IRS revokes an organization's section 501(c)(3) status

Plain-English summary

The IRS issued a final adverse determination revoking an organization's recognition as exempt under IRC § 501(c)(3), effective on the stated date. The letter says the organization was not operated exclusively for exempt purposes and that its principal activity was managing debt management plans as a commercial service. The determination also made contributions no longer deductible and required the organization to file Form 1120 for the listed years and later years. The organization could seek declaratory judgment under IRC § 7428 within the stated period.

Ruling snapshot

• Question: Did the organization continue to operate exclusively for exempt purposes under IRC § 501(c)(3)?
• Outcome: Revocation, the organization's section 501(c)(3) status was revoked
• Key authorities: IRC §§ 501, 170, 7428, 6110, and 6104; Treas. Reg. §§ 1.501(c)(3)-1(c)(1) and 1.501(c)(3)-1(d)(3)

Full text (IRS public release)

Internal Revenue Service
Appeals

Department of the Treasury

Address any reply to:
Employer Identification Number:
Date: December 12, 2013 *
Person to Contact:
Number: 201410043 ***
Release Date: 3/7/2014 Contact Telephone Number:
Fax Number:

UIL: 501.03-30

Certified Mail
Dear

This is a final adverse determination regarding your exempt status under section
501(c)(3) of the Internal Revenue Code (the Code). Our favorable determination letter
to you dated July XX, 20XX is hereby revoked and you are no longer exempt under
section 501(a) of the Code effective January 1, 20XX.

The revocation of your exempt status was made for the following reason:

Our adverse determination was made because your organization is not operated
exclusively for exempt purposes. Section 1.501(c)(3)-1(c)(1) of the Federal Tax
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). An organization
will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

Contributions to your organization are no longer deductible under §170 of the Code.
You are required to file income tax returns on Form 1120. These returns should be filed
with the appropriate Service Center for the tax years ending December 31, 20XX and

December 31, 20XX, and for all tax years thereafter in accordance with the Code.

Processing of income tax returns and assessments of any taxes due will not be delayed
should a petition for declaratory judgment be filed under section 7428 of the Code.

We will make this letter and the proposed adverse determination letter available for
public inspection under Code section 6110 after deleting certain identifying information.

We have provided to you, in a separate mailing, Notice 437, Notice of Intention to
Disclose. Please review the Notice 437 and the documents attached that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions
in Notice 437.

If you decide to contest this determination under the declaratory judgment provisions of
section 7428 of the Code, a petition to the United States Tax Court, the United States
Claims Court, or the district court of the United States for the District of Columbia must
be filed before the 91st day after the date this determination was mailed to you. Please
contact the clerk of the appropriate court for rules regarding filing petitions for
declaratory judgment. To secure a petition from the United States Tax Court, write to
the United States Tax Court, 400 Second Street, N.W., Washington, DC 20217. See
also Publication 892.

You also 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 tax matters that may not
have been resolved through normal channels get prompt and proper handling. You
may call toll-free, 1-877-777-4778, for Taxpayer Advocate assistance or visit
www.irs.gov/advocate for more information.

If you have any questions, please contact the person whose name and telephone
number are shown in the heading of this letter.

Sincerely yours,

/s/
Appeals Team Manager

Enc: Publication 892

cc: *

DEPARTMENT OF THE TREASURY
Internal Revenue Service

TAX EXEMPT AND GOVERNMENT
ENTITIES DIVISION

February 18, 2009
Taxpayer
ORG
Identification Number:
ADDRESS Form:
Tax Year(s) Ended:
Person to Contact./ID
Number:
Contact Numbers:
Telephone:
Fax:

Certified Mail - Return Receipt Requested

Dear

We have enclosed a copy of our report of examination explaining why we believe
revocation of your exempt status under section 501 (c)(3) of the Internal Revenue Code
(Code) is necessary.

If you accept our findings, take no further action. We will issue a final revocation letter.

If you do not agree with our proposed revocation, you must submit to us a written request
for Appeals Office consideration within 30 days from the date of this letter to protest our
decision. Your protest should include a statement of the facts, the applicable law, and
arguments in support of your position.

An Appeals officer will review your case. The Appeals office is independent of the Director,
EO Examinations. The Appeals Office resolves most disputes informally and promptly. The
enclosed Publication 3498, The Examination Process, and Publication 892, Exempt
Organizations Appeal Procedures for Unagreed Issues, explain 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.

