Determination 1234030: IRS denies 501(c)(3) exemption to a foreclosure mortgage organization

Plain-English summary

The IRS denied tax-exempt status to an organization that planned to buy defaulted mortgages, restructure them, and foreclose on or sell homes when borrowers did not keep their homes. The organization also planned to provide foreclosure-prevention and financial counseling. The IRS concluded that the mortgage lending and home sale activities were a substantial non-exempt commercial purpose, while the educational activities were incidental. It also found private benefit concerns because the founders would operate the mortgage business, and section 501(q) problems because the organization would make loans and its board did not meet the statutory independence requirements. The final determination states that donors could not deduct contributions under section 170 and that the organization had to file federal income tax returns.

Ruling snapshot

• Question: Whether the planned mortgage-purchase, foreclosure, counseling, and loan activities qualified the organization for exemption under section 501(c)(3).
• Outcome: Denied.
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 501(q), 6104(c), 6110, and 7428(b)(2); Treas. Reg. §§ 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(1)(ii), 1.501(c)(3)-1(d)(2), and 1.501(c)(3)-1(d)(3)(i).

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Number: 201234030 Contact Person:
Release Date: 8/24/2012
Identification Number:

Date: May 30, 2012
Contact Number:

Employer Identification Number:
Form Required To Be Filed:

Tax Years:
UIL: 501.00-00; 501.03-30; 501.32-00; 501.33-00;
501.36-01

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.

Because 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. File the returns in accordance with their
instructions, and do not send them to this office. Failure to file the returns timely may result in a
penalty.

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, follow the
instructions in Notice 437. If you agree with our deletions, you do not need to take any further
action.

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.

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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 G Lerner
Director, Exempt Organizations

Enclosure

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

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: April 5, 2012 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
UIL #:s
501.00-00
501.03-30
501.32-00
501.33-00
501.36-01
Legend:
D = Date
E = State
F = Founder
G = Founder/Director
P = Name of Agency
Dear

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

Issues
• Does your activity of purchasing the mortgages on foreclosed properties from

lenders, restructuring and holding those mortgages as mortgagee and receiving
periodic payments from the borrowers of principal and interest constitute a

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commercial business and therefore cause you to fail the operational test? Yes, for
the reason explained below.

• Does you activity of making loans to debtors and the negotiating of loans on behalf
of debtors cause you to be in contravention of section 501(q) and therefore cause
you to fail to qualify for exemption under section 501(c)(3) of the Code? Yes, for
the reason described below.

Facts

Your formation was the brainchild of co-founders F and G who have been real estate
investors since 1999. F and G became aware of the foreclosure problem while serving as
financial counselors and establishing their own real estate business. Building on the
foundation of their knowledge and experience in real estate investing F and G began to
pursue their vision of helping people affected by foreclosure.

You were incorporated on D in E. Your Articles of Incorporation state that your purpose is
to reduce the amount of foreclosures, both locally and nationally, by allowing
homeowners to maintain ownership of their home with the help of creative intervention
services. You amended your articles later to include an appropriate purpose clause that
meets the requirements of section 501(c)(3) of the Internal Revenue Code.

Your bylaws state your purpose is to create opportunities for families to attain
independence through home ownership by providing access to financial literacy training
and intervention support services for the prevention of foreclosure.

You currently have three board members. You were founded by F and G who are related
by marriage. They run and oversee your day-to-day operation. Both founders co-own
several real estate investing and management companies. F currently works full time for
you to make your vision a reality, and you will employ him as the full-time executive
director. G is on your board with two other directors. One of those two directors is also in
the real estate business. G intends to work approximately twenty (20) hours per week for
you. Her duties will include providing accounting services, fundraising, negotiating for the
purchase of defaulted mortgages from lenders, conducting individual meetings and group
workshops for debtor education, and providing mortgage workout assistance to debtors.
Two other directors will provide services for you on an as-needed basis. Your statement
of revenues and expenses shows that your officers, directors, and trustees received
compensation. Later you indicated that board members will not be compensated as an
employee, president, counselor or a board member.

You purchase mortgages from lending institutions which are in default and heading into
foreclosure. When possible, you purchase such defaulted mortgages in blocks at a
discounted price. The distributions made to mortgage lenders to purchase the defaulted
mortgages will allow you to intervene in the foreclosure process and negotiate mortgage
workouts with the debtors. You will have written contracts with mortgage lenders for the

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purchase of mortgages. You will use cold calls and direct mailings to mortgage lenders to
determine which lenders have mortgages in foreclosure and wish to sell such mortgages.
You will then negotiate with particular lenders regarding the terms of the sale of such
mortgages to you.

