Other 1318014: IRS revokes a credit-counseling organization’s exemption

Plain-English summary

The IRS revoked a credit-counseling organization’s exemption under section 501(c)(4), effective January 1, 20XX. The organization initially proposed debt-management and counseling services for needy individuals, but later stopped enrolling new clients and maintained existing debt-management accounts administratively. The IRS found no educational outreach, inadequate support for employee training and expenses, and substantial benefits to a selected client group. It concluded that the organization operated in a business-like manner and did not primarily further social welfare.

Ruling snapshot

• Question: Whether the organization was operated exclusively for exempt purposes under section 501(c)(4).
• Outcome: Revocation.
• Key authorities: IRC §§ 501(c)(4), 509(a)(2), 6033; Treas. Reg. §§ 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(2), 1.501(c)(3)-1(d)(3)(b), 1.501(c)(4)-1(a)(1), 1.501(c)(4)-1(a)(2), 1.6001-1(c); Rev. Rul. 65-299; Rev. Rul. 86-98.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE Division, EO Grp 7983
9350 Flair Dr. 2nd Floor
TAX EXEMPT AND El Monte, CA 91731-2885

. GOVERNMENT ENTITIES

DIVISION

April 2, 2008

Taxpayer Identification Number:
Number: 201318014

Release Date: 5/3/2013 Form:
Tax Year(s) Ended:
ORG
ADDRESS Person to Contact/ID Number:
UIL: 501.04-00 Contact Numbers:
Telephone:
Fax:

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Dear

We have enclosed a copy of our report of examination explaining why we believe an
adjustment of your organization's exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed
Publication 3498, The Examination Process, explains how to appeal an Internal
Revenue Service (IRS) decision. Publication 3498 also includes information on your
rights as a taxpayer and the IRS collection process.

If you request a conference, we will forward your written statement of protest to the
Appeals Office and they will contact you. For your convenience, an envelope is
enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals
conference, or if you do not request an Appeals conference, you may file suit in United
States Tax Court, the United States Court of Federal Claims, or United States District
Court, after satisfying procedural and jurisdictional requirements as described in
Publication 3498.

Letter 3610 (04-2002)
Catalog Number 34801V

You may also request that we refer this matter for technical advice as explained in
Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues. If a
determination letter is issued to you based on technical advice, no further administrative
appeal is available to you within the IRS on the issue that was the subject of the
technical advice.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to
Proposed Adverse Action. We will then send you a final letter modifying or revoking
exempt status. If we do not hear from you within 30 days from the date of this letter, we
will process your case on the basis of the recommendations shown in the report of
examination and this letter will become final. In that event, you will be required to file
Federal income tax returns for the tax period(s) shown above. File these returns with
the Ogden Service Center within 60 days from the date of this letter, unless a request
for an extension of time is granted. File returns for later tax years with the appropriate
service center indicated in the instructions for those returns.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate
assistance is not a substitute for established IRS procedures, such as the formal
appeals process. The Taxpayer Advocate cannot reverse a legally correct tax
determination, or extend the time fixed by law that you have to file a petition in a United
States court. The Taxpayer Advocate can, however, see that a tax matter that may not
have been resolved through normal channels gets prompt and proper handling. You
may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you
prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number
shown in the heading of this letter. If you write, please provide a telephone number and
the most convenient time to call if we need to contact you.

Letter 3610 (04-2002)
Catalog Number 34801V

Thank you for your cooperation.

Sincerely,

Marsha A. Ramirez
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018

Report of Examination
Envelope —

Letter 3610 (04-2002)
Catalog Number 34801V

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 12/31/20XX,
12/31/20XKX
LEGEND
ORG - Organization name XX — Date EIN - EIN Address - address
City - city State - state POA - poa President - president
Treasurer — treasurer Secretary - secretary CEO — CEO BM-1 through
BM-6 — 15 through 6° BM CO-1 through CO-7 - 1° through 7*" COMPANIES
Issue:

Whether ORG (ORG) was operated exclusively for exempt purposes described within
Internal Revenue Code section 501(c)(4):

a. Whether ORG is engaged primarily in activities that accomplish an exempt
purpose?

b. Whether more than an insubstantial part of ORG’s activities is in furtherance of a
non-exempt purpose?

c. Whether ORG was operated for the purpose of serving a private benefit rather
than public interests?

Facts

Background of ORG:

ORG (ORG), with Employer Identification Number (“EIN”) EIN, was initially
incorporated in the State of State on March 26, 20XX. The specific purpose of the
corporation was to provide credit counseling and debt management services.

