IRS denies a financial literacy organization's section 501(c)(3) exemption

Plain-English summary

The IRS denied tax-exempt status to an organization that planned to provide financial literacy tools, services to low- and moderate-income households, and consulting services to small businesses. The organization did not establish that its operations were exclusively educational or charitable, because much of its planned activity depended on membership dues and fees and its educational programs were still under development. The IRS also found a substantial commercial purpose, private benefit to for-profit entities, and failure to meet section 501(q)'s fee-policy requirements for credit counseling organizations. The organization therefore did not qualify under section 501(c)(3), and its contributions were not deductible under section 170.

Ruling snapshot

• Question: Did the organization qualify for exemption under section 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 501(q), 6104, and 7428; Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 201252026 Contact Person:
Release Date: 12/28/2012
Identification Number:

Date: October 3, 2012
Contact Number:

Employer Identification Number:
Form Required To Be Filed:

Tax Years:
UIL: 501.32-00; 501.32-01; 501.33-00

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.

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,

Holly O. Paz
Director, Exempt Organizations
Rulings and Agreements

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: August 8, 2012 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:

LEGEND: UIL:

B= Date 501.32-00

D= State 501-32-01

E= State 501.33-00

P= Name of Program

r= $

s= $

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.

Issues

e Do you meet the operational test under section 501(c)(3) of the Code? No, for
the reasons described below.

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

Facts

You were incorporated on Bin D. Your Articles of Incorporation state that your purpose

is to engage in any lawful act or activity for which corporations may be organized under
the General Corporation Law of D. Your articles also contain the necessary 501(c)(3)
language.

You will promote wealth creation and financial self-determination within and among low
and moderate income households and communities by developing and distributing adult
financial education and literacy tools and services., You will also provide member
products and services to small businesses located within or serving low and moderate
income households and communities, and advocate on behalf of the collective interests of
low and moderate income households and communities.

You will develop services and programs aimed at three groups of stakeholders; low and
moderate income households, employees of corporations and stakeholders of other types
of institutions, and small businesses of 100 employees or less, located within or primarily
serving low and moderate income communities.

You solicit funds from the public in order to defray costs of program development and
operations, create supportive networks of households, businesses and organizations
concerned with wealth-creation among low and moderate income households and
communities, participate in conferences and community based activities that support
wealth creation among low and moderate income households and communities, and
advocate on behalf of the collective interest of low and moderate income households, and
the small businesses that serve them.

Some of your products such as technology based tools and education materials on credit
card use, debt load management, household budgeting, home ownership and mortgage
costs etc will be distributed free of charge. As a means of augmenting the learning
experience for the recipient households you will provide niche social networking
environments where similar households may receive additional web based learning
opportunities, cost effective products and services and information aimed at further
financial self-determination. For corporations and institutions you will charge the
sponsoring institution or employer a one-time fee. For small businesses you provide these
services for a one-time fee. This is a membership fee which entitles the small business to
become a life time member. Small business members will receive services such as entity
selection and creation, drafting governance related documents, business valuation,
competitive benchmarking, business plan creation, succession planning and exit
strategies, risk and strategy analysis etc. You provide small business consulting and
advisory services on a member only basis. Your financial literacy and education products
will be distributed free of charge but will be priced according to common pricing
conventions for the purpose of measuring the cost of production such as labor, materials
and overhead. Some products and services, such as those provided to your small
business membership or those sponsored by companies or organizations on behalf of
their employees or stakeholders, will be priced below market prices set by for-profit
providers of similar products and services. Members will be eligible for discounts based
on their size. Companies and organizations purchasing sponsored products and services

will also be eligible for a price discount based on an organization by organization basis.

In developing, marketing and distributing your products and services you referred to three
“service groups”; adult financial literacy, corporations and institutions and small business
services.