You will target homeowners who are facing foreclosure or already in default of their loans
across the country. Income levels of the homeowners will vary based on the geographic
locations of their homes. The initial point of contact will be the lending institutions that
will serve as your source for adopting a homeowner. Defaulted notes will be purchased
by you from lending institutions and then restructured to enable homeowners to make
affordable mortgage payments to you.

You do not put any price limit or other conditions on the home mortgages you purchase.
After you have purchased the mortgage, you as a lender and mortgage holder, determine
whether the homeowner's full intention is to stay in the home and maintain ownership or
proceed with foreclosure. If the homeowner intends to stay in the home, you will provide
homeownership counseling and work with the homeowner to establish a payment that
they can afford. You will either reduce the interest rate, extend the term of the loan,
reduce the principal balance or use any combination of these in order to help them keep
their home. Terms will be established on a case-by-case basis according to what the
family can afford. For example if the ARM Interest rate on a mortgage has been adjusted
upward and has therefore become unaffordable you will adjust the rate back to the lower
ARM rate. In cases where the home value has dropped below what is owed on the
mortgage you would reduce the mortgage amount to the current value of the house.

Your mortgage buying process requires an inspection of defaulted mortgage notes that a
lending institution is holding on their books. Once a list of the notes is inspected each
note is evaluated, then you will make discounted offers in the form of "Letter of intent to
purchase" for the lending institution to review. The lending institutions will act on all or a
portion of the notes that they are interested in selling. At that time, the lending institution
will provide to you a packet of documents and agreements (each lending institution will
have their own set of documents and agreements) for you to review and sign. Once this
packet is returned to the lending institution and all the required information and
agreements are signed, the lending institution will draft an "approval of sale Letter" stating
that they wish to proceed with the sale. If required, you will sign and notarize the
approval letter and return it to the lending institution.

Some of the other steps in the process that occur after the signed agreements are
completed are the search for the original note or a filing of an "Affidavit Lost Note" if only
copies of the note exist. An "Allonge" document attached to the note identifies the
promisor and the new owner as you in this instance. The final step is a Transfer of Lien
or an "Assignment of Deed of Trust and Assignments of Rent" that is recorded at the
courthouse. A Release of Lien will also be recorded to release the previous Deed of
Trust on the property.

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In the event that you have to foreclose on a home or the homeowner chooses not to own
the home, you will foreclose the home and sell it to the public at the current market value.
Such situations include; the homeowner abandons the property and is unreachable, the
homeowner moves to another town or state, or the homeowner chooses not to make
mortgage payments. You will then give the home buying opportunities to someone who
has already lost their home to foreclosure or to a low to moderate-income family.

Your budget shows that you will spend approximately $2 million, 4 million and 8 million in
the first three years of operation for mortgage purchases. Almost all of your expenses
(95%-98%) are for mortgage purchases. Your exempt purpose is carried out by providing
defaulting homeowners with financial education, budgeting strategies, foreclosure
prevention strategies and mortgage workout resolution.

You provided various sample notes, forms and agreements that are used for your
mortgage purchase, foreclosure, and reposition activities. The samples include Transfer
of Lien, Release of Lien, Allonge and Real Estate Lien Note, Affidavit of Lost Note and
Indemnification, Mortgage Payment History Certification, Letter of Intent to Purchase
Note, Approval of Purchase Letter, Escrow Collection Receipt and Instructions,
Authorization for Reserve Account, Loan Servicing - Buyer and Seller Information.

As a part of providing the new mortgage to the homeowner, you plan to help the
homeowners whose mortgage you purchase with homeownership counseling and
referrals on employment information, mental health counseling, childcare, and
educational services. The homeownership counseling consists of Intake and Action Plan,
Budget Counseling, Credit Counseling, and Debt Reduction Counseling. You state that
this financial and housing counseling occupies a substantial portion of your time.

You will host group workshops for small groups of homeowners who have defaulted on
their mortgages and/or are threatened with foreclosure on their homes. You will conduct
such workshops on weeknights and Saturdays at local libraries, other available
conference rooms, or in your offices. The homeowners will be taught basic financial
literacy including financial and credit terms, budgeting strategies, the importance of taking
and maintaining a positive credit rating, the foreclosure process and various methods and
procedure of foreclosure prevention. You state that this activity will consist of about ten
percent of your time.

You will also assist the debtors in communicating with the debtors' mortgage lenders. You
would use approximately ten percent of your time for this activity, which entails initiating
workout negotiations and negotiating plans to allow debtors to keep their homes. Later
you dropped this activity by stating that you are not going to work out payment solutions
for your clients with lending institutions and clarified that you will only acquire the
defaulted notes from the lending institutions and begin any financial counseling after the
note is purchased and a restructure process has begun.

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You will hire P, an independent title insurance agency to perform your account servicing
under a service agreement. P will receive payments, take care of impound accounts,
1098 forms and late notices etc.