ORG initially filed Form 1023, Application for Recognition of Exemption under
Section 501(c) (3) of the Internal Revenue Code, for the Service to make a
determination whether ORG meets the public support test under IRC 509(a)(2). The
application was signed by POA, CPA as Power of Attorney. ORG described its
activities and operational information on page 2 of Form 1023 as and hereby quoted:

“The Organization’s proposed program activities will consist of debt management
services to be offered to needy individuals without regards to race, sex, creed or

national origin. The debt management program activities will entail one hundred

percent of the organization’s time.

(A) Detailed Description of the Activity:

Form 886-Arev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 12/31/20XX,
12/31/20XX

The Organization will offer debt management services to needy individuals
based on the biblical concepts of money management. These services will
include:

Counseling needy individuals on best practices designed to retire excessive debt
balances in a systematic and rational way.

The preparation of a personal budget for the purpose of redrafting debt
payments and submission to creditors.

Negotiating with the creditors a new debt retirement schedule on the basis of the
prepared personal budgets.

Implementing a payment plan, once the creditors’ agreement has been secured,
wherein funds from these needy individuals will be collected, placed in a
separate trust escrow account and then remitted to the creditors as per the
previously arranged payment plans with the respective creditors.

How activity furthers exempt purpose:

The organization was formed for the specific purpose to promote and improve
the health, education and welfare of needy individuals by providing credit
counseling and debt management services. By assisting individuals get out of
debt in a rational and systematic fashion, the organization will be improving the
welfare of these persons and possibly keep them from bankruptcy and/or
financial ruin. By educating them in the biblical teachings of money
management, the persons benefited may avoid similar financial crisis in the
future.

(B) When the activity will be initiated:
The activities are expected to commence June 1, 20XX.
(C)Where and by whom the activity will be conducted:
The activity will be conducted primarily in the State of State by CO-1.”
The officers and directors listed on the Form 1023 were President, CEO, President
and Director; Treasurer, Treasurer and Director and Secretary, Director, Secretary and

Chief Operating Officer.

A copy of the unexecuted copy of bylaws was provided along with its Form 1023
application submission. However, during the course of the determination application

Form 886-Acrev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 8 86 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 12/31/20XX,
12/31/20XX

processing, the determination specialist requested ORG to revise its Form 1023 to a
Form 1024 under Civic Leagues, social welfare organizations. On June 23, 20XX, the
Service issued the determination exemption letter to ORG as an IRC 501(c)(4)
organization.

Minutes:

For the years under examination, ORG provided annual meetings conducted for the
years 20XX, 20XX and 20XX. The minutes were signed by Treasurer. These minutes
indicated Treasurer as secretary of ORG. The board members presented, as stated in
the minutes, were Treasurer, BM-1, BM-2, BM-3 and BM-4.

For the minutes, dated January 27, 20XX, under the heading for Chief Executive's
Report and hereby quoted:

“Treasurer reported that the number of individuals benefited by the Organization
was continuing to decline. Among other factors discussed, changes that occurred in
the 20XX state of State debt management legislation combined with the unique nature
of the Organization's clientele was making it difficult to expand the organizations
community activities. Treasurer recommended that alternatives be considered to
transfer the Organization’s operations to another not for profit organization, should the
declining trends continue. After discussion among Board Members it was agreed that
Sonia’s comments were to be taken under consideration by the Board for further
consideration and ultimate resolution.

For the minutes, dated February 13, 20XX, under the heading for Chief Executive's
Report and hereby quoted:

“Treasurer reported that the number of individuals benefited by the Organization was
continuing to decline 1,928 during 20XX to a projected number of less than 1,100. After
discussion among Board Members it was agreed that Treasurer's prior
recommendation that alternatives be considered to transfer the Organization's
operations to another not for profit organization be taken under consideration by the
Board at this time.

Therefore, Be it was resolved that to the extend feasible, any employees of the
organization that could be given employment by CO-2 a 501(c)(3) should be allowed to
seek employment with that Organization, and that a proposal for the ultimate transfer of
the State clients presently being served by ORG be deferred as long as it is
operationally feasible to continue serving any remaining clientele.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/ Period Ended
ORG EIN 12/31/20XX,
12/31/20XX

For the minutes, dated May 25, 20XX, under the heading for Chief Executive's
Report and hereby quoted:

“Treasurer reported that the number of individuals benefited by the Organization
continued to decline to 987, a greater decline than anticipated.

