IRS determination 1311029: IRS finalizes denial of exemption for a mortgage counseling organization

Plain-English summary

The IRS finalized its adverse determination that a mortgage counseling organization did not qualify for exemption under IRC § 501(c)(3). The organization’s activities included mortgage mitigation services, counseling, and planned educational programs. The IRS found that the organization was not operated exclusively for exempt purposes, did not satisfy the public-interest requirement, and did not meet the special requirements for credit counseling under § 501(q). The proposed adverse determination became final after no protest was filed within 30 days.

Ruling snapshot

• Question: What did the IRS determine under the cited Code provisions?
• Outcome: revocation.
• Key authorities: IRC § 501; IRC § 501(q); IRC § 170; IRC § 7428

Full text (IRS public release)

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

TAX EXEMPT ANL
GOVERNMENT ENTITIES

DIVISION
Release Number: 201311029 Contact Person:
Release Date: 3/15/2013
Date: December 21, 2012 Identification Number:
UIL Code: 501.00-00
501.32-00 Contact Number:
501.33-00
501.36-01 Employer Identification Number:
Form Required To Be Filed:
Tax Years:
Dear

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

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

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

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

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

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

Sincerely,

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: November 1, 2012 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
Legend: UIL Numbers:
D= date 501.00-00
E= date 501.32-00
F= date 501.33-00
G= state 501.36-01
L= individual
M= business

p = dollar amount
Dear

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

Issues
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 D as a nonprofit corporation under G law. Your Articles of
Incorporation (“Articles”) state that you are organized for exclusively 501(c)(3) purposes.

Your primary activity is providing mortgage mitigation services to homeowners who face
possible foreclosures. This includes homebuyer education, counseling, default
management and education, foreclosure prevention and counseling, community
outreach and assistance to help families obtain/sustain homeownership. You promote

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your services through HUD, government agencies, banks, lenders and other
businesses. Your mortgage counseling process is as follows:

1) A client would first contact you, then complete a Client Intake Form, Financial
Assessment Form, List of Creditors and completes the reason for delinquency.

The Client Intake Form is a two page form that lists the property, mortgage, and
lender information.

The Financial Assessment Form is a one page form that lists the client's personal
and financial information.

2) The client signs the Authorization Form which authorizes you to contact lenders
for negotiation.

3) The client submits proof of income (current pay stubs for one month), two most
recent bank statements and tax returns, and the most recent mortgage
statement. In the event that the client does not have any of these documents,
he/she fills out a form that explains why he/she does not have the document.

4) You prepare a cover letter and send it with the above documents to the lender.

The cover letter is a one-page letter with the loan number, name of mortgagor,
and property address, which asks for a loan modification due to financial
hardship.

5) You or the client may contact the lender for a follow up.
6) The lender informs you of the result.
7) You present the results from the lender to your client to avoid foreclosure.

You will conduct homebuyer workshops, classes, and seminars in connection with your
mortgage mitigation service. You plan to spend half of your time on workshops, classes,
and seminars. You have not yet conducted any educational activities although you have
been providing mortgage mitigation counseling. You did not provide details regarding
how you will conduct these educational activities. Nor have you conducted any
fundraising to date. You plan to conduct fundraising activities once you receive non-
profit organization status. You do not have concrete fundraising plans other than two
solicitation letters to communities and governmental institutions.

Your service is available to any family that is delinquent on their mortgage. You have
conducted mortgage counseling and provided actual forms and logs for the people to
whom you have provided services. You stated that you have had no clients when we
asked the number of clients you have served. Later you explained that you do not think
of them as clients because you did not obtain them through marketing efforts. You do
not charge fees for your mortgage mitigation services. Instead, you will apply for HUD

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housing counseling agency certification to receive HUD grants or payments. You are
also seeking donations from the public.