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

If we do not hear from you within 30 days from the date of this letter, we will process your
case based on the recommendations shown in the report of examination. If you do not
protest this proposed determination within 30 days from the date of this letter, the IRS will
consider it to be a failure to exhaust your available administrative remedies. Section 7428(b)(2) of the Code provides, in part: "A declaratory judgment or decree under this
section shall not be issued in any proceeding unless the Tax Court, the Claims Court, or
the District Court of the United States for the District of Columbia determines that the
organization involved has exhausted its administrative remedies within the Internal
Revenue Service." We will then issue a final revocation letter. We will also notify the
appropriate state officials of the revocation in accordance with section 6104(c) of the Code.

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.

Thank you for your cooperation.

Sincerely,

Renee B. Wells
Acting Director, EO
Examinations

Enclosures:
Publication 892
Publication 3498
Report of
Examination

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
“ Explanation of Items Exhibit 990
‘ Name of Taxpayer Year/Period Ended
ORG
01/01/20XX
EIN
LEGEND
ORG - Organization name XX - Date Address - address City - city
State - state President - president CI-1 - 1% COMPANY DIR-1, DIR-

2, DIR-3 & DIR-4 - 197, 2nd, 382 ¢ 4th DIR

Issues:

1. Whether ORG (hereafter referred to as ORG) is operated exclusively for exempt purposes
   described in Internal Revenue Code §501(c)(3):

a) Is ORG engaged primarily in activities that accomplish an exempt purpose?

b) Were more than an insubstantial part of ORG activities in furtherance of a non-exempt |
purpose? |
c) Was ORG operated for the purpose of serving a private benefit rather than public interests?

Facts:

Organizational History

ORG' was incorporated under the laws of the State of State as a non-profit corporation on
October 23, 20XX. In a determination letter dated July 24, 20XX, ORG was granted exemption
from federal income tax as an organization described in IRC, section 501(c)(3). ORG was and is
located at Address, City, State.

During the examination President, the ORG President and individual in charge of operations,
stated that he acquired the general knowledge about credit counseling and Debt Management
Plans (hereafter referred to as DMPs) from a friend whose name he could not recall. The friend
had been employed by a larger credit counseling company named CO-1, which is no longer —
recognized as tax-exempt by the IRS. President further stated that his idea to form ORG was
supported and encouraged by members of his family and church. President led the effort to
incorporate ORG and seek tax-exempt status; however the only persons listed as founders are 3
family members of President. The 3 organizing officers are as follows: DIR-1 (President's sister),
DIR-2 ‘his sister's husband) and DIR-3 (President's mother). President stated that the reason he
did not include himself as an officer or trustee originally, was that he planned to be paid a full-
time salary and believed that paid officers would be looked upon unfavorably. No board meeting
minutes were kept, nor were any records evidencing board members' input or involvement in
decision making. The family relationships were partially disclosed in a response to the
application package where it stated that DIR-1 is DIR-2's husband. On the third form 990 return
filed, there was a disclosure that DIR-3 was DIR-1's mother and that DIR-2 was DIR-1's
husband.

The organization was given its tax exempt status based on activities described on its Form 1023 -
Application for Recognition of Exemption and in additional responses to information requested in

Form 886-A (Rev. 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 990
‘ Name of Taxpayer Year/Period Ended
ORG 01/01/20XX

EIN

Letter 1312 dated July 16, 20XX. The proposed activities listed on the application were written
as follows:

1 Giving charitable advice to poor, underprivileged and financially distressed members of the
community to help the poor and their families get out of debt and stay out of debt

2. Doing charitable work for the poor underprivileged and financially distressed members of
   the community by contacting their creditors for them, rescheduling their payments , helping
   them complete forms or completing forms for them, and writing letters for them to help them
   get out of, reduce, and stay out of debt.

3. Lessening the burdens of state and local government by helping poor, underprivileged or
   financially distressed members of the community from having to seek and rely upon state or
   federal financial aid in order to feed house or support themselves or their families.

4. Educating the poor, underprivileged or financially distressed members of the community on
   how to set up and live within budgets that they can afford so as to avoid getting into debt and

behind in their payments to their creditors.