Board of Directors:

According to ORG’s response dated May 23, 20XX, the current board of directors
was as follows:

Treasurer- Managing Director/Secretary
CEO- Chief Executive Officer/President
BM-1- Director/Board Member

BM-2- Director/Board Member

BM-3- Treasurer/Board Member

Former Officer, Directors, and Key Employees included the following individuals:

Secretary- Director/Board Member
BM-4- Director/Board Member
BM-5- Director/Board Member
BM-6- Director/Board Member

ORG’s related entities:

Treasurer is also the Managing Director and Secretary for CO-2 which provides
debt management services to clients. Treasurer also owns a Subchapter S Corporation
named CO-3.

Interview with Treasurer:

On June 6, 20XX, Revenue Agent interviewed Treasurer regarding ORG’s
activities. ORG was established with the main concern to serve its local clients in City.
It was set up initially to manage clients’ delinquent utility bills. ORG brought clients’
payments to the local utility companies for the clients. However, ORG’s service
eventually evolved into debt management. As of July 20XX, ORG did not enroll any
new clients. ORG maintains the existing debt management program (DMP) accounts
for the existing clients who would eventually complete the DMP. ORG did not conduct
any educational seminars and Secretary manages the daily operation of this entity.

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -4-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 12/31/20XX,
12/31/20XX

Number of clients and fees charged:

In ORG’s response dated May 23, 20XX, it mentioned as of the beginning of the tax
year 20XX, the number of clients was 2,245. During the year from January 20XX
through July 20XX, 795 new clients were enrolled. For the entire 20XX year, 649 DMP
clients were dropped off and 463 numbers of clients completed the DMP program.

In ORG’s response dated November 13, 20XX, due to the change in the State Debt
Management Law, the monthly client fees have increased to the greater of $ or % of the
amount paid to creditors each month. The previous client fees were $ per month plus $
per month per creditors placed on the DMP program. ORG also indicated that fees are
reduced and or waived, based on the individual clients’ ability to pay. The Service had
asked for the number of clients whose fees were reduced and waived on its Information
Document Request (IDR) #3. However, ORG’s representative, BM-3 sent a
correspondence to the Service on February 15, 20XX indicating ORG is willing to agree
with an agreed revocation to expedite the examination process and therefore, ORG
wants to avoid the need of responding to the Information Document Request #3 that
was sent on February 12, 20XX.

Referrals:

ORG indicated on its May 23, 20XX’s response that it did not utilize any lead
providers for potential clients. ORG received referrals primarily from existing clients,
community based organizations such as churches and corporations, in addition to the
clients received as a result of direct mass media advertising. However, the Service was
not able to request further information from ORG to verify the percentage of clients that
ORG received from various sources as of the date this report is issued. ORG's
representative, BM-3 sent a correspondence to the Service on February 15, 20XX,
indicating ORG is willing to agree with an agreed revocation to expedite the
examination process for closing and therefore, ORG wants to avoid the need of

responding to the IDR #3 that was sent on February 12, 20XX.

Employees of ORG:

In 20XX, ORG had 28 employees who were Accountant, Accounting Assistant,
Accounting Supervisor, Clerk, Counselors, Customer Care Representatives (CCR), and
Technical Support. 10 of the 28 employees were identified as CCR and 9 employees
were identified as Counselors and 1 employee as Counselor/Supervisor. In 20XX, the
number of employees was downsized to 8 individuals. Some of the employees were
transferred to CO-2.

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 12/31/20XX,
12/31/20XX

When asked for the Employee Handbook, ORG indicated it did not have any
employee handbook and it followed the general guidelines of CO-2.

When asked for the employee training materials such as scripts used or job aids,
ORG indicated it trained employees on one-to-one basis and therefore, did not use any
scripts. It also utilized the training materials of CO-2.

Customer Care Representative:

In response to the Service’s Document Request #1 for working experience, ORG
provided a document indicating as Servicing Department and job description for
Customer Care (Service) Representative (CCR). There was no job description for
counselor.

The job description for the CCR is described as follows:
“Duties and Responsibilities:

Customer Care Representative (CCRs) are responsible for answering all
incoming calls into CO-2 (CO-2) Call Center. The handling and managing of the
client accounts includes all file maintenance, paperwork, and necessary
computer adjustments. This position will be responsible for all inquiries from
clients, creditors, and other satellite offices verbally via the telephone or through
correspondence pertaining to their assigned position. Some inquiries may
include research, which is, but not limited to, client assistance, calling the
creditor, check research, review of the client database, and collaboration with
other internal departments. .