You have five board members. Among them, L, your president and founder, is the only
director/employee who conducts mortgage mitigation counseling and educational
activities. His compensation is budgeted at p dollars annually along with a health
insurance benefit for each year in which you are in full operation. Your income is
expected to be at least $ annually during this period. We requested all of your
board minutes from your inception. You provided board minutes for one meeting that
recorded a resolution for your corporation reinstatement with the State of G. This
meeting was held on E. You sent additional board minutes for a meeting that recorded
an election of one additional board member. No other minutes were provided.

You stated that you have not had any income or expenses since your inception.
However, you have had a lease with M (an unrelated third party) for over two years and
the lease payments have been paid by L. You did not provide any evidence or indication
whether the lease payments made by L are a loan or a donation. You did indicate that
the lease, application fee, and all other fees have been paid out of L's own personal
funds and L was prepared for the upfront expenses to start a business.

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 exempt from tax if they
are organized and operated exclusively for charitable or educational purposes and no
part of their net earnings inures to the benefit of any private shareholder or individual.

Section 501(q) of the Code provides that organizations which provide “credit counseling
services” as a substantial purpose shall not be exempt from taxation under section
501(a) unless they are described in sections 501(c)(3) or 501(c)(4) and they are
organized and operated in accordance with the following requirements:

(1)(A) The organization--

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

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

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

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(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.

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(a)-1(c) of the regulations defines the words “private shareholder or
individual” in section 501 of the Code to refer to persons having a personal and private
interest in the activities of the organization.

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(c)(2) of the regulations provides that 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 1.501(c)(3)-1(d)(1)(ii) of the regulations provides that an organization must
show that it serves a public rather than a private interest and specifically that it is not
organized or operated for the benefit of private interests, such as designated
individuals, the creator or his family, shareholders of the organization, or persons
controlled, directly or indirectly, by such private interests.

Section 1.501(c)(3)-1(d)(2) of the regulations provides that the term “charitable,” is used
in section 501(c)(3) in its generally accepted legal sense and includes the relief of the
poor and distressed or of the underprivileged.

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

(a) The instruction or training of the individual for the purpose of improving or
developing his capabilities; or

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(b) The instruction of the public on subjects useful to the individual and beneficial to
the community.

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

The organization provided information to the public on budgeting, buying practices, and
the sound use of consumer credit through the use of films, speakers, and publications.
It aided low-income individuals and families who have financial problems by providing
them with individual counseling, and if necessary, by establishing budget plans. Under
the budget plan, the debtor voluntarily made fixed payments to the organization, holding
the funds in a trust account and disbursing the funds on a partial payment basis to the
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 ruling found that, by aiding low-income individuals and families who have financial
problems and by providing, without charge, counseling as a means for the orderly
discharge of indebtedness, the organization was relieving the poor and distressed.
Moreover, by providing the public with information on budgeting, buying practices, and
the sound use of consumer credit, the organization was instructing the public on
subjects useful to the individual and beneficial to the community. Thus, the organization
was exempt from federal income tax under section 501(c)(3) of the Code.

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

Outside the context of credit counseling, individual counseling has, in a number of
instances, been held to be a tax exempt charitable activity. Rev. Rul. 78-99, 1978-1
C.B. 152 (free individual and group counseling of widows); Rev. Rul. 76-205, 1976-1
C.B. 154 (free counseling and English instruction for immigrants); Rev. Rul. 73-569,
1973-2 C.B. 178 (free counseling to pregnant women); Rev. Rul. 70-590, 1970-2 C.B.
116 (clinic to help users of mind-altering drugs); Rev. Rul. 70-640, 1970-2 C.B. 117
(free marriage counseling); Rev. Rul. 68-71, 1968-1 C.B.249 (career planning education
through free vocational counseling and publications sold at a nominal charge).

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Overwhelmingly, the counseling activities described in these rulings were provided free,
and the organizations were supported by contributions from the public.

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

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

In Harding Hospital, Inc. v. United States, 505 F.2d 1068 (1974), the court held that an
organization seeking a ruling as to recognition of its tax-exempt status has the burden of
proving that it satisfies the requirements of the particular exemption statute.

