Determination 1303019: IRS denies exemption to a fee-based credit counseling venture

Plain-English summary

The IRS denied exemption under IRC § 501(c)(3) to an organization that planned to market personal-finance education through financial professionals and distribute a related for-profit company's software. The IRS found that the operation would primarily provide fee-based membership services, promote the related company's products, and benefit directors who owned that company. It also found that the organization had not shown that its services would be charitable or educational, and that it did not satisfy the governance and fee-policy requirements of IRC § 501(q). The organization therefore failed the operational, private-benefit, and credit-counseling requirements for exemption.

Ruling snapshot

• Question: Does the proposed credit counseling organization qualify for exemption under IRC §§ 501(c)(3) and 501(q)?
• Outcome: Denied.
• Key authorities: IRC §§ 501, 501(q), 170, 6104, 6110, 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

DIVISION

Contact Person:
Release Number: 201303019 Identification Number:
Release Date: 1/18/2013
Date: October 25, 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.

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,

Holly O. Paz
Director, Exempt Organizations
Rulings and Agreements

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: September 6, 2012 Contact Person:
Identification Number:
Contact Number:
FAX Number:

Employer Identification Number:

LEGEND: UIL:

B = date
C = date
E = state
F = program
G = program
H = individual
I = individual
J = individual
K = business
O = dollar amount

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

Do you meet the operational test 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 under E law. Your Articles of Incorporation (“Articles”)
state, in Article IV, that:

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“The business and purpose of the corporation shall be to support and promote efforts to
deliver personal finance information and education.”

Your Bylaws state, in Section 2, that you are:

“(O)rganized exclusively for charitable, scientific and educational purposes, more
specifically to facilitate, educate, unite and collaborate with diverse people and
organizations to enhance and strengthen the inclusive nature of our community.”

You were created in response to the recommendations made by the President's Council
on Financial Literacy. You will create and implement a plan to make the fight against
indebtedness a national priority, that begins by coordinating the disparate efforts of
financial education companies and organizations, as well as partner with currently
existing financial services industries, to create an army of educators and messengers
that will serve as front-line, grass-roots, intermediaries that will reach as many as 10
million people every year.

You have three directors; H, J, and K. H and J are financial professionals. K is a
personal assistant and elderly caregiver. Currently, H and J are not compensated.
When you begin to generate revenue, you will compensate H and J in a manner that is
commensurate with the risk and investment associated with the business as well as
industry standards.

H and J own 100% of O, a for-profit entity, creator of the software program G. You will
enter into a wholesale, distribution and licensing agreement with O. The licensing
agreement will enable you to make available certain financial teaching materials and
tools, such as G, to financial intermediaries for free, or nearly free. The intermediaries
will use the tools to deliver financial information and education. The terms of the
licensing agreement will be negotiated and representative of an arm’s length
transaction. You will ensure that all negotiations result in paying no more than fair
market value by only agreeing to a license fee that is 50% or more below the retail price
of the product(s). The agreement will further stipulate that you cannot sell “mark-up” and
sell the licensed product as a stand-alone item.

You will transform currently existing networks of hundreds of thousands of financial
service providers into personal finance educators. These providers will be your
membership. They in turn will act as your intermediaries and integrate the industry
specific tools and information you provide into their core business. The providers will
promote good financial habits that will enable consumers to retain wealth.

To effectively create change you have adopted a marketing brand and message called
F. F represents the consolidated and fundamental principles being taught by hundreds
of thousands of financial advisors and forms the foundation, starting point and self-
assessment tool for every person who seeks to embark down a path of being financially
responsible.

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F is a universal and standardized means of making personal finance decisions by
assessing and measuring an individual's financial foundation and their commitment to
managing their financial life. F simply says individuals should:

• Establish and/or maintain an emergency reserve/cash cushion to help manage
  day-to-day cash flow to avoid living paycheck to paycheck and/or relying on
  credit cards.

• Have zero non-mortgage debt (credit card balances, auto loans, student loans)
  which steals away money that otherwise could be saved and invested.

• Establish, or improve on, a savings habit which begins by accumulating the
  equivalent of a years worth of household income.

• Endeavor to own a home and put themselves in a position to pay off the
  mortgage in the shortest possible time.

Your primary efforts will be to arm existing networks of financial services professionals
with just-in-time personal finance teaching and education information and tools, based
on F. These professionals will then deliver the financial education information to
consumers.

The mortgage industry, and its nationwide network of financial service providers,
represents your initial target industry. The mortgage industry provides services to 6 to
10 million consumers annually and is uniquely positioned, and motivated, to adopt F to
reach the 92% of Americans who do not work with a financial advisor. The mortgage
industry is the ideal way to reach consumers because:

e Mortgage consumers will view F as a solution that clearly serves their needs

e The mortgage industry will see F as a means to regain public and Wall Street
confidence and reestablish the mortgage industry as a vibrant component of the
U.S. Economy

e Wall Street will use F as a means of improving the quality of the borrower and
reducing default risk.