5. Lessening neighborhood tensions by helping poor, underprivileged and financially distressed
   members of the community from having to take bankruptcy, become homeless and resorting
   to possible criminal activities to make money to survive.

6. by helping parents get out of debt and stay out of debt, support themselves Combating
   community deterioration and juvenile delinquency through their own labor and provide safer,

more secure homes for their children.

Based on the information submitted to the IRS in the Application for Exemption, the
Determinations Unit concluded that ORG qualified for exemption both as a charitable organization,
as it was to provide relief to the poor and underprivileged; and as an educational organization as
it was to instruct the community on subjects useful to the individual and beneficial to the
community.

Activity Description

ORG is operated as a sole proprietorship, rather than as a public charity. President performs all of
the substantive work and hires minimal clerical help, usually one assistant. President is the only
“credit counselor. He does not have any certification or degrees in credit counseling, counseling or
social work, although both the website and the telephone answering recording ask prospective
clients to "speak with one of our certified counselors..."

The primary activity and income source of ORG is enrolling and managing the debt accounts of
clients in Debt Management Plans (DMP). The DMP is a plan whereby a client agrees to make a
monthly payment to ORG to satisfy his or her unsecured debts. ORG distributes the client's
payment, minus a "voluntary" contribution or processing fee, to each creditor under the terms
arranged between ORG and the creditor under the plan. Substantially all of the debts handled in a

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or’

Explanation of Items Exhibit 990
‘ Name of Taxpayer Year/Period Ended
ORG 01/01/20XX

EIN

DMP are credit card debts, but some clients have other unsecured debts serviced, such as medical
expense balances. ORG maintained accounts of between 800 and 850 DMP clients at any given
time during the period. ORG does not offer related services such as bankruptcy counseling,
foreclosure counseling and has not documented any referrals to professional outside help.

From the examined period to present ORG has not received any public or private contributions
from sources for which they do not provide DMP services. On its application, ORG stated that
Financial Support would come 50% from Contributions of General Public and 50% from
Contributions of Private Organizations. The Application stated that consultation, analysis and
budget planning would be a free service to the community. If clients wished to use services
further, upon enrollment in the Debt Management Program, they will be advised to make a $
voluntary contribution. For clients continuing to use the DMP service, there would be $ voluntary
contribution every month that a payment is made through ORG.

The examination revealed that 100% of ORG's income is derived from either DMP clients or from
the banks for which it provides DMP payment services. A 56% of ORG income is derived from
the voluntary fees charged to DMP clients. ORG has not been able to furnish any documentation
that DMP fees charged to clients were in fact voluntary. ORG received several document
requests to provide a list of clients who received DMP assistance and were not charged a fee.
President was not able to provide any documentation where fees were waived, but responded to
document request with a statement that fees are waived based on poverty guidelines.

The remaining 44% of ORG's income is derived from the banks that have outstanding loans to
DMP clients. The banks in this case made payments to ORG referred to as "Fair Share" until mid
20XX. Subsequently, the banks shied away from referring to DMP compensation as Fair Share
and started funding credit counseling organizations by what they call "grants". Fair Share
payments were based on a percentage of the direct amount of DMP payments made to banks by
credit counseling companies. The banks claim that grant funding is based on the organization's
need and the extent to which it benefits consumers and the public at large. In a letter from

to ORG dated April 25, 20XX, it states: ” will supplement its
modified Fair Share participation by providing grants to those non-profit agencies that
demonstrate ongoing professional commitment to credit counseling and consumer education in
their communities."

ORG is not held accountable as a condition of the grants. ORG does not document any client
education. ORG does not keep any records of client education, counseling or referrals to other
qualified professionals. Telephone calls are not recorded and no documentation is maintained
which supports that DMP clients receive any education during the telephone calls. President
claims that, during phone calls, he acquires financial information, provides counseling, discusses
budgets and suggests the "best course of action". Since there were no recordings kept of these
phone calls, there is no verification as what actually transpired on past telephone calls. During
the examination the Agent listened in on a call. President phoned a number left on the answering

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 990
Name of Taxpayer Year/Period Ended
ORG
01/01/20XX

EIN

system and listened while the client explained her hardships, debts, income and obligations.
President empathized, jotted numbers on scrap paper and did not discuss the issue of DMP or
offer any solution. The call lasted about 15 minutes and ended with President taking a message in
order to phone her back later. No education, counseling or advice was given. Because the call
was observed by the IRS, no DMP was pursued.

