Determination 1314048: IRS denies exemption to a fee-based credit restoration organization

Plain-English summary

The IRS denied tax-exempt status to a nonprofit that planned to provide credit restoration, identity theft protection, credit education, and related services. The organization charged membership and service fees, did not waive those fees for people who could not afford them, and expected all of its income from those fees. The IRS concluded that the organization failed the organizational and operational tests because its governing documents did not limit its purposes to exempt activities and its services were substantially commercial rather than educational or charitable. The IRS also found that the organization had not shown its activities would avoid private benefit and inurement, and that its structure did not satisfy the governing-body requirement in IRC § 501(q). The final determination followed the organization's failure to protest an earlier proposed adverse determination.

Ruling snapshot

• Question: Does a fee-based credit restoration and identity theft protection organization qualify for exemption under IRC § 501(c)(3)?
• Outcome: denied
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 501(q), 6104(c), and 6110; Treas. Reg. §§ 1.501(a)-1(c), 1.501(c)(3)-1

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 201314048 Contact Person:
Release Date: 4/5/2013
Identification Number:

Date: January 10, 2013 Contact Number:
Employer Identification Number:
Form Required To Be Filed:

VIL: 501.32-00; 501.32-01; 501.33-00 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 476328

2

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 476328

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Date: November 9, 2012 Contact Person:

Identification Number:

Contact Number:

FAX Number:

Employer Identification Number:
LEGEND: UIL:
B = date 501.32-00
C = state 501-32-01 |
D = individual 501.33-00

e = dollar amount
f = dollar amount
G = business

Dear

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

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

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

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

Facts
You are a non-profit corporation formed on B under the laws of the State of C. Your
Articles of Incorporation state in Article Three that your purpose is:

to provide full service credit restoration, which may involve credit analysis,
dispute of erroneous information, identity theft protection, and a personal
consultant on call. The quasi-public objective is to benefit the public by increasing
the public’s credit health and improve the proper functioning of the credit system.

Your Board of Directors is composed of four individuals, none of whom are
compensated. D is compensated as your executive officer, however, he is not a
member of the Board of Directors.

Your activities include full service credit restoration, identity theft protection and group
education seminars on credit related topics. Approximately % of your time is spent
on presenting group seminars and % of your time is spent on providing credit
restoration/identity theft services. Your website allows a potential client to chat live with
a consultant or to request services. In addition, a section on credit education includes a
glossary of credit terms, credit laws, financial calculators, sample credit reports and
access to educational videos on credit related topics.

You have entered into a licensing agreement with G, an unrelated 3rd party. The
licensing agreement covers the software and technology used to provide your services
to members. The agreement provides for an initial payment to the developer as well as
a royalty per user that enters into an agreement for your identity theft or credit
restoration services. You do not pay a royalty to G for members receiving only the 90-
day free membership. You selected G because of their ability to modify their software to
meet your needs.

You partner with various city business development groups to present seminars to
inform their members and prospective members on the importance of credit. A free 90-
day credit restoration membership is provided to attendees of the seminars, if desired.
In addition, free 90-day membership service cards are provided to businesses that
regularly encounter individuals applying for credit such as car dealerships and mortgage
companies. You work with these businesses to provide information regarding your
services to applicants who are denied credit. At the expiration of the 90-day free
membership, members can apply for a yearly membership providing credit restoration
and identity theft protection services. The standard membership fee is e dollars per year
for both credit restoration and identity theft protection services for four members of the
same household. You also offer individual credit restoration services for a membership
fee of f dollars per year. A payment plan is available upon a showing of financial
hardship, which is determined on a case-by-case basis. You have a minimum charge of
f dollars. You do not waive your fees for those individuals who cannot afford to pay for
your services.

Letter 4036(CG) (11-2005)

You have held 50-60 seminars to date. You have held seminars at least three times a
month for smaller venues through various companies such as banks, insurance
companies, tax preparation services, automotive dealerships and mortgage companies.
The number of attendees varies from 15-50+ depending upon the venue and location.
All seminars are currently hosted by D.

