Determination 1314045: IRS denies exemption to a mortgage counseling organization

Plain-English summary

The IRS denied exemption to an organization that planned to counsel homeowners facing mortgage problems, help with loan modifications, and provide housing and financial education. It did not limit its services to low-income people, had not yet conducted its educational programs, and had not supplied enough detail about its HUD application or counseling methods. The IRS concluded that the counseling and mortgage-resolution services were substantially commercial and not sufficiently educational or charitable. It also found private-benefit concerns because the three related trustees would be compensated and the organization had not shown that its operations would avoid inurement. The organization additionally failed IRC § 501(q)'s requirements for tailored credit counseling and an independent governing body.

Ruling snapshot

• Question: Does a mortgage counseling and loan-modification organization qualify for exemption under IRC § 501(c)(3)?
• Outcome: denied
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 501(q), 6104(c), 6110, and 7428(b)(2); Treas. Reg. §§ 1.501(a)-1(c), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(c)(2), and 1.501(c)(3)-1(d)(1)(ii); Rev. Proc. 2012-9

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 201314045 Contact Person:
Release Date: 4/5/2013
Identification Number:

Date: 1/10/2013 Contact Number:
Employer Identification Number:
Form Required To Be Filed:

UIL: 501.32-00; 501.33-00; 501.36-01 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.

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.

Letter 4038(CG) (11-2005)
Catalog Number 476328

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

Sincerely,

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 476325

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Date: October 31, 2012 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
UIL #:s
501.32-00
501.33-00
501.36-01
Legend:
B =
D =
U =
V =
W =
xX =
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.

Issue

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

Facts

You were established for the purposes of counseling homeowners who are in trouble with their
Letter 4036

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mortgage payments, educating non-profit organizations and individuals about the Home
Affordable Modification Program and non-governmental housing aid programs, preventing
foreclosures, and advocating for consumers on banks' mishandling of loan modifications.

You were incorporated on date D as a nonprofit corporation under state B law. Your Articles of
Incorporation state that you are organized exclusively for charitable, religious, educational and
scientific purposes including for such purposes the making of distributions to organizations that
qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code, or the
corresponding section of any future federal tax code. Your articles also state you are
established for the “ ... purpose of educating, training, motivating and consulting individuals,
municipalities and business entities to retain their assets and/or minimize their losses incurred
by changes in the economy, their personal economic and financial circumstances and other
factors.”

Your primary activity is providing one-on-one housing counseling to homeowners in trouble with
their mortgages as a U.S. Department of Housing and Urban Development ("HUD") or a certified
counseling agency (_ %). One-on-one housing counseling, mortgage delinquency and default
resolution counseling occupies % of your housing counseling activities. The rest of your
activities ( %) consist of housing and financial seminars, workshops and classes to the public.
Your one-on-one housing counseling activities include Home Affordable Modification Program
("HAMP"). HAMP is a HUD program designed to help homeowners who are in trouble with their
mortgage payments. You do not have any income or asset limitation for your counseling
services. Your clients must have a clear hardship and be eligible for a modification or other
forms of mortgage assistance. You define the hardship as follows: reduction of income due to
underemployment, reduced pay or hours, decline in business earnings, death, disability or
divorce of a borrower or co-borrower; increase in expenses due to monthly payment reset, high
medical or health care costs, uninsured losses, increased utilities or property taxes; and
excessive monthly debt payments with creditors.

Your housing counseling focuses solely on residential property and is available for various types
of mortgage loans up to x dollars including FHA, VA, conventional, fixed, variable, and predatory
mortgages. At the initial housing counseling session, you collect the homeowners’ most current
mortgage statement, financials, and credit report. With the homeowner's authorization, you
obtain their mortgage information from lenders. During the session, you explain the aid
programs available for homeowners. You did not provide further details regarding how you
explain the aid programs. Your initial counseling lasts three hours. You perform a financial
analysis that matches the homeowners' needs. At the end of the initial counseling, you provide
the homeowners with a monthly financial statement, which shows their income, expenses and
debt and an analysis of their mortgage to income ratio and debt to income ratio.