Adult Financial Literacy

You will provide research and technology based adult financial literacy tools and services
to low and moderate income households beginning with the State of E, free of charge to
the recipient household. The tools will include material on credit card use, debt load
management, household budgeting and savings, home ownership and mortgage costs
and related topics. You will also develop multimedia products and Web2.0 products that
instruct on various topics (retirement planning, investor education and related topics). To
augment the learning experience you will provide niche social networking environments
where additional web-based learning opportunities, cost-effective products and services,
and share information aimed at further financial self determination. You will develop
original research on various topics related to financial services access among low and
moderate income households, the unbanked and under banked and related topics. Every
sponsored product is developed to address the information and literacy needs of target
specific audiences.

Your principal initiative is the P network. The P network is the centerpiece of your adult
financial literacy program and is the technological embodiment of your information,
education, advocacy and action philosophies. Your primary expense in the first few years
of operation will be the development and implementation of the digital learning and
literacy platform. You will pay a for-profit third party for the creation of the platform. You
will retain all rights and powers associated with any intellectual property you develop.

We asked for specific details (syllabus, material, etc...) regarding the educational
programs you offer. You indicated that the adult financial literacy program is under
development.

Corporations and Institutions

You will provide research and technology based adult financial literacy tools and services
to workforce employees and stakeholders within other types of organizations and
institutions beginning with the State of E. You will charge a one-time fee (a fee schedule
for this service was not provided). The tools will include pension analysis and retirement
planning, investor education seminars and related products. To augment the learning
experience you will provide niche social networking environments where additional web-
based learning opportunities, cost-effective products and services, and share information
aimed at further financial self determination.

Small Business Services

You are a membership organization. Only small business members are required to pay a
membership fee. Annual memberships are up to r. A lifetime membership can be
purchased for s. You will not charge service fees to you membership. The annual or
lifetime membership provides free access to your services. Non-members will be provided
services with a fee based on the type of service requested.

You indicate that you provide your membership with “superior “market-grade” professional
service for a fraction of market price in a membership fee.” Your members can avail
themselves, free of charge, to a growing network of lawyers, accountants, marketing
professionals, financiers and fellow members. Members have three categories of
services; Foundation, Growth and Network. Foundation services include start-up services
(business plan, creating a legal entity, filing for licenses and registrations, etc...) and post-
establishment services (trademark monitoring and notification services, assistance with
employment laws, loan application assistance, etc...). Growth services assists members
evaluate, plan, implement and manage growth and provide access to investors. Network
services provide access to your professional list server, network of professionals, original
research, monthly newsletter, and other services.

In response to our question whether you will charge fees, you responded you will not
charge a fee of your clients for your services. You will however charge a membership fee
in return for which your members will be entitled to a suite of consulting and advisory
services. In addition companies and institutions will be provided company specific
services and the price charged to each company will be determined on a case by case
basis. You also stated that if a company or organization is unable to pay for the company
specific financial program they requested the program will not be provided to their
employees or constituents.

You will develop web-based and mobile based products, tools and services and purchase
tools and services developed for you by third party software designers. You also intend
on creating or purchasing marketing materials that contain proprietary trademarks and
service marks such as t-shirts, hats, sweatshirts, pens, pencils, notepads and ornamental
objects.

Approximately 50% of your time will be spent providing your small business members
services such as drafting operating agreements, shareholder agreements, agreements
between partners etc. You also state that since the activities you will provide in the future
are all based on the areas of adult financial literacy and small business consulting it is
impossible to imagine all of the activities you will engage in. Services provided to your
small organization members are provided by volunteers with professional experience in
the area or areas of need facing the member. A potential small organization contacts
you via phone or e-mail one of your volunteers fields their questions and takes additional
information regarding the client. The potential member is then provided with information
regarding your membership dues and types. You will provide the potential member with a

summary of needs and an application for membership. Upon return of the application and
the dues the member is matched up with a volunteer with specific experience.

You do not have any employees and do not plan to hire any employees. You do not
provide personal financial counseling services. The vast majority of your activities will be
digitally based and distributed via web-based, mobile-based and notebook-based
devices. You will rely heavily on pro-bono and volunteer services of professionals and
donated resources.