Your credit restoration service includes a full credit analysis as well as a break down of
the client's credit report. The credit analysis/breakdown of the credit report is done over
the phone or in person, however, it is not provided in a written format. A certified credit
consultant is assigned to each member. The service also includes mediation for
collection of past due accounts; customized letters for inaccurate or erroneous credit
report items; follow-up/correspondence with credit bureaus; assistance in re-
establishing valid credit lines; and an e-book on obtaining financial freedom.

Identity theft protection includes preventative measures; staggered copies of credit
report; review for suspicious accounts; removal from pre-approved/junk mail lists; ebook
on how to prevent identity theft at home; removal of all inaccurate items from credit
report; and a full service restoration in the event of an identity theft. You have assisted
over 8,500 clients, and serviced over 1,400 members through your 90-day free program.
The free service includes the full credit analysis, education materials and support.
Typically, within the 90-day free period, you are able to remove most errors appearing
on the credit reports and provide the client with a clear cut idea of what they need to do
to re-establish their credit and optimize their current score. About % of your members
come through the seminars, % from referrals, % from auto dealerships, % from
mortgage companies and % from your website.

The mediation component of your credit restoration service involves working with the
member to pay a fair amount to each creditor. You try to help your members save
money by assisting with negotiation of reduced payments. You assist clients in re-
establishing valid credit and placing fraud alerts on all three major credit bureaus if
desired. In the event identity theft occurs you guide the member through filling out the
appropriate fraud affidavits and police reports as well as forwarding the completed
information to the credit bureaus. Follow-up to verify removal of the disputed items is
also provided.

Your promotional materials provide comparisons of your services/prices to for-profit
providers of similar services. You state that you provide all of the various services for a
fraction of the cost of the listed for-profit providers.

You employ six credit consultants. The consultants are responsible for educating and
walking clients through the credit restoration and optimization process. All new
employees undergo two weeks of classroom training, followed by two weeks of on-the-
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Letter 4036 (CG) (11-2005)

job training with an experienced consultant. Your employee manual provides detailed
instructions for consultants to follow regarding client interactions. Your consultants are
required to present all of your services every time they contact a client. In addition,
consultants must strive to have at least one item removed on the first set of letters even
if it is as simple as an address variation to get “customer engaged in the process.”

Your budgets indicate that all of your income is expected from membership fees (fees
for your services). Finally, you do not plan to solicit grants or donations nor do you have
a fundraising plan.

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 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(b)(1)(i) of the regulations provides that an organization is
organized exclusively for one or more exempt purposes only if its articles of
organization:

(a) Limit the purposes of such organization to one or more exempt purposes, and

(b) Do not expressly empower the organization to engage, otherwise than as an
insubstantial part of its activities, in activities that in themselves are not in
furtherance of one or more exempt purposes.

Section 1.501(c)(3)-1(b)(4) of the regulations provides that an organization's assets
must be dedicated to an exempt purpose, either by an express provision in its governing
instrument or by operation of law.

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.

Letter 4036(CG) (11-2005)

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
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

(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. The organization did not charge fees for counseling
services or proration services. 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

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Letter 4036 (CG) (11-2005)

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.

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 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.

Letter 4036 (CG) (11-2005)

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 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 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

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Letter 4036 (CG) (11-2005)

service is its primary goal" and held that the organization was not operated exclusively
for purposes described in section 501(c)(3). Easter House, 12 Cl. Ct. at 485-486.

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

In Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C., 2003), the court
relied on the “commerciality” doctrine in applying the operational test. Because of the
commercial manner in which this organization conducted its activities, the court found
that it was operated for a non-exempt commercial purpose, rather than for a tax exempt
purpose. As the court stated:

Among the major factors courts have considered in assessing
commerciality are competition with for profit commercial entities; extent
and degree of below cost services provided; pricing policies; and
reasonableness of financial reserves. Additional factors include, inter
alia, whether the organization uses commercial promotional methods
(e.g. advertising) and the extent to which the organization receives
charitable donations.

In Solution Plus, Inc. v. Commissioner, T.C. Memo. 2008-21, the Tax Court held that a
credit counseling organization was not exempt under section 501(c)(3) because it was
not organized and operated exclusively for educational or charitable purposes and
impermissibly served private interests. The organization was formed by an individual
with experience selling debt management plans. The founder and his spouse were the
only member's of the organization’s board of directors. The organization did not have
any meaningful educational program or materials for providing to people who contacted
the organization, and its financial education seminars for students constituted an
insignificant part of the organization’s overall activities.