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 typical section 501(c)(3) organizations. It had not solicited, nor had it
received, voluntary contributions from the public. Its only source of income was fees
from services, and those fees were set high enough to recoup all projected costs and to
produce a profit. Moreover, it did not appear that the corporation ever planned to
charge a fee less than “cost.” Finally, the corporation did not limit its clientele to
organizations that were section 501(c)(3) exempt organizations.

In 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.

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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 organizations were provided by government and private foundation
grants, contributions, and assistance from labor agencies and the United Way. An
incidental amount of their revenue was from service fees. Thus, the court concluded,
“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 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 was 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 Salvation Navy v. Commissioner, T.C.M. 2002-275 (2002), the Tax Court found that
one of the reasons why the organization did not qualify for exemption from federal
income tax was because it could not prove that it was not organized to serve the private
interests of its founder.

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."

Application of Law

Section 501(c)(3) of the Code sets forth two main tests for an organization to be
recognized as exempt. An organization must be both organized and operated
exclusively for purposes described in section 501(c)(3). Section 1.501(c)(3)-1(a)(1) of
the regulations. Based on the information you provided in your application and
supporting documentation, 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. See 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 are distinguishable from the organizations in Consumer Credit Counseling Service
of Alabama, above, and Rev. Rul. 69-441 by the methodology you use to conduct your
counseling activities because you do not offer counseling that is structured primarily to
improve your clients’ understanding of their financial problems or their skills in solving
them. Rather you are similar to the organization in Solution Plus, Inc. v. Commissioner,
above because your goal is not providing the best solution to homeowners who are

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experiencing a hardship, rather, you are providing a mitigation service. You gather
homeowners’ financial data and documents needed to submit to their lender for
mortgage mitigation, prepare loan mitigation paper work, search for the right mitigation
channel, and negotiate with lenders for lower mortgage payments. Because such work
does not provide a development from the relevant facts that would materially aid a
listener or reader in a learning process this is not educational. See Rev. Proc. 86-43,
above. Accordingly, you failed to establish that your interactions with clients provide
instruction or training “useful to the individual and beneficial to the community” within the
meaning of section 1.501(c)(3)-1(d)(3)(i) of the regulations.

Although you stated that educational workshops and seminars will be your primary
activity, you have not conducted any educational activities thus far. You have provided
mortgage mitigation services and have an office space for that. Moreover, you did not
provide a detailed plan for how, when, and where you will conduct your educational
activities, nor have you submitted copies of any educational materials, agendas or
schedule of sessions. See Harding Hospital, Inc. v. United States and Salvation Navy v.
Commissioner, above. You have the burden of proving that you satisfy the requirements
for exemption. Therefore, you are similar to Harding Hospital and Salvation Navy in that
you failed to provide a detailed plan of your proposed activities. Furthermore, even if
you conduct the educational workshops and seminars as indicated, you do not qualify
for exemption under section 501(c)(3) of the Code because your mortgage mitigation
service, which is not an exempt activity, is more than a substantial portion of your
activity. See, Better Business Bureau of Washington D.C., Inc. v. United States, 326
U.S. 279 (1945), in which the Supreme Court held that the presence of a single non-
exempt purpose, if substantial in nature, will destroy the exemption regardless of the
number or importance of truly exempt purposes.

Your Activities Are Not Charitable

Half of your time and resources are devoted to providing foreclosure consulting
(mortgage mitigation) services to any family that is delinquent on their mortgage. Such
families are not necessarily poor or distressed. Therefore, your foreclosure mitigation
services do not further charitable purposes. Helping any individual avoid taking a loss or
having to go through the foreclosure process does not provide relief to the poor and
distressed within the meaning of section 1.501(c)(3)-1(d)(2) of the regulations or serve
any other purpose recognized as charitable. Accordingly, you are unlike the
organizations described in Consumer Credit Counseling Service of Alabama, above and
Rev. Rul. 69-441, above which aided low-income individuals and families who have
financial problems, thereby relieving the poor and distressed.