On the. initial tour of the ORG office, the examination revealed that the only files kept were
those of DMP clients. Files contained DMP contract, credit card statements and no educational
materials. The Agent asked what educational materials were used and was told that President
directs client to use the ORG website, specifically its budgeting tools, but also its calculators and
useful links. President states the reason that he keeps only files on DMP enrolled clients is that it
would be too costly to keep files on everyone who called in.

ORG does not report having any assets or liabilities other than minimal checking account balance
($ EOY 20XX, $ EOY 20XX) and accounts and payroll payable ($ EOY 20XX, $ EOY 20XX).
The office space is rented from an unrelated party and what little office furniture present is left
over from President's previous for-profit business ventures. There are computer equipment and a
flat-screen TV present which were purchased subsequent to the examined period and for which
no detailed accounting is available.

President has a bachelor's degree in computer engineering and has some experience in other for-
profit ventures, including mortgage brokering and advertising. He created the organization's
website and states that he wrote all the information, including verbiage of educational interest
contained on it. The website is in English and Spanish at website or website It underwent a major
overhaul in April of 20XX. The former website home page was retrieved in examination through
the use website. It focused primarily on the Debt Management Program. The subsequent revision
was more elaborate and contains a section with educational information, budgeting tools and
links to several established outside resources and information about DMP's. President claims that
he wrote all of the educational material contained in the website.

The ORG website generates DMP leads by prompting potential clients to leave their contact
information for a free analysis. The website states "Our Certified Credit Counselors can help
you online, by mail, in person or you can attend one of our free seminars." It states that the DMP
program can lower interest rates, reduce payments by up to 58%, stop harassment from creditors,
and improve your credit and that there are no requirements to qualify.

President also purchases airtime on Spanish local radio and TV. During these programs he |
discuses some aspect of personal finance such as credit scores, identity theft or free credit |
reports. Copies of two radio appearances and one TV interview were provided for and reviewed

by the Agent (and a fluent Spanish speaking Agent). Each lasted 5 to 10 minutes. The copies of

appearances furnished did not solicit or discuss DMPs, however they were recorded after the

period when the website was overhauled to shift focus away from DMP and towards education.

Form 886-A (Rev. 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 990
N: f Year/Period Ended
“ORG Taxpayer 01/01/20XX

EIN

They were provided after the Agent had made numerous requests for proof of educational
activities and after President was advised of the implications of having substantial non-exempt
activities. All programs included mention of ORG and its website.

President stated that he also conducts face to face "counseling and "seminars" at the office and
atvarious off-site locations such as: booths set up at Hispanic festivals, at fairs held by President's
church and free seminars held at the ORG office. President states he gives free financial
counseling and then shows interested individuals how to access their free credit report online.
The Agent made several requests for any and all calendars of events, past and present. When a
calendar was finally presented, it contained only printouts of the following 3 months with the
names of various institutions sprinkled on it. When the Agent asked why there were no times,
phone numbers or addresses listed President responded that these were only prospective outreach
contacts that he intended to call. The Agent did sit in on a seminar at a clubhouse of an apartment
complex which President arranged long after the examination had begun. 4 residents showed up.
President spoke for 45 minutes about the importance of credit scores and how they are affected.
Because the IRS was observing, the presentation did not contain any mention of DMPs.

President mentioned one other unusual activity. He states he organized a group of volunteer
students from State International University (his alma mater) to assist him in attempting to
acquire certain certifications for the organization. No documentation was provided regarding this
activity. President did state that ORG never obtained the certification the students sought to help
him get. This activity was to have occurred shortly after the revision of the website.

President continues to operate ORG in the above described manner, without hiring any
counselors and continues to be totally controlled by President and his family. There was one
added board member in March 20XX; DIR-4. President stated that he had no relationship to
DIR-4. However, Accurint research revealed that DIR-4's wife had co-owned a residential
property with President.

LAW and ANALYSIS:

Section 501(c)(3) of the Code exempts from federal income tax corporations organized and
operated exclusively for charitable, educational, and other purposes, provided that no part of the
net earnings inure to the benefit of any private shareholder or individual. The term charitable
includes relief of the poor and distressed (Section 1.501(c) (3)-1(d) (2), Income Tax
Regulations).