The Court held that the organization's purposes were not educational because its
"activities are primarily structured to market, determine eligibility for, and enroll
individuals in DMPs." Its purposes are not to inform consumers “about understanding
the cause of, and devising personal solutions to, consumers’ financial problems," or "to
consider the particular knowledge of individual callers about managing their personal
finances." The Tax Court also held that the organization's purposes were not charitable

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Letter 4036(CG) (11-2005)

because "its potential customers are not members of a [charitable] class that are
benefited in a 'non-select manner * * * because they will be turned away unless they
meet the criteria of the participating creditors.”

The Tax Court further held the organization would operate for the private interests of its
founder because the founder and spouse were the only directors, the founder was the
only officer and employee, and his compensation was based in part on the
organization’s DMP sales activity levels. The organization was “a family-controlled
business that he personally would run for financial gain, using his past professional
experience marketing DMPs and managing a DMP call center.” The Court further held
that the organization’s principal activity of providing DMP services, which were only
provided if approved by a caller's creditors, furthered the benefit of private interests.

Finally, the Tax Court held that the facts in Credit Counseling Services of Alabama _v.
United States, 78-2 U.S.T.C. 9660 (D.D.C. 1978) “stand in stark contrast” because “the
sale of DMPs is the primary reason for [Solution Plus's] existence, and its charitable and
educational purposes are, at best, minimal."

Application of 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).
You fail both tests.

Organizational Test

To demonstrate that it is organized exclusively for exempt purposes an organization
must have a valid purpose clause and a valid dissolution provision in its organizing
document. Sections 1.501(c)(3)-1(b)(1)(i) and 1.501(c)(3)-1(b)(4) of the regulations.
Your Articles provide that your specific purpose is to provide full service credit
restoration, which may involve credit analysis, dispute of erroneous information, identity
theft protection, and a personal consultant on call. Your Articles do not limit your
purposes to one or more exempt purposes. Specifically, providing credit restoration and
identity theft protection can serve a nonexempt purpose. As you do not have a valid
purpose clause, you do not meet the organizational test. Section 1.501(c)(3)-1(b)(1)(i) of
the regulations.

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.

Letter 4036(CG) (11-2005)

The presence of a single non-exempt purpose precludes exemption regardless of any
valid exempt purposes. Better Business Bureau of Washington, D.C. v. U.S You failed
to establish that you are operated exclusively for one or more exempt purposes.

Your Activities Are Not Exclusively Educational

You are distinguishable from the organizations in Consumer Credit Counseling Service
of Alabama, supra, and Rev. Rul. 69-441 by the methodology you use to conduct your
counseling activities. Your services include appointments, negotiation with creditors,
correspondence with credit bureaus, information regarding certain lenders, preventative
measures to identify and prevent identity theft and restoration in case of actual identity
theft. Only one meeting with the client is required before you begin providing credit
restoration and/or identity theft services. Unlike the organizations in Consumer Credit
Counseling Service of Alabama, supra, and Rev. Rul. 69-441, supra, you do not offer
counseling sessions that are structured primarily to improve your clients’ understanding
of their financial problems or their skills in solving them. You provided no evidence that
your employees do anything more than review a client's credit report and send letters to
the credit bureaus regarding removing specific items from the report. Repairing or
communicating with a client on their credit report is not an educational activity because
it does not provide a development from the relevant facts that would materially aid a
listener or reader in a learning process. Rev. Proc. 86-43, supra.

Although your website contains some educational content and you distribute some
educational literature at your seminars, these educational components are incidental to
the provision of credit restoration and/or identity theft protections services. Furthermore,
you did not indicate who provides any educational aspect of your program and your
employees do not have education, instruction, or training as a responsibility. Therefore,
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 do not operate a substantive on-going educational program; % of your time is .
spent on the provision of services. While you do provide training to your employees, the
training is related to the provision of services for a fee. Like the organization in Solution
Plus, supra, you did not provide evidence that you help clients develop an
understanding of the cause of their financial problems or a plan to address their
financial problems. You provided no evidence that you intend to establish long-term
counseling relationships with your clients.