In addition to housing counseling, you offer mortgage delinquency and default resolution
counseling services ("resolution services”) to homeowners who are either current or delinquent
on their mortgage and are financially eligible for a mortgage modification and/or forbearance.
For resolution services, you collect general information about the homeowners and the house, a
signed and dated limited power of attorney, and other necessary documents. Your home
advocacy representatives assist homebuyers in preparing the documentation for submission,

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ensure the accuracy and legitimacy of the homeowners' information, prepare the submission
package tailored according to the lenders’ guideline, follow up on the case, and send additional
documents, if necessary. You also negotiate with the lenders directly as an additional service, if
needed and requested. The goal of your Resolution Service is for homeowners to have a new
payment plan within % of the homeowners' gross income by lowering the interest, principal
reduction, and/or forbearance. You did not provide further details how you achieve the lower
interest, a principal reduction, and/or forbearance for the homeowners. You conduct a follow-up
counseling for the mortgage modification. At follow-up counseling, your counselors update the
homeowners on the status of their modifications and advise them about any additional
documentation.

A home advocacy representative can handle between 50-70 clients monthly. Your target is to
handle 500 clients monthly with a % [front-end debt-to-income] clearance rate. You assign a
specific advocate to a homeowner for quick modification, provide homeowners easy access to
their data via a secure online portal, and email them biweekly. You provide the homeowners an
option that a specific advocate acts as an authorized third party to communicate with lenders
directly. You have not submitted an application form to become a HUD or housing counseling
agency. We asked for a draft of the form. You did not provide us a draft copy citing you do not
have the draft and the filing of the form is dependant on funding.

Your housing and financial seminars, workshops and classes are open to the public. The
seminars include an introduction to a mortgage modification and how to apply. The workshops
explain how to make a monthly statement, a profit and loss statement, fill in the needed
documents for a mortgage modification, and how to present the income sources. You have not
conducted housing and financial seminars, workshops and classes. You do not have any
curriculum, materials, or any type of funding plan. All your educational activities are dependant
on funding.

You are governed by three trustees, U, V, and W. V and W are brother and sister and share the
same surname with U. U's and V's duties are "associations with the cities" and recruitment of
officers and home advocacy representatives. Both provide 160 hours of services to you per
month. W oversees inter non-profit relations, advertising and personal relations, and she
provides 80 hours of services to you per month. You indicate a trustee will be compensated at
nearly $100,000. You project that compensation to your governing members will reach x dollars
yearly. Your employees will consist of ten home advocacy representatives, five mortgage
counselors and five seminar leaders. Home advocacy representatives help your clients apply for
a loan modification, update their file, and make sure that the lenders have all the information
they need. Mortgage counselors help your clients find the resources and the right program.
Seminar leaders are in charge of conducting and organizing the seminars. Two-thirds of your
operation will be funded by HUD, certified counseling agencies, and other types of public
funding. The rest of your funding will come from receipts from admissions for housing and
financial seminars, workshops, classes, educational materials sold, and fundraising events.

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,

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

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

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

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

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

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

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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 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(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(d)(1)(ii) of the regulations provides that an applicant organization is not
organized or operated exclusively for one or more exempt purposes unless it serves a public
rather than a private interest. Thus, to meet the 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 non-profit organization formed to
help reduce personal bankruptcy by informing the public on personal money management and
aiding low-income individuals and families with financial problems was exempt under section
501(c)(3) of the Code. Its board of directors was comprised of representatives from religious
organizations, civic groups, labor unions, business groups, and educational institutions.

The organization provided information to the public on budgeting, buying practices, and the
sound use of consumer credit with films, speakers, and publications. It aided low-income
individuals and families who have financial problems by providing them with individual
counseling and, if necessary, by establishing budget plans. Under the budget plan, the debtor
voluntarily made fixed payments to the organization, holding the funds in a trust account and
disbursing the funds on a partial payment basis to the creditors. The organization neither

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charged fees for counseling services nor prorated their services. The organization did not make
loans to debtors or negotiate loans on their behalf. Finally, the organization relied upon
contributions, primarily from the creditors participating in the organization's budget plans, for its
support. Creditors were not required, though, to make such contributions as a condition of
participation.

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

Revenue Ruling 76-441, 1976-2 C.B. 147, presented two situations concerning school
operations. In the first scenario, a nonprofit school succeeded to the assets of a for-profit
school. While the former owners were employed in the new school, the board of directors was
completely different. The ruling concludes that the transfer did not serve private interests. Part
of that conclusion was based on the independence of the board. In the second scenario, the for-
profit school converted to a nonprofit school. The former owners became the new school's
directors. The former owners/new directors benefited financially from the conversion. The ruling
concludes that private interests were served.

Rev. Proc. 86-43, 1986-2 C.B. 729, describes the methodology test the 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.