Skills and Abilities:
Qualified applicants will possess the following skills and abilities:

Great attitude and professionalism in Customer Service.

Be able to communicate clearly and professionally via telephone.
Knowledge and understanding of basic computer and office skills.
Experience in problem solving, organization, and prioritization.

Ability to do multiple tasks as given or assigned.

Maintain composure while handling difficult customers and situations.
Capability to perform necessary research to answer questions.

Analyze information to determine the nature of communication whether it
be a complaint, inquiry or service request.

Form 886-Aev.4-68) Department of the Treasury - Internal Revenue Service
Page: -6-

Form 8 86 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 12/31/20XX,
12/31/20XX

e Team and goal oriented.
Background requirements:

Educational Requirements:
e High School Diploma/GED, at least two years of College preferably.

Previous Work Experience:
e One to two years of work experience in an office environment.
e One year of Customer Service experience.
e Preferable work experience, six months in a Call-Center environment.

Knowledge:
e General understanding of credit cards and consumer lending, such as,
annual percentage rates, monthly creditor statements, etc.
e Use of facsimile machine and photocopier.
e Excellent oral and written communications skills.

It was noted that the above job description is the same as the one used by ORG's
related entity- CO-2.

Employee Performance Evaluation:

When asked for employee performance evaluation on the 28 employees which were
employed in 20XX year, ORG indicated no formal evaluations were conducted since
they only employed for a very short period. Revenue Agent reviewed the employees’
files when she visited City, some of the employees from the 28 were hired in 20XX year
but there were no evaluations for them in their personnel files.

Financial Data:

Revenue:

For the years under examination, CO-2 received its funding from the following:

Category 12/31/20XX 12/31/20XX
Revenue
Program Svc Revenue
Total

For the years under examination, CO-2 incurred the following expenses:

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service

Page: -7-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 12/31/20XX,
12/31/20XX
12/31/20XX 12/31/20XX
Category Amount Percentage | Amount Percentage
Wages and salaries
Advertising
Automobile
Office expenses/supplies
Rent
Travel
Others
Total Expenses

Expenses:

Upon reviewing the available records that were provided, adjustments are made to the
expenses for the following:

Automobile Expense:
CO-4 automobile:

Automobile expense on the lease for the CO-4 will be treated as wages to Mr.
Secretary for the above two years. In ORG’s response dated November 13, 20XX,
ORG indicated and hereby quoted,

“ There was not a W-2 Form issued to Secretary, as the vehicles were used by
Secretary, as well as other Counselors, Volunteers and directors whenever necessary.
Secretary also provided the benefit to the organization by leasing the vehicle in his
name.”

The Service issued IDR #3 for the log sheets showing how the vehicles were used.
However, as indicated above, ORG’s representative, BM-3 sent a correspondence to
the Service on February 15, 20XX indicating ORG is willing to agree with an agreed
revocation to expedite the examination process for closing and therefore, ORG wants to
avoid the need of responding to the IDR #3 that was sent on February 12, 20XX. Since
the Service was unable to verify the proper use of the automobiles, the entire expense
will be treated as wages to Secretary. ORG is responsible for the adjustment on its
Form 941s for the years under examination. The amount of automobile expense for the
20XX year was $ and for the 20XX year, the amount was $. Please see attached report
for the employment tax adjustment.

Other automobiles:

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -8-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 12/31/20XX,
12/31/20XX

For the year 20XX, ORG made auto payments to CO-5, Land Rover and DMV
renewal for a total of $. Since ORG did not provide supporting documents to
substantiate the need of these vehicles for business purposes, an adjustment of $ will
be disallowed from the total expenses reported.

Printing and Reproduction:

The Service requested a list of six checks for sample review for verification of the
expense incurred. However, as stated above, ORG’s representative, BM-3 sent a
correspondence to the Service on February 15, 20XX indicating ORG is willing to agree
with an agreed revocation to expedite the examination process for closing and
therefore, ORG wants to avoid the need of responding to the IDR #3 that was sent on
February 12, 20XX. Since the Service was unable to verify the proper payments for the
20XX year, a disallowance of $ for the checks numbered #, # ,#, and # will be made to
the total expenses unless ORG can provide evidence that these checks were for
printing use for ORG since these checks were payable to individuals.