You will be distributing an insightful and visual personal finance teaching and education
program through G. There are three versions of G; basic, professional and premium.
You will offer only the premium version. You will acquire a license to distribute G as an
added value for your mortgage industry membership. G has been designed specifically
for you by the mortgage industry to be used at the point-of-sale for every mortgage
transaction in America. G will transform the mortgage process into a teaching and
education event. G will ask:

e Did the transaction create and/or maintain an emergency reserve for the
consumer?

e Did we eliminate and/or help the consumer avoid carrying consumer debt
balances?

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e Were we able to help the consumer create and/or maintain a consistent savings
plan?

• Have we enabled the homeowner to put himself in a position to pay off the
  mortgage sooner?

You intend to begin by distributing G. This will allow you to put in place the “seed corn”
for your nationwide branding and marketing efforts to promote F. Next, you will conduct
an 18-month, broad based, multi-event, nationwide public awareness promotion
intended to do the following:

e Make financial literacy a national priority

e Involve up to 10 million Americans

Provide financial issue education

Help revitalize the mortgage and housing industry
Promote G

Award prizes to 100,000 individuals

Your third project will be an upbeat and interactive e-newsletter and magazine
distributed to millions of Americans. The publication will promote the value of thriftiness,
the importance of being self-reliant, savings as a personal responsibility and looking
forward to a satisfying retirement.

Your fourth project will be a series of nationwide television and radio public service
announcements that promote F.

You estimate that you will spend 60% of your time conducting outreach activities, 30%
supporting your membership and 10% conducting administrative duties. Your website
will be the primary tool by which people will connect with you and vice-versa.

Your website indicates, in part, that your mission is to support a member base of like-
minded groups and individuals and to create a nationwide corps of financial educators.
You will promote F and the creation and use of a nationwide personal banking system
for the purchase of major non-mortgage consumer goods and services. You promote
consumer rights and create and distribute, either directly or through strategic
partnerships, personal finance information and tools based on F. The website briefly
summarizes your projects (G, a nationwide promotion campaign, magazine and videos)
and indicates the benefits and financial costs of membership.

Currently, you have no facility and board members are donating the use of their homes
and equipment at no cost to you.

You submitted your licensing agreement with O entered into on C. O grants you a non-
transferable, non-exclusive, non-assignable license, without right to sublicense, to
market, promote, distribute and resell software product(s) developed by O (G

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Professional and Premium). All intellectual property rights will remain with O. Your rights
are limited to distributing O to your membership and you are not entitled to sell or
distribute O on a stand-alone basis. You will pay O z dollars per year for each license
fee you distribute. You will provide O the names, addresses and phone numbers of your
members to whom you have distributed products and any feedback regarding the
products. The agreement, while not signed, lists H and J as the parties who would be
accepting the terms of the contract.

Your long-term plans are to generate sufficient contributions that will allow you to
provide materials and tools to the intermediaries at no charge. Initially, you will provide
the materials and tools at a substantially lower cost as compared to alternative products
and services.

You plan to charge a user setup fee of z doilars. It appears a G subscriber will pay more
than one setup fee. A month-to-month individual subscription for G will range from $50
to $400 per month. You compare this to similar products available for similar prices. You
will also offer organizational memberships, with fees ranging anywhere from $500 to
$250000.

The general public can obtain G through retail channels of O. However, the retail
services of O will be phased out as your membership grows.

You have projected income including contributions in addition to receipts for your
services and membership fees, and have projected expenses for salaries, facilities,
licensing fees, marketing and advertising.

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
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) 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,

body--

(F)

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(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

(ili) 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

(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).

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

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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(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)(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. 61-170, 1961-2 C.B. 112, an association composed of professional private
duty nurses supported and operated a nurses' registry to help make the nurses'
services more readily available to the general public. The association’s bylaws stated
that its specific purposes were to provide employment for its members as well as to
organize an adequate and available nursing placement service for the community. Its
membership was open to both registered and practical nurses who met specified
requirements. The organization maintained a registry of its members showing their
respective qualifications and the types of services they perform. Reference and
placement from the register were made on a rotating basis upon request for nursing
services. The association was operated primarily to afford greater employment
opportunities for its members, and only incidentally for the benefit of the general public.
This was evidenced by the fact that it drew its support primarily from members and was
controlled by a board of trustees composed of professional nurses, without public
participation of any kind. Thus, the association was not organized or operated
exclusively for exempt purposes as described in section 501(c)(3) of the Code.