Rev. Proc. 2012-9, 2012-2 |.R.B. 261, provides that exempt status may be recognized in
advance of the organization’s operations if its proposed operations are described in sufficient
detail to permit a conclusion that it will clearly meet the particular requirements for exemption

pursuant to the section of the Code under which exemption is claimed. Section 4.03(2) states
that the organization must fully describe all of the activities in which it expects to engage,
including the standards, criteria, procedures or other means adopted or planned for carrying out
the activities, the anticipated sources of receipts, and the nature of contemplated expenditures.

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In Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (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 American Institute for Economic Research v. United States, 302 F. 2d 934 (Ct. Cl. 1962) cert.
denied 372 U.S. 976 (1963), the court considered an organization that provided analyses of
securities and industries and of the economic climate in general. It sold subscriptions to various
periodicals and services providing advice for purchases of individual securities. The court noted
that education is a broad concept, and assumed arguendo that the organization had an
educational purpose. However, the totality of the organization’s activities, which included the
sale of many publications as well as the sale of advice for a fee to individuals, was indicative of a
business. Therefore, the court held that the organization had a significant non-exempt
commercial purpose that was not incidental to the educational purpose, and was not entitled to
be regarded as exempt.

In Harding Hospital, Inc. v. United States, 505 F.2d 1068 (6th Cir. 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 Tax Court found that a
corporation formed to provide consulting services did not satisfy the operational test under
section 501(c)(3) of the Code because its activities constituted the conduct of a trade or
business that is ordinarily carried on by commercial ventures organized for profit. Its primary
purpose was not charitable, educational, or scientific, but rather commercial. In addition, the
court found that the organization's financing did not resemble that of the typical section 501(c)(3)
organizations. It had not solicited, nor had it received, voluntary contributions from the public. Its
only source of income was fees from services, and those fees were set high enough to recoup
all projected costs and to produce a profit. Moreover, it did not appear that the corporation ever
planned to charge a fee less than “cost.” Finally, the corporation did not limit its clientele to
organizations that were section 501(c)(3) exempt organizations.

In Consumer Credit Counseling Service of Alabama, Inc. v. United States, 44 A.F.T.R. 2d (RIA)
1401 (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 was 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

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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. As such, the community and education
counseling assistance programs were the agencies’ primary activities. The primary sources of
revenue for these organizations were provided by government and private foundation grants,
contributions, and assistance from labor agencies and United Way. An incidental amount of
their revenue was from service fees. Thus, the court concluded that “each of the plaintiff
consumer credit counseling agencies was an organization described in section 501(c)(3) as a
charitable and educational organization.” See also, Credit Counseling Centers of Oklahoma,
Inc, v. United States, 45 A.F.T.R. 2d 80 (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 above.

In La Verdad v. Commissioner, 82 T.C. 215 (1984), an organization was formed to provide
education and charity, but failed to provide sufficient details regarding its proposed operations.
The court held that it failed to prove that it would operate exclusively for exempt purposes under
section 501(c)(3) of the Code.

In Easter House v. U.S., 12 Cl. Ct. 476 (1987), affd, 846 F. 2d 78 (Fed. Cir.), cert. denied, 488
U.S. 907 (1988), the Claims Court found an organization that operated an adoption agency was
not exempt under section 501(c)(3) of the Code because a substantial purpose of the agency
was a non-exempt commercial purpose. The court concluded that the organization did not
qualify for exemption under section 501(c)(3) because its primary activity was placing children
for adoption in a manner indistinguishable from that of a commercial adoption agency. The court
rejected the organization's argument that the adoption services merely complemented the health
related services to unwed mothers and their children. Rather, the court found that the health-
related services were merely incident to the organization's operation of an adoption service,
which, in and of itself, did not serve an exempt purpose. The organization's sole source of
support was the fees it charged adoptive parents, rather than contributions from the public. The
court also found that the organization competed with for-profit adoption agencies, engaged in
substantial advertising, and accumulated substantial profits. Accordingly, the court found that the
"business purpose, and not the advancement of educational and charitable activities’ purpose of
plaintiff's 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 (7th Cir. 1991), the Court of Appeals upheld a
Tax Court decision that an organization operating restaurants and health food stores in a
manner consistent with the doctrines of the Seventh Day Adventist Church did not qualify for
exemption under section 501(c)(3) of the Code because the organization was operated for a
substantial non-exempt commercial purpose. The court found that the organization's activities
were "presumptively commercial" because the organization was in competition with other
restaurants, engaged in marketing, and generally operated in a manner similar to commercial
businesses.