Educational Materials and Seminars:

For the 20XX year, ORG reported on its general ledger for a total amount of
$ for educational materials and seminars. The Service has requested a few of
these checks to verify the proper expenses. However, as stated earlier, ORG wants to
expedite the examination process for closing and hereby, agree with an agreed
revocation without responding to the request. Since the Service was unable to verify
whether the payments were for educational materials and seminars provided, the entire
amount will be disallowed from the total expenses unless ORG can provide
documentation to substantiate the expense.

Advertising:

For the 20XX and 20XX years, ORG paid $ and $ for advertising expenses. The
Service has inquired ORG why it still incurred advertising expenses for these two years
since ORG stopped enrolling new clients as of July 20XX. ORG did not provide its
response because it wanted the Service to expedite the examination process for closing
as mentioned above. Since the Service was unable to verify the reasons for the
advertising, a partial disallowance of a total of $ for the year 20XX and the entire
advertising expense of $ for the year 20XX will be made to the total expenses claimed
for these two years.

Travel:

Form 886-Acrev.4-68) Department of the Treasury - Internal Revenue Service
Page: -9-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 12/31/20XX,
12/31/20XX

For the two years, ORG reported on its general ledger for the amounts of $ for the
20XX year and $ for the 20XX year. The Service had inquired for documentations for
the travel incurred for the 20XX year. However, ORG did not respond due to the
reason mentioned above. Since the Service was unable to verify the travel expenses,
these amounts will be adjusted from the total expenses reported.

Rent:

For the two years, ORG reported on its general ledger for the amounts of $ for the
20XX year and $ for the 20XX year. . The Service had inquired for documentation as
to why ORG needed three locations to operate since it did not enroll any new clients as
of July 20XX. The Service also requested for a list of employees who worked at these
locations and their job duties. However, ORG did not respond due to the reason
mentioned above. Since the Service was unable to verify the reasons for these three
locations, a disallowance of the two locations will be made to rents that were paid to the
Address and the Address. The total adjustment for the 20XX year is $ and $ for the
20XX year.

The total adjusted expenses are as follows:

Adjustment for the years: 12/31/20XX 12/31/20XX
Total expenses reported
Adjustments:

Automobiles

Printing

Educational Materials/Seminars

Advertising

Travel

Rent
Total adjusted expenses

The revised net income or loss is computed as follows:

Category 12/31/20XX 12/31/20XX
Revenue

Adjusted expenses
Net income/loss

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -10-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 12/31/20XX,
12/31/20KXX

Bank statements:

ORG maintained the following accounts as of the end of each tax year under
examination. The account balances shown on the bank statements for these accounts
were as follows:

Account Number Type Balance as of 12/31/05
CO-6 Administrative Account

CO-7 Trust fund

Law:

Section 501(a) of the Internal Revenue Code provides that an organization
described in section 501(c)(4) is exempt from income tax. The Code defines Section
501(c)(4)(A) as Civic leagues or organizations not organized for profit but operated
exclusively for the promotion of social welfare, or local associations of employees, the
membership of which is limited to the employees of a designated person or persons in
a particular municipality and the net earnings of which are devoted exclusively to
charitable, educational, or recreational purposes. Section 501(c)(4)(B) states that
Subparagraph (A) shall not apply to an entity unless no part of the net earnings of such
entity inures to the benefit of any private shareholder or individual.

Income Tax Regulations section 1.501(c)(4)-1(a)(1) defines civic organizations as a
civic league or organization may be exempt as an organization described in section
501(c)(4) if (i) it is not organized or operated for profit; and (ii) it is operated exclusively
for the promotion of social welfare.

Income Tax Regulations section 1.501(c)(4)-1(a)(2) defines promotion of social
welfare as (i) in general, an organization is operated exclusively for the promotion of
social welfare if it is primarily engaged in promoting in some way the common good and
general welfare of the people of the community. An organization embraced within this
section is one which is operated primarily for the purpose of bringing about civic
betterments and social improvements. A “social welfare” organization will qualify for
exemption as a charitable organization if it falls within the definition of “charitable” set
forth in paragraph (d)(2) of Section 1.501(c)(3)-1 and is not an “action” organization as
set forth in paragraph (c)(3) of Section 1.501(c)(3)-1.