Your operational focus is on generating revenue in the form of fees from your credit
restoration and identity theft protection services. Your only source of revenue is fees
from members. Fees charged to the member include the following: e dollars — credit
restoration and identity theft for one year and f dollars — individual credit restoration.
10

Letter 4036 (CG) (11-2005)

Your efforts are focused on repairing the bad credit of clients in exchange for a fee.
Similar to the organization in Solution Plus, supra, your efforts are focused on informing
potential clients about the range of services available and signing them up for either
your credit restoration service or identity theft protection service. Like the organizations
described in Solution Plus, supra, Better Business Bureau, supra, and Easter House,
supra, your activities have an underlying commercial motive. Thus, your activities are
not exclusively educational within the meaning of section 501(c)(3).

Your Activities Are Not Charitable

Most of your time and resources are devoted to providing services for a fee. Credit
restoration and identity theft protection services that you provide to members do not
further charitable purposes. Helping members improve their credit and prevent identity
theft 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.

The credit restoration and identity theft protection services you provide to individuals do
not further charitable purposes. You indicated that the services are open to anyone. You
charge fees for the all of your services. You do not waive your fees for those clients who
cannot afford to pay for your services, therefore, your services are not directed
exclusively to low-income individuals. 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. Primarily 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 developed guidelines intended to help discern whether an organization
has a substantial nonexempt commercial purpose. See e.g., B.S.W. Group, supra;
Easter House, supra; Airlie, supra; Living Faith, supra. Generally, the factors proffered
by courts focus on the nature of the activities and how an organization conducts its
business.

Your activities consist exclusively of providing services to clients for a fee to anyone
who can afford to pay your fee. Your activities do not further an exempt purpose, but
rather a substantial nonexempt commercial purpose. The fees do not entitle your clients
to any educational programs or services beyond an e-book and some literature
regarding credit-related topics. Helping members remove bad/negative credit, outdated
credit, inaccurate credit, obsolete credit, erroneous credit, or incomplete credit from the
client's credit report or otherwise upgrade the credit report under the law serves a

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Letter 4036(CG) (11-2005)

commercial purpose. This is evidenced by the fact that your literature compares your
services/fees to those of similar for-profit service providers. Providing the same services
as those provided by a for-profit also demonstrates that you are operating like a
commercial organization seeking to maximize profits, rather than a charitable or
educational organization seeking to serve the public. Thus, similar to the organization in
Easter House, supra, the profit-making fee structure of your consulting services
overshadows any of your other purposes.

Your finance structure further demonstrates that you operate for a substantial
nonexempt commercial purpose. You indicated that you will operate solely based upon
the receipt of fees for services. You do not fundraise or solicit donations and grants.
You do not have a substantive plan to solicit grants or donations in the future.
Accordingly, you are unlike the organizations described in Consumer Credit Counseling
Service of Alabama, supra, 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 operations
are financed entirely by fees earned from providing services to clients. Receiving
support primarily from fees for services is indicative of a commercial purpose. Easter
House, supra.

Like the organizations in Easter House, supra, Airlie, supra, and Living Faith, supra, you
are in direct competition with commercial businesses because you conduct activities
generally conducted for a profit. In fact, you conduct the same activities as a
commercial firm as indicated in your promotional materials. You conduct many of your
activities in the same manner as commercial enterprises. Accordingly, your activities
evidence a substantial commercial purpose.

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 and Better
Business Bureau of Washington, D.C, supra. Therefore, you are not operated for an
exempt purpose.

Private Benefit

An organization is not organized or operated exclusively for exempt purposes unless it
serves a public rather than a private interest. See section 1.501(c)(3)-1(d)(1)(ii) of the
regulations. The credit restoration services you provide to clients substantially benefit
the for-profit corporations referring clients to you. Providing credit restoration services to
individuals who have been denied credit when attempting to purchase a car or a home
facilitates new clients for the companies making the referrals. 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).

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Letter 4036 (CG) (11-2005)

Conclusion

Based on the facts and information provided, you do not meet the organizational or
operational tests, 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 are serving public, rather than private purposes. 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 that 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 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. To be
represented during the appeal process, you must file a proper power of attorney, Form

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Letter 4036 (CG) (11-2005)

2848, Power of Attomey and Declaration of Representative, if you have not already
done so. For more information about representation, see 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 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 to you. 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 also 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

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Letter 4036(CG) (11-2005)