In KJ's Fund Raisers, Inc. v. Commissioner, T.C. Memo 1997-424 (1997), affd, 82 AFTR 2d
7092 (1998), the Tax Court found that another gaming organization was not exempt. While the
organization raised money for charitable purposes, it also operated for the substantial benefit of
private interests. The organization's founders, Kristine Hurd and James Gould, were the sole
owners of a bar, KJ's Place. The organization, through the owners and employees of KJ's
Place, sold lottery tickets exclusively at KJ's Place during regular business hours. While in KJ's
Place, the lottery ticket purchasers were sold beverages. The initial directors were Hurd, Gould,
and a related individual. The initial board was replaced several times until Hurd and Gould were
no longer on the board. At all times Hurd and Gould were the organization's officers. Salaries
had been paid to Hurd and Gould and rent had been paid to KJ's Place. The organization
maintained that the fact that salaries and rent were no longer paid in this fashion indicated the
independence of the board. The Court took another view: "Although those practices ceased and
are not in issue here, the current board of directors is composed of at least the majority of the
same members who allowed those amounts to be paid." This strongly suggests that Hurd and
Gould are free to set policy for their own benefit without objection from the board.

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

New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), was an action for
declaratory judgment that the petitioner brought to challenge the denial of his application for
exempt status. The court, in finding that the actual purposes displayed in the administrative
record supported the Service’s denial, stated “It is well-accepted that, in initial qualification cases
such as this, gaps in the administrative record are resolved against the applicant.”

The court noted that if the petitioner had evidence that contradicted these findings, it should
have submitted it as part of the administrative process. The court also highlighted the principle
that exemptions from income tax are matters of legislative grace.

Application of Law

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. You failed to establish that you are operated
exclusively for one or more exempt purposes. See section 1.501(c)(3)-1(c)(1) of the regulations.
Further details for this determination are set forth below.

Your Housing Counseling Activities Are Not Educational

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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 housing counseling and resolution services that are
structured primarily to improve your clients’ understanding of their financial problems or their
skills in solving them. It is not an educational activity when you assess and analyze a
homeowner's financial situation and 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. See Rev. Proc. 86-43, above. During the counseling, you provide
information related to housing aid programs and analysis to the homeowners, which may contain
some educational methodology; however, you did not provide further explanation or detail how
the information is educational. Overall, your housing counseling is not educational. Also, you
failed to establish that your interactions with clients provide instruction or training “useful to the
individual and beneficial to the community” within the meaning of section 1.501(c)(3)-1(d)(3)(i) of
the regulations.

You Are Not Operated Exclusively for Charitable Purposes

More than a substantial amount of your time and resources are devoted to providing housing
counseling and resolution services to any individuals who are in a hardship. Your definition of
hardship does not include the poor and distressed. Providing the mortgage mitigation service
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 because these individuals are not
necessarily poor and distressed. The individuals who are eligible for a modification or other
forms of mortgage assistance include all income level individuals including high-income
individuals. Thus, you are unlike the organization described in Rev. Rul. 69-441, above, which
aided low-income individuals and families who have financial problems, and relieved the poor
and distressed within the meaning of section 1.501(c)(3)-1(d)(2) of the regulations.

You Have a Substantial Non-exempt Purpose

Your application and responses strongly demonstrate that you operate for the substantial
commercial purpose of providing housing counseling and resolution services to the public. See
Better Business Bureau of Washington D.C.., Inc. v. United States, 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 housing
counseling and resolution services are no different from those of a commercial mortgage
mitigation business. The fact that your income source is governmental grants would not change
your commerciality because the grants are basically the fees that you charge to governments
instead of your clients. Furthermore, the fact that you concentrated on housing counseling and
resolution services without any educational components indicate commercial motive. In
addition, your housing counseling and resolution services directly competes with commercial
entities that conduct housing counseling and mortgage mitigation services. The courts found
that an organization that conducts a commercial business and competes with commercial
companies does not qualify for exemption under 501(c)(3) in Easter House v. U.S. and Living

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Faith, Inc. v. Commissioner, regardless of the organizations’ doctrines. You therefore do not
operate exclusively for exempt purposes. See section 1.501(c)(3)-1(c)(1) of the regulations.