Currently, you do not receive client referrals from any organization. However, you intend
to establish referral arrangements with various non-profits and similarly situated service
providers. We asked for information regarding the for-profit entities for which you now
have or plan to have a relationship. You responded by indicating that you intend to utilize
both for-profit and non-profit organizations and it is “completely impossible to anticipate
even a sampling of the for-profit” organizations with whom you will do business.

Your website indicates that you promote “wealth creation and financial self-determination
within and among working families and communities by developing and distributing adult
financial education and literacy tools and services, providing member products and
services to small businesses located within or serving our communities, and by
advocating on behalf of the collective interests of working families, and the communities
in which they reside.” You have developed a web based learning content management
system P, a personalized website that integrates niche networking, RSS web feeds,
financial literacy tools, investor education tools, and related news and _ information
designed to address the specific needs of your client’s households, aimed at increasing
financial literacy and elevating financial decision making. Your website describes P as
the centerpiece of your adult financial literacy program and is the digital embodiment of
your financial self-determination model. You are currently accepting requests from for-
profit and not-for-profit companies interested in providing your stakeholders with a
complete and long lived adult financial literacy program.

When asked about the nature of your advocacy activities and whether you plan to
conduct legislative or lobbying activities you answered that these questions were not
applicable to you.

You have nine directors two of whom are related and the majority of whom are employed
or involved in the financial industry.

Your funding comes from corporate and small business membership fees, consulting
fees, foundation grants and donations. You submitted budgets for your first four years of
operations. Approximately 50% of your income is from membership dues.

Your growth strategy as per your Annual Board meeting agenda from Feb 2011 shows
that you plan to establish a physical office during year four and expand your services to
include bankruptcy and credit counseling services. However you did not provide any

details regarding these activities.

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:

(A)

(B)

(C)

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.

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

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

(iii) 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.

(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
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 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(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 that an applicant organization is
not organized or operated exclusively for one or more of the purposes specified in
subdivision (i) of this subparagraph unless it serves a public rather than a private interest.
Thus, to meet the requirement of this subdivision, it is necessary for an organization to
establish that it is not organized or operated for the benefit of private interests such as
designated individuals, the creator or his family, shareholders of the organization, or
persons controlled, directly or indirectly, by such private interests.

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.

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.”

Operating for the benefit of private parties constitutes a substantial nonexempt purpose.
Old Dominion Box Co. v. United States, 477 F. 2d 340 (4th Cir. 1973), cert. denied 413
U.S. 910 (1973).

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.

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 Bethel Conservative Mennonite Church v. Commissioner, 746 F. 2d 388, 391 (7th Cir.
1984) the court considered how a medical plan conducted by a church affected its exempt
status. In analyzing the facts of the case the court stated that "The facts in each case
must be explored to ascertain the predominant or primary purpose for which the
organization was formed, and also the manner of its operation.”

In Church by Mail, 765 F. 2d 1387 (9th Cir. 1985), affg. TCM 1984-349, Tax Court
concluded that the extent of the integration between the operations of a non-profit entity
and related for-profit entities controlled by the non-profit directors precluded exemption.
Furthermore, the Tax Court found it unnecessary to consider the reasonableness of
payments made by the applicant to a business owned by its officers. The 9th Circuit
Court of Appeals, in affirming the Tax Court’s decision, stated that “the critical inquiry is
not whether particular contractual payments to a related for-profit organization are
reasonable or excessive, but instead whether the entire enterprise is carried on in such a
manner that the for-profit organization benefits substantially from the operation of the
Church”.

In Easter House v. U.S., 12 Cl. Ct. 476, 486 (1987), affd, 846 F. 2d 78 (Fed. Cir.) cert.
denied, 488 U.S. 907, 109 S. Ct. 257, 102 L. Ed. 2d 246 (1988), the court found an
organization that operated an adoption agency was not exempt under section 501(c)(3) of
the Code because a substantial purpose of the agency was a nonexempt 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 nonexempt 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 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, inter alia, whether the organization uses 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 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 sale of DMPs is the primary reason
for [Solution Plus's] existence, and its charitable and educational purposes are, at best,
minimal.”

Application of Tax 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 the operational test.