The term educational includes (a) instruction or training of the individual for the purpose of
improving or developing his capabilities and (b) instruction of the public on subjects useful to the
individual and beneficial to the community (Treas. Reg. § 1.501(c)(3)-1(d)(3)).

Section 1.501(c)(3)-1(a)(1) of the regulations provides that, in order to be exempt as an
organization described in section 501(c)(3), an organization must be both organized and operated

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit 990
Name of Taxpayer Year/ Period Ended
ORG
01/01/20XX

EIN

exclusively for one or more of the purposes specified in such section. If an organization fails to
meet either the organizational test or the operational test, it is not exempt.

Section .1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as
"operated exclusively" for one or more exempt purposes only if it engages primarily in activities
that accomplish one or more of such exempt purposes specified in section 501(c)(3). An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose. The existence of a substantial nonexempt purpose, regardless
of the number or importance of exempt purposes, will cause failure of the operational test. Better
Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (1945).

Educational purposes include instruction or training of the individual for the purpose of
improving or developing his capabilities and instruction of the public on useful and beneficial
subjects. Treas. Reg. § 1.501(c)(3)-1(d)(3). In Better Business Bureau of Washington D.C.., Inc. v.
United States, 326 U.S. 279 (1945), the Supreme Court held that the presence of a single non-
exempt purposes, if substantial in nature, will destroy the exemption regardless of the number or
importance of truly exempt purposes. The Court found that the trade association had an
"underlying commercial motive" that distinguished its educational program from that carried out
by a university.

In American Institute for Economic Research v. United States, 302 F. 2d 934 (Ct. Cl. 1962),, the
Court considered the status of an organization that provided analyses of securities and industries
and of the economic climate in general. The organization sold subscriptions to various
periodicals and services providing advice for purchases of individual securities. Although the
court noted that education is a broad concept, and assumed for the sake of argument that the
organization had an educational purpose, it 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.

An organization must establish that it serves a public rather than a private interest and "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." Treas. Reg. § 1.501(c)(3)-I (d)(1)(ii). Prohibited private
interests include those of unrelated third parties as well as insiders. Christian Stewardship
Assistance, Inc. v. Commissioner, 70 T.C. 1037 (1978); American Campaign Academy v.
Commissioner, 92 T.C. 1053 (1989). Private benefits include an "advantage; profit; fruit;
privilege; gain; [or] interest." Retired Teachers Legal Fund v. Commissioner, 78 T.C. 280, 286
(1982).

The Service has issued two rulings holding credit counseling organizations to be tax exempt.
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

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

. Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit 990
N f 'T Year/Period Ended
“ORG axpayer 01/01/20XX

EIN

incidence of personal bankruptcy. Its primary activity was to meet 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 prorating 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.

Rev. Rul. 69-441, 1969-2 C.B. 115, granted 501(c)(3) status to an organization with two
functions: it educated the public on personal money management, using films, speakers, and
publications, and provided individual counseling to "low-income individuals and families." As
part of its counseling, it established budget plans, i.e., debt management plans, for some of its
clients. The debt management services were provided without charge. The organization was
supported by contributions primarily from creditors. By virtue of aiding low income people,
without charge, as well as providing education to the public; the organization qualified for
section 501(c)(3) status.

In the case of Consumer Credit Counseling Service of Alabama, Inc. v. U.S., 44 A.F.T.R. 2d 78-
5052 (D.D.C. 1978), the District Court for the District of Columbia held that a credit counseling
organization qualified as charitable and educational under section 501(c)(3). It fulfilled charitable
purposes by educating the public on subjects useful to the individual and beneficial to the
community. Treas. Reg. § 1.501(c)(3)-1(d)(3)(i)(b). For this, iti charged no fee. The court found
that the counseling programs were also educational and charitable; the debt management and
creditor intercession activities were "an integral part" of the agencies' counseling function and
thus were charitable and educational. Even if this were not the case, the court viewed the debt
management and creditor intercession activities as incidental to the agencies' principal functions,
as only approximately 12 percent of the counselors’ time was applied to debt management
programs and the charge for the service was "nominal." The court also considered the facts that
the agency was publicly supported and that it had a board dominated by members of the general
public as factors indicating a charitable operation. See also, Credit Counseling Centers of
Oklahoma, Inc. v. United States, 79-2 U.S.T.C. 9468 (D.D.C. 1979), in which the facts and legal
analysis were virtually identical to those in Consumer Credit Counseling Centers of Alabama,
Inc. v. United States, discussed immediately above.