The commerciality doctrine has been debated by numerous courts. The classic cases on the
commerciality are found in B.S.W. Group, Inc. v. Commissioner and Airlie Foundation v.
Commissioner, above. The courts decisively concluded that running a consulting service and a
conference center are not an exempt activity for the reason of commerciality, which is applicable
to your housing counseling and resolution services. In addition, the court noted the dependency
of the income from the operation, which is also similar to you, since most of your income will
come from payments for services. The court in American Institute for Economic Research v.
United States, above, applied an even more stringent interpretation. The court held that an
educational organization was not entitled to exemption because it conducted the sale of
publications as well as the sale of advice for a fee to individuals. You are similar in terms of your
selling of resolution services. Accordingly, your commercial activities are evidence of more than
an insubstantial non-exempt commercial purpose.

Inurement/Private Benefits

A fundamental requirement for an organization that seeks exemption from federal income taxes
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. See section 1.501(c)(3)-1(d)(1)(ii) of the
regulations. You have not shown that your organizational structure and manner of operation do
not result in inurement to your governing members U, V, and W . Your related board of
directors, your compensation policies, and your operations do not establish that you are
operated for public interests as opposed to private interests. You are similar to the organization
in KJ's Fund Raisers, Inc. v. Commissioner in that you do not have checks and balances over
your founders' compensation. The court ruled against KJ's Fund Raisers even though it had
independent board members. It raised money for charitable purposes but because of the
presence of substantial private benefits to the bar owners, the court ruled that KJ’s was not
exempt. Such private benefits included: the founders were the sole owners of the bar, lottery
tickets were sold exclusively at the bar during the regular business hours, beverages were sold
to ticket purchasers, and rental payments were made to the bar.

You do not have independent board members, which makes you similar to the second situation
in Revenue Ruling 76-441. This ruling confirms the importance of an independent board. The
ruling concludes that private interests were served because the former owners became the new
school's directors. Your board of directors are related and you have not established how
compensation of x dollars to your officers is reasonable. Therefore, you have not establish that
the private interests of U, V, and W will not result in inurement.

Section 501(q) of the Code

An organization that provides educational information on financial topics or financial counseling
to homeowners who are at risk of foreclosure is providing “credit counseling services’ within the
meaning of section 501(q)(4)(A) of the Code. Thus to be exempt from taxation you must, in

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addition to complying with the requirements of section 501(c)(3), comply with the provisions of
section 501(q).

All of your governing members are compensated for the work they provide for you. Therefore,
your governing body does not comply with section 501(q)(1)(D)(ii) that requires 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.

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

Failure to Establish Qualification for Recognition of Exempt Status

An applicant is required to submit sufficient information during the application process for the
Service to conclude that the organization is in compliance with the organizational and
operational requirements of section 501(c)(3) before a ruling is issued. Denial of exemption may
be based solely upon failure to provide information describing in adequate detail how the
operational test will be met. See La Verdad v. Commissioner and section 4.03 of Rev. Proc.
2012-9, above. In many instances, you did not provide explanations required by the application.
For example, you did not explain how you applied for a HUD housing counseling agency even
though your main source of income will be from HUD grants. In fact, you failed to provide a draft
application form, which is the first step of being a HUD housing counseling agency. 40% of your
activity consists of housing and financial seminars, workshops and classes. You did not show
how you actually carry out such activities. Your reason for not having any plans or necessary
draft form of applications is that you do not have any funds yet. Exemption from federal income
tax is not a right but rather a matter of legislative grace. See New Dynamics Foundation, above.
In addition, an organization has the burden of providing sufficient substantive information
regarding its activities and operations to establish entitlement to tax-exempt status. See Harding
Hospital, Inc. v. United States, above. Based on the facts presented, you failed to provide an
adequate basis for us to determine that you are organized and operated exclusively for exempt
purposes. See La Verdad v. Commissioner.

Conclusion

In summary, you are not operated exclusively for educational or charitable purposes.
Specifically you fail the operational test for exemption under section 501(c)(3) of the Code
because your housing counseling and resolution services are commercial in nature and you did

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not establish that your net earnings will not inure in whole or in part to the benefit of private
shareholders or individuals. You also fail to qualify under section 501(q) of the Code because
your housing counseling and resolution services are not tailored to specific individuals' needs
and you compensate all of your governing members. In addition, you failed to provide sufficient
information in your application to enable us to determine that you are eligible for recognition of
exempt status. 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, under the heading “Regional Office Appeal”. The statement of facts (item 4)
must be accompanied by the following declaration:

“Under penalties of perjury, I 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

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part, that a declaratory judgment or decree shall not be issued in any proceeding unless the Tax
Court, the United States Court of Federal Claims, or the District Court of the United States for
the District of Columbia determines that the organization involved has exhausted all of the
administrative remedies available to it within the IRS.

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

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

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

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

lf 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