To satisfy the 501(c)(3) 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. You failed to establish that you are operated exclusively for one or more
exempt purposes.

Your Activities Are Not Educational

You were formed to promote wealth creation and financial self-determination. You will
provide services to low and middle income clients, corporations and your membership.
While some of your activities may have an educational component and you plan to
provide some free services, your operational focus is on generating fees from your
membership and other activities. Similar to the organization in Solution Plus, supra, your
efforts are focused on informing potential clients about the range of services available and
signing them up for one of your programs.

The products, tools and services you will provide appear to contain some educational
content. However, most of the access to this information is limited based on ability to pay
or membership status. When we asked for specific details regarding your educational
programs you indicated that the programs were under development. This is not sufficient
to establish that you exclusively 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.

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 an educational organization.

Your Activities Are Not Charitable

You provide services to low and moderate income households and communities and
corporations. However, most of your time and resources are devoted to servicing your
membership. You are not described under section 1.501(c)(3)-1(d)(2) of the regulations
as your services are primarily marketed and available to those who can afford your fees
or dues rather then those who are poor and distressed.

Your services do not further charitable purposes as you do not limit your services to low-
income individuals.

You do not waive your fees for those clients who cannot afford to pay for your services.
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.

Unlike the organizations in Consumer Credit Counseling Service of Alabama; supra, and
Rev. Rul. 69-441, supra, you charge fees (member and non-member fees) for most of
your services. ‘“[P]rimarily providing services for a fee ordinarily does not further
charitable purposes.” Solution Plus, supra.

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 consistently held that an organization's purposes may be inferred from

its manner of operations (Bethel Conservative Mennonite Church, supra). Your manner of
operations is commercial in nature.

Your activities primarily consist of providing consulting and other services to dues paying
members and fee based clients. Your activities do not further an exempt purpose, as
recognized by statute or by case law, but rather a substantial nonexempt commercial
purpose. You provide services similar to those provided by for-profit entities. It is
significant that you are in direct competition with for-profit entities that provide similar
services. "Competition with commercial firms is strong evidence of the predominance of
non-exempt commercial purposes.” B.S.W. Group, 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 activities generally conducted for a profit.

Like the organization described in Old Dominion Box Co, supra, your operation for the
benefit of private parties, your membership and fee paying clients, constitutes a
substantial nonexempt purpose.

The activities you identify as “charitable” and “educational” are incidental to your primary
purpose of providing services and tools in return for dues or a fee. 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.

Private Benefit

An organization is not organized or operated exclusively for exempt purposes unless it
serves a public rather than a private interest. See section 1.501(c)(3)-1(d)(1)(ii) of the
regulations. Your primary expense will be to pay a for-profit entity to create your financial
tools. It is not necessary for us to determine whether such payments are unreasonable
(Church by Mail ,supra). Your enterprise is carried on in such a manner as to
substantially benefit the for-profit entity.

You will make referrals to for-profit entities and refused to provide details regarding this
planned future activity, indicating it is completely impossible to anticipate even a sampling
of the for-profit institutions you will have relationships with. The referrals are a single non-
exempt purpose which precludes exemption similar to the organization in Better
Business Bureau of Washington, D.C.,supra.

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

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. Therefore, for the purposes of section 501(q) you provide credit
counseling as a substantial purpose, and 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 failed to
establish that your membership dues and other fees are reasonable. Also, you do not
have a fee waiver policy.

Therefore, even if 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 operated exclusively for exempt
purposes.

You do not pass the operational test. You are not educational, you are not charitable, you
have a substantial non-exempt purpose, you have not demonstrated that your operations
serve a public rather than a private interest and you have failed to meet the requirements
of section 501(q).

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.

Appeal Rights

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’. The statement of facts (item 4)
must be accompanied by the following declaration:

“Under penalties of perjury, | declare that | 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.”

The declaration must be signed by an officer or trustee of the organization who has personal
knowledge of the facts.

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 EO Determinations
Group 7827 550 Main Street, Group 7827
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,

Holly O. Paz
Director, Exempt Organizations
Rulings & Agreements

Enclosure, Publication 892