Law

Section 501(a) of the Code provides that an organization described in section 501(c)(3)
shall be exempt from taxation.

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
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:

(1)(A) The organization--

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

(ii) 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,

(iii) 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

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

(1)(D) At all times the organization has a board of directors or other governing body

(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

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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).

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 .

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 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 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, to meet the requirements of this subsection, 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)(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 non-profit 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

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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 with 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 neither charged fees for counseling services nor prorated their services. 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. Creditors were not required, though, to make
such contributions as a condition of participation.

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 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 . . . [non-
exempt] purpose, if substantial in nature, will destroy the exemption regardless of the
number or importance of truly . . . [exempt] purposes.”

In American Institute for Economic Research v. United States, 302 F. 2d 934 (Ct. Cl.
1962), the Court considered an organization that provided analyses of securities and
industries and of the economic climate in general. It sold subscriptions to various
periodicals and services providing advice for purchases of individual securities. The court
noted that education is a broad concept, and assumed arguendo that the organization
had an educational purpose. However, the totality of the organization's activities, which
included the sale of many publications as well as the sale of advice for a fee to
individuals, was indicative of a business. Therefore, the court held that the organization
had a significant non-exempt commercial purpose that was not incidental to the
educational purpose, and was not entitled to be regarded as exempt.

In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the Tax 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.

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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 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.” Finally, the corporation did not limit its clientele to organizations that were section
501(c)(3) exempt organizations.

In Easter House v. U.S., 12 Cl. Ct. 476, 486 (1987), affid, 846 F. 2d 78 (Fed. Cir.) cert.
denied, 488 U.S. 907, 109 S. Ct. 257, 102 L. Ed. 2d 246 (1988), the Claims 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 agency was a non-exempt
commercial purpose. The court concluded that the organization did not qualify for
exemption under section 501(c)(3) because its primary activity was placing children for
adoption in a manner indistinguishable from that of a commercial adoption agency. The
court rejected the organization's argument that the adoption services merely
complemented the health related services to unwed mothers and their children. Rather,
the court found that the health-related services were merely incident to the organization's
operation of an adoption service, which, in and of itself, did not serve an exempt purpose.
The organization's sole source of support was the fees it charged adoptive parents, rather
than contributions from the public. The court also found that the organization competed
with for-profit adoption agencies, engaged in substantial advertising, and accumulated
substantial profits. Accordingly, the court found that the "business purpose, and not the
advancement of educational and charitable activities purpose of plaintiffs adoption
service, is its primary goal" and held that the organization was not operated exclusively
for purposes described in section 501(c)(3). Easter House, 12 Cl. Ct. at 485-486.

In Living Faith, Inc. v. Commissioner, 950 F.2d 365 (1991), the Court of Appeals upheld a
Tax Court decision that an organization operating restaurants and health food stores in a
manner consistent with the doctrines of the Seventh Day Adventist Church did not qualify
for exemption under section 501(c)(3) of the Code because the organization was
operated for a substantial non-exempt commercial purpose. The court found that the
organization's activities were "presumptively commercial" because the organization was
in competition with other restaurants, engaged in marketing, and generally operated in a
manner similar to commercial businesses.

In Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C., 2003), the District
Court relied on the “commerciality” doctrine in applying the operational test. Because of
the commercial manner in which this organization conducted its activities, the court found
that it was operated for a non-exempt commercial purpose, rather than for a tax-exempt
purpose. As the court stated: "Among the major factors courts have considered in
assessing commerciality are competition with for profit commercial entities; extent and
degree of below cost services provided; pricing policies; and reasonableness of financial
reserves. Additional factors include, among other things, whether the organization uses

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commercial promotional methods (e.g., advertising) and the extent to which the
organization receives charitable donations."

In Solution Plus, Inc. v. Commissioner, T.C. Memo. 2008-21, the Tax Court held that a
credit counseling organization was not described in 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 (“DMPs”). The founder and his spouse were
the only members of the organization’s board of directors. The organization did not have
any meaningful educational program or materials to provide to people who contacted the
organization, and its financial education seminars for students constituted an insignificant
part of the organization’s overall activities.

Application of Law

Operational Test

To satisfy the operational test under section 501(c)(3) of the code an organization must
engage primarily in activities that accomplish one or more of such exempt purposes as
specified in section 501(c)(3) of the Code and Section 1.501(c)(3)-1(c)(1) of the
regulations. Under the operational test, the purpose towards which an organization's
activities are directed, and not the nature of the activities themselves, is ultimately
dispositive of the organization’s right to be classified as a section 501(c)(3) organization.
As in B.S.W. Group, Inc. v. Commissioner, your activities are not directed toward one or
more exempt purposes. Your activities primarily further the substantial non-exempt
purpose of operating a mortgage loan and home sale business. Thus, you are not
operated exclusively for one or more exempt purposes.