Income Tax Regulations section 1.501(c)(4)-1(a)(2)(ii) states that the promotion of
social welfare does not include direct or indirect participation or intervention in political
campaign on behalf of or in opposition to any candidate for public office. Nor is an
organization operated primarily for the promotion of social welfare if its primary activity
is operating a social club for the benefit, pleasure, or recreation of its members, or is

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -11-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 12/31/20XX,
12/31/20XX

carrying on a business with the general public in a manner similar to organizations
which are operated for profit.

The Service has issued a revenue ruling holding credit counseling organizations to
be tax exempt under IRC 501(c)(4). Rev. Rul. 65-299, 1965-2 C.B. 165, granted
exemption to a 501(c)(4) organization whose purpose was to assist families and
individuals with financial problems and to help reduce the incidence of personal
bankruptcy. Its primary activity appears to have been meeting with people in financial
difficulties to “analyze the specific problems involved and counsel on the payment of
their debts.” The organization also advised applicants on proration and payment of
debts, negotiated with creditors and set up debt repayment plans. It did not restrict its
services to the needy. It made no charge for the counseling services, indicating they
were separate from the debt repayment arrangements. It made “a nominal charge” for
monthly prorating services to cover postage and supplies. For financial support, it
relied upon voluntary contributions from local businesses, lending agencies, and labor
unions.

In Contracting Plumbers Cooperative Restoration Corp. v. United States, 488 F.2d
684 (2d Cir. 1973), cert. denied, 419 U.S. 827, 685, 687 (1974), the Court of Appeals
held that an organization assisting member plumbers in their profession by repairing the
cuts they made in city streets was not exempt under section 501(c)(4). The court
concluded the organization was not primarily devoted to the common good because it
provided substantial benefits to its private members that were different than those
benefits provided to the public.

Rev. Rul. 86-98, 1986-2 C.B. 74 stated that benefit to members does not qualify an
organization to be exempted under Internal Revenue Code (Code) 501(c)(4). In this
ruling, the IPA (individual practice association) negotiates agreements with HMOs on
behalf of member physicians under which its members provide medical services to
HMO member patients. The agreements also require the IPA to perform necessary
administrative claims services. The ruling concludes that the primary IPA beneficiaries
are its member-physicians rather than the community as a whole. The IPA benefits
member-physicians by functioning like a billing and collection service, and a collective
bargaining representative for them. Moreover, the IPA does not benefit the community
by providing HMO patients access to otherwise unavailable medical care, and does not
provide care below the customary and reasonable charges of members in their private
practices.

Taxpayer’s Position:

ORG’s position has not been determined.

Form 886-Acrev.4-68) Department of the Treasury - Internal Revenue Service
Page: -12-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
| ORG EIN 12/31/20XX,
12/31/20KX

Government’s Position:

The Service contends that ORG has a more than insubstantial nonexempt
purpose. ORG provides its DMP service as the only activity to its existing clients. As of
July 20XX, ORG stopped enrolling new clients. For the years under examination, ORG
did not perform any educational activities to these clients but maintained their DMP
accounts administratively. Therefore, its exemption status should be revoked.

ORG’s total source of funding was from fair share contributions and client fees.
ORG did not receive any private or governmental grants for the years under
examination. ORG had completely relied on the creditors’ fair share and client service
fees for its operation.

The contribution amounts solicited from the existing DMP clients are not
charitable gifts or donations. They are fees for services and ORG may have misled its
clients into claiming contribution deductions in which they are not entitled to.

ORG was not primarily devoted to the common good because it provided
substantial DMP benefits to its clients. ORG’s clients are a selected group of
individuals who must meet the criteria set by the participating creditors. ORG is
carrying on a business with the general public in a manner similar to organizations
which are operated for profit.

For the earlier years which ORG still enrolled DMP clients, its employees had no
performance evaluations in their personnel files or evidence showing they continuously
receive training on how to develop options and recommendations for the incoming
callers. There was no evidence or plan for the development of skills for the counselors
to identify underlying personal problems of the callers so they can make appropriate
referrals for the callers.

As confirmed with ORG’s officer, Treasurer, ORG did not provide any
educational outreach activities for the years under examination. ORG’s board
comprised with five individuals of which two members are family members and it is not
a community-based board.

Conclusion:

In summary, ORG was not operated exclusively for tax exempt purpose,
because it did not engage primarily in activities that accomplish an exempt purpose and
more than an insubstantial part of ORG’s activities are in furtherance of a non-exempt
purpose Accordingly, it is determined that ORG is not an organization described in
section 501(c)(4) effectively January 1, 20XX.

Form 886-Arev.4-68) Department of the Treasury - Internal Revenue Service

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