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 determination says the organization operated a credit counseling and debt management plan business rather than primarily carrying out exempt educational or charitable activities. It also says the organization served a substantial private purpose and provided business to a related company. Contributions were no longer deductible, and the organization was directed to file Form 1120 for the listed years and later years.

Ruling snapshot

• Question: Did the organization continue to operate exclusively for exempt charitable or educational purposes under IRC § 501(c)(3)?
• Outcome: Revocation, the organization's section 501(c)(3) status was revoked
• Key authorities: IRC §§ 501, 170, 7428, 6104, and 1679; Treas. Reg. §§ 1.501(c)(3)-1(c)(1) and 1.501(c)(3)-1(d)(1)

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: 201410044 *

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’”). It is determined that you do not qualify as exempt from
Federal income tax under section 501(c)(3) of the Code effective January 1, 20XX.

Our revocation was made for the following reasons:

* is not operated exclusively for exempt purposes. Under Treasury Reg. § 1.501(c)(3)-1(c)(1),
an organization will be regarded as operated exclusively for one or more exempt purposes only if it
engages primarily in activities which accomplish one or more 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.

In addition, you are operated for a substantial private purpose rather than a public purpose. Under
Treasury Reg. § 1.501(c)(3)-1(d)(1)(ii), an organization is not organized or operated exclusively for
one or more of the purposes specified in subdivision (i) of this subparagraph unless it serves a
public rather than a private interest. Thus, to meet the requirement of this subdivision, it is
necessary for an organization to establish that it is not organized or operated for the benefit of
private interests such as designated individuals, the creator or his family, shareholders of the
organization, or persons controlled, directly or indirectly, by such private interests. See Treasury
Reg. § 1.501(c)(3)-1(d)(1)(iii), Example 3. *’s agreement with *** shows that it is operated for
a substantial private rather than public purpose.

Contributions to your organization are not deductible under Code section 170.

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, 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, you may file an action for declaratory judgment under
the provisions of section 7428 of the Code in one of the following three venues: 1) United States
Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for
the District of Columbia. A petition or complaint in one of these three courts must be filed within 90
days from the date this determination letter was mailed to you. Please contact the clerk of the
appropriate court for rules for filing petitions for declaratory judgment. To secure a petition form
from the United States Tax Court, write to the United States Tax Court, 400 Second Street, N.W.,
Washington, D.C. 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 a tax matters that may not have been resolved through normal channels get
prompt and proper handling. If you want Taxpayer Advocate assistance, please contact the
Taxpayer Advocate for the IRS office that issued this letter. You may call toll-free, 1-877-777-
4778, for the Taxpayer Advocate 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,

IS/
Appeals Team Manager

Enc. Publication 892

cc: KKKKK

Internal Revenue Service
Department of the Treasury
Taxpayer Identification Number:

EIN
Form:
Tax Year(s) Ended:
December x, 200X and December x, 200X
Person to Contact/ID Number.

Date: April 24, 2006 Telephone:

Fax:

Legend

ORG=Name of

organization

EIN= EIN of organization
NN= Name of individual

ORG

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.

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F

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,

Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F

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

Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended

December x, 200X
ORG and December x,
200X
Legend
ORG1= Former name of organization ST= State
ORG= Name of organization x= Number
NLBB= Newsletter, brochure, book X= Year
NN = Name of Individual
Issue:

1. Whether ORG is operated exclusively for exempt purposes
   described within Internal Revenue Code section
   501(c) (3):

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

b. Whether more than an insubstantial part of the
activities of ORG are in furtherance of a non-exempt
purpose?

c. Whether ORG was operated for the purposes of
serving private rather than public interest?

Facts:

ORG (hereafter referred to as "ORG") was incorporated on October
x, 199X as a Domestic Non-profit Corporation in the ST. The
articles were amended August x, 200X, to change the name. The former
name was ORG1. The stated purpose of the organization was:
To help the public with financial problems, as a
provision of debt management services as authorized by
the debt management service act.