You Have a Substantial Nonexempt Commercial Purpose

The courts have developed guidelines intended to help discern whether an organization
has a substantial nonexempt commercial purpose. See B.S.W. Group and Easter
House above. Generally, the factors proffered by courts focus on the nature of the
activities and how an organization conducts its business. Your activities consist of
providing mortgage mitigation services to individuals, which has no educational

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component. It consists solely of gathering information and sending the information to
lenders for negotiation. The fact that you do not charge fees directly to your clients does
not alleviate your commercial purpose. You will receive fee payments from HUD or its
intermediaries on behalf of your clients. Thus, you are similar to the organizations in
B.S.W. Group and Easter House, above, in the fee structure of your mortgage mitigation
services.

Your financial structure further demonstrates that you operate for a substantial
nonexempt commercial purpose. You indicated you will fundraise and _ solicit
government grants. However, you have not received any government grants and you do
not have a substantial plan to solicit grants in the future. There is also no evidence that
you have received contributions or gifts from disinterested members of the public. In
fact, your only source of income is from your founder, L. Accordingly, you are unlike the
organizations described in Consumer Credit Counseling Service of Alabama, above,
that received the bulk of their support from government and private foundation grants,
contributions, and assistance from labor agencies and the United Way (only an
incidental amount of their revenue was from fees). Your operational details strongly
indicate that you are financed entirely by revenue earned from the HUD payments for
mortgage mitigation services to homeowners who face foreclosure on their homes.
Receiving support primarily from payments for providing services is indicative of a
nonexempt purpose. See Easter House, above.

Inurement /Private Benefit

An organization is not operated exclusively for one or more exempt purposes if its net
earnings inure in whole or in part to the benefit of private shareholders or individuals.
Section 501(c)(3) of the Code; Section 1.501(c)(3)-1(c)(2) of the regulations. Further, a
fundamental requirement for an organization that seeks exemption from federal income
tax is that it benefits the public rather than its creator, shareholders, or persons having a
personal or private interest in the activities of the organization. You are operated in a
similar manner to L's private business in terms of governance and operation. Even
though you have five board members, there is no evidence that board members other
than L are actively involved in the organizational decision making process, including
board meetings. Other factors include all of your income has come from L, L was
prepared for the upfront expenses to start a business, L is the only compensated
person, and L's compensation, including benefits, amounts to more than half of your
total income and almost all of the proceeds. You have not demonstrated that your
structure and manner of operation do not result in inurement to L in the form of
compensation, payments for services and business referrals. You are similar to the
organizations in Harding Hospital, Inc. v. United States and Salvation Navy _v.
Commissioner, above, in that you cannot prove that you are not operated as L's private
business and your net earnings do not inure to L.

Section 501(q) of the Code
An organization that provides educational information on financial topics or financial
counseling to homeowners who are at risk of foreclosure is providing “credit counseling

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services” within the meaning of section 501(q)(4)(A) of the Code. Thus, even if you had
established that you engage in such activities as a substantial purpose, to be exempt
from taxation you must in addition to complying with the requirements of section
501(c)(3), comply with the provisions of section 501(q).

You do not meet the requirements under section 501(q)(1)(A)(i) of the Code. The Code
requires a credit counseling organization to provide credit counseling services tailored
to the specific needs and circumstances of consumers. Your service, however, only
focuses on the mortgage mitigation service. In fact, all you provide is the preparation of
necessary paperwork, sending the paperwork to the lender and following up with
lenders regarding modification offers. Therefore, you failed to meet the requirement of
section 501(q)(1)(A)(i) of the Code.

Had you established that you 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
because your activities are not 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 do not serve a public
rather than a private interest. In addition, you do not meet the requirements under IRC
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:

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;

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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, | 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.”

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:

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Mail to: Deliver to:

Internal Revenue Service

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 and Agreements

Enclosure, Publication 892