The organizations included in the above decision waived the monthly fees when the payments
would cause 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.

Form 886-A (Rev. 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 990
Name of Taxpayer Year/Period Ended
ORG 01/01/20XX

EIN

Outside the context of credit counseling, individual counseling has, in a number of instances,
been held to be a tax-exempt charitable activity. Rev. Rul. 78-99, 1978-1 C.B. 152 (free
individual and group counseling of widows); Rev. Rul. 76-205, 1976-1 C.B. 154 (free counseling
and English instruction for immigrants); Rev. Rul. 73-569, 1973-2 C.B. 179 (free counseling to
pregnant women); Rev. Rul. 70-590, 1970-2 C.B. 116 (clinic to help users of mind-altering
drugs); Rev. Rul. 70-640, 1970-2 C.B. 117 (free marriage counseling); Rev. Rul. 68-71, 1968-1
C.B.249 (career planning education through free vocational counseling and publications sold at a
nominal charge). Overwhelmingly, the counseling activities described in these rulings were
provided free, and the organizations were supported by contributions from the public.

GOVERNMENT POSITION:

ORG is not operated exclusively for charitable or educational purposes. An IRC section
501(c)(3) organization will only qualify for tax exempt status if it is organized and operated
exclusively for charitable or educational purposes. The organization has not been able to produce
any compelling evidence to show its activities discriminate to a charitable class, or that it
provides any education which improves or develops individuals' capabilities or instructs the
public on useful and beneficial subjects. ORG has not carried out any the objectives listed in its
Application for Exemption. Neither the DMP activities, nor the attempts made to generate DMP
clients constitute charitable work, education or advice. ORG is not lessening the burdens of state
and local government, easing neighborhood tensions or combating community deterioration.

ORG is operating in a commercial manner, substantially the same as a for-profit credit
counseling organizations and charges comparable fees. More than an insubstantial part of its
activities are commercial in nature. None of ORG's activities are exempt as described under
Internal Revenue Code section 501(c)(3). The organization does not limit its client base to a
charitable or low-income population. The organization is motivated by the fees that it charges
and not by charitable activities described in IRC, section 501(c)(3).

The purpose of ORG's activities differs substantially from those of the organizations in Rev. Rul.
65-299, Rev. Rul. 69-441, and Consumer Credit Counseling Service of Alabama, Inc. v. U.S.
There were no fees waived, public support, educational program, or any exempt activity that
would meet the requirements as stated under IRC section 501(c)(3). There was no evidence of
any meaningful education or credit counseling being conducted. Unlike the credit counseling
organizations described in the Revenue Rulings referred to above, and in Consumer Credit
Counseling Service of Alabama, Inc. v. U.S., during the period of exam ORG provided very little
if any counseling or education to its clients. ORG's sole purpose was to enroll clients in and
manage Debt Management Plans.

The various other activities undertaken by President, including Spanish radio and TV
appearances, and seminars are primarily to generate leads for DMP accounts and to attempt to
satisfy the Government that the organization is providing education. Since President is the only

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
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. . Department of the Treasury - Internal Revenue Service Schedule No. or

• • Form 886A Explanation of Items Exhibit 990
    : Year/Period Ended
    Name of Taxpayer 01/01/20XX
    EIN

counselor, the more time he claims he was involved in outreach, the less time he would have had
to spend on educating individual callers.

Conclusion

Based on the facts presented in this examination, ORG does not operate exclusively for exempt
purposes, because it did not engage primarily in activities that accomplish an exempt purpose.
ORG's principal activity is the management of Debt Management Plans. This activity does not
achieve charitable or educational purposes, but is merely a commercial service. Even if ORG
were able to establish that it was formed and operated for charitable or educational purposes, it
would not qualify for exemption because it is operated for a substantial non-exempt purpose.
Accordingly, it is determined that the tax exempt status of ORG should be revoked because it is
not an organization described in IRC §501(c)(3), effective January 1, 20XX.

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