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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 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.

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

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because it does not consider their background or training in the subject matter." The
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.”

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 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 rather than those connected with
the debt management programs. The primary sources of revenue for these

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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 Bethel Conservative Mennonite Church v. Commissioner, 746 F. 2d 388, 391 (7" Cri.
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.

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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 nonexempt 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 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 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

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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, you fail the operational test.

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 will begin by marketing a financial tool, G, to your membership. Your membership
will use G to educate their clients when providing services. Sometime in the future you
plan to conduct a nationwide educational campaign, create a magazine and offer
financial videos. All of the planned activities include the promotion of G and your for-
profit members conduct almost all of the educational activity. You will not operate a
substantive, on-going educational program, provided no evidence that you help clients
develop an understanding of the cause of their financial problems, or provide a plan to
address their financial problems. You have provided no evidence that you intend to
establish long-term relationships with the public. Your activities are only connecting your
for-profit members to clients whom they will then educate, using O’s product. Although
your website contains some educational content, it is not sufficient 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.

Your operational focus is on generating fees from your membership. 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.

Rev. Proc. 86-43, supra, states a 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." You failed to prove that your method of communication

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through your membership to the general public meets the standards of Rev. Proc. 86-43, supra. Thus, you failed to establish that your activities are educational within the
meaning of section 501(c)(3) of the Code.

Your Activities Are Not Charitable

Your time and resources are devoted to marketing the products of a related for-profit
entity, O. Your membership will use O’s products, including G, to assist their clients.
You do not limit your services to poor or distressed individuals.

Further, you do not waive your fees for those who cannot afford to pay for your services.
While you plan to offer some free services sometime in the future, no specific details
were provided and you will rely primarily on fees to produce revenue. 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.
“[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, and have
outlined factors related to the nature of how an organization conducts its business,
including pricing policies, funding sources, and the organization’s competitiveness with
and similarity to other commercial ventures, in discerning substantial nonexempt
commercial purposes. See e.g., Arlie Foundation, supra, B.S.W. Group, supra; Living
Faith, supra.

Your activities consist primarily of providing membership services for a fee. Although an
organization is not disqualified from tax-exempt status solely because its primary activity
constitutes a business, when it conducts a business with an apparently commercial
character as its primary activity, "that fact weighs heavily against exemption." B.S.W. Group, supra.

You will market and distribute a product created by O. You will pay a license fee to O for
every copy of G distributed. All intellectual property rights will remain with O. You will
provide O the names, addresses and phone numbers of your members to whom you
have distributed products and any feedback regarding the products. Like the
organization described in Old Dominion Box Co, supra, your operation for the benefit of
private parties constitutes a substantial nonexempt purpose.

The general public can obtain G through retail channels. Other for-profit organizations
offer similar products. It is significant that you are in direct competition with for-profit
entities. "Competition with commercial firms is strong evidence of the predominance of
nonexempt commercial purposes." B.S.W. Group, supra.

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An examination of your activities, pricing policies, funding sources and competition with
for-profit entities clearly indicate your manner of operations is commercial in nature.
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.

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.

It is unnecessary for us to determine the payments to the related for-profit entity O are
unreasonable. Church by Mail, supra. Your entire enterprise is carried on in such a
manner as to substantially benefit the related for-profit entity.

You are controlled by a small board of directors, composed primarily of financial
professionals. You will be marketing and promoting products created and distributed by
O, and O will receive z dollars for each license distributed. Two of your three directors,
H and J, own O. Your reseller agreement lists both H and J as signatories. This is all
evidence that you operate for the benefit of your directors rather than the public, as in
Rev. Rul. 61-170, supra.

Your board of directors is composed of persons who stand to gain financially from your
organization's activities, unlike the organization in Rev. Rul. 69-441, supra, whose
board of directors was comprised of representatives from religious organizations, civic
groups, labor unions, business groups, and educational institutions.

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).

Further, as a result of insiders gaining benefits from your operations, inurement is
present, as H and J gain increased promotion, marketing, sales and use of both G and
F. 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(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. Thus 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).

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You have failed to 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 as required by section 501(q)(1)(C).

You are not governed by a board controlled by persons representing the broad interests
of the public as required by section 501(q)(1)(D). You are governed by a board
primarily composed of financial professionals who will benefit from your activity.

You plan to compensate two of your three directors. This would not comply with section
501(q)(1)(D)(ii) that indicates that at all times the organization must have a board of
directors or other governing body 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).

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 do not meet the operational test as
your activities are neither educational or charitable. You are organized and operated for
commercial purposes. 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. You have also 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.

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. These items include:

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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.

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.

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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,

Holly O. Paz
Director, Exempt Organizations
Rulings & Agreements

Enclosure, Publication 892