You Are Not Operated Exclusively for Charitable or Educational Purposes

Your primary purpose of purchasing mortgages in default and working with the debtors
subsequent to such purchasing to assist them with foreclosure intervention is not a
charitable purpose as described in section 1.501(c)(3)-1(d)(2) of the regulations. The fact
that you do consultations with the debtors whose mortgages you have purchased either
through phone calls or face to face interviews is also not educational since the purpose of
these interviews are to determine if these debtors will eventually become your clients.
Conducting a mortgage lending business to the general public does not serve a charitable
purpose.

Almost all of your time and resources are devoted to conducting a mortgage loan
business and providing subsequent financial counseling as part of the loan business to
any individual who is facing foreclosure or already in default on his loan. Thus, you are
unlike the organization described in Rev. Rul. 69-441,

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You are not educational as described in section 1.501(c)(3)-1(d)(3)(i) of the regulations.
Any educational activity you offer is only incidental to your primary activity of operating a
mortgage loan business. You are similar to the organization described in Solution Plus,
Inc. v. Commissioner of Internal Revenue, above , in that your activities are the conduct
of a mortgage loan business. Any educational activity you conduct is incidental to your
mortgage loan business.

You Have a Substantial Non-exempt Purpose

Your Form 1023 application and responses strongly demonstrate that Like the
organization in Better Business Bureau of Washington D.C., Inc. v. United States, 326
U.S. 279 (1945), above, you operate for the substantial non-exempt purpose of operating
commercial mortgage loan business.

Your mortgage loan business is no different from that of a commercial lending business.
You set the mortgage payments in the manner that commercial lenders would do for
homes that face foreclosure, you foreclose on homes when the homeowners do not make
payments, and you sell foreclosed homes to the general public at market price. Your
mortgage lending business directly competes with commercial lending entities. You are
similar to the organizations in Easter House v. U.S. and Living Faith, Inc. v.
Commissioner, above,

As in Airlie Foundation v. Commissioner, above, your commercial lending business is a
classic case involving the commerciality doctrine.

Similar to the organization in American Institute for Economic Research v. United States,
above, your commercial activity of selling mortgage products and homes serves a
significant non-exempt purpose and any educational purpose is incidental thereto
Therefore you are not entitled to exemption under section 501(c)(3) of the Code.

Inurement/Private Benefit

You operate for the private benefit of your founder and his spouse by using funds raised
to support their mortgage loan business. You use funds raised by you to purchase
mortgages and operate a commercial lending business. F and G your founders operate
the business day to day. Your organizational structure and manner of operation result in
inurement to F and G. Funds raised by you will be used to operate a mortgage lending
business which will be operated on a day to day basis by F and G. In accordance with
section 1.501(c)(3)-1(d)(1)(ii) of the Regulations you have not established that you are not
operated for your founders' private interests.

Section 501(q) of the Code

You are described in section 501(q) and 501(q)(4)(A) of the Code as an organization that
provides credit counseling services.. However, you are not in compliance with the

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provision of section 501(q)(1)(A)(ii) of the Code since you make loans to debtors at
specified rates of interest and negotiate the making of loans on behalf of debtors.

F & G are founders and are in charge of your operations. F works full time for you. G
and another member of your board is also in the real estate business. Therefore, your
governing body does not comply with the requirements of section 501(q)(1)(D)(ii). G's
presence on the board that is comprised of 3 board members gives G 33% of the voting
power and since 2 of the three board members have relationships with other real estate
related businesses you also do not meet the requirements of 501(q)(1)(D)(iii) since more
than 49% of voting power is vested in persons who are employed by the organization or
who will benefit financially, directly or indirectly, from the organization's activities,

Conclusion

Based on the facts and information provided, you are not operated exclusively for exempt
purposes because your activity of purchasing the mortgages on foreclosed properties and
holding and servicing those mortgages constitutes a commercial business. Therefore,
you are not described in section 501(c)(3) of the Code. In addition the making and
negotiating of loans on behalf of debtors causes you to fail to meet the requirements of
section 501(q).

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.

Types of information that should be included in your appeal can be found on page 2 of
Publication 892, under the heading “Regional Office Appeal”. These items include:

. The organization’s name, address, and employer identification number;
A statement that the organization wants to appeal the determination;
The date and symbols on the determination letter;
A statement of facts supporting the organization’s position in any contested factual
issue;
A statement outlining the law or other authority the organization is relying on; and
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, | declare that | have examined the statement of facts

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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.

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.

13

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

Sincerely,

Lois Lerner
Director, Exempt Organizations

Enclosure, Publication 892