-2005)
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