On October x, 200X, the organization filed Form 1023, Application
for Recognition of Exemption, with the Internal Revenue Service. On
March x, 200X, ORG received from the Internal Revenue Service a
determination letter advising the organization of recognition of
exempt status under Section 501(c) (3) of the Internal Revenue Code
("Code").
Per Form 1023 the organization stated:
The organization's purpose is to educate the publicon a
variety of financial issues, with special attention to
educating families and individuals on personal
budgeting and the wise use of credit. We will use
trained professional counselor's to help families and
individuals with current financial difficulties,

Form 886-A (Rev.468) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Year/Period Ended
LName-ofTaxpayer
Dece rx,
ORG and December x,

Explanation of Items 200X.

through sound budget: or spending planning, and educate
them on how to avoid future financial difficulties. The
counselors will help the clients complete a
comprehensive budget analysis, examining items such as
gross household income, employment tenure,
mortgage/rent payments, automobile payments and
unsecured debt levels. Using this information, the
counselor will try to establish a realistic and
disciplined budget. If a family or an individual is
having financial problems that are beyond the scope of
sound budgeting techniques, a counselor will set up a
debt management plan for the orderly liquidation of the
debt; as a viable alternative to bankruptcy. We will
begin educating the general public through advertising
on a national level sometimes in the year 200X.

During our second year of operation, our goal is to
develop an educational video based on our counseling
program.

In addition to the counseling services described above,
the organization will increase its educational
activities in the following manner as funding and
financial support increase.

1. The organization will provide group
   advisory instruction to all age group when
   there is a need for credit, budget, and
   financial counseling services with
   particular, but no exclusive reference, to
   those in special and pressing need thereof,
   through money management workshops will be
   conducted by trained professional counselors
   with extensive training in financial and
   credit issues. It is projected that this
   service will be offered within the second x
   months of operation.

2. The organization will form a committee to
   determine research, education, and public
   information activities conducive to the general
   welfare with respect to budgeting, financial
   matters and consumer credit. Proposed
   activities will include publishing
   informational brochures covering numerous
   financial topics, including but not excluding

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

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

| Explanation of Items — pe ter —
Name of Taxpayer December x, 200X
ORG and December x,
200X

household budgeting, how to re-establish
credit, and how to use credit. These brochures
will be provided to the public at no cost. The
organization will also publish a monthly
newsletter designed to educate individuals and
families, on an ongoing basis, in credit and
financial issues. The brochures and newsletters
will be published in-house. Both paid and
volunteered staff will actively contribute to
the research, writing and editing of the
publications. It is projected that the
newsletter will go into publication during this
coming year.

3. The organization will cooperate with public and
   private agencies, organizations and
   associations engaged in the same and similar
   educational counseling programs.

NN is the former President of ORG currently owns and
operates RR. RR is responsible for providing all credit
card processing services for ORG.

For years ending 200X and 200X, the Board of Directors of
NN, NN and NN are all children of the former President
and creator, NN.

The application list x initial officers: (1) NN,
President, (2) NN-Vice President, (3) NN. There were no
directors mentioned on the application. The organization
also stated on their application that they are not the
outgrowth of (or successor to) another organization, or
does not have a special relationship with another
organization by reason of interlocking directorates or
other factors.

The President of ORG NN is also an officer and employee of
RR. RR provides consultation and creative placement of all
radio and television broadcasting and print advertising. RR
also creates and produces the monthly newsletter, "NLBB".
In addition, RR is also responsible for

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

the creation and production of all collateral materials and
brochures.

Activities during January x, 200X-December x, 200X:

ORG Form 990, Return of Organization Exempt from Income Tax,
is under examination for the tax years ended December x,
200X and December x, 200X.

During the examination years, ORG activities consisted of
providing credit counseling and debt management services to
individuals experiencing credit problems.

The credit counseling services ORG provides are by
telephone. It employs individuals to answer incoming calls
from the general public in response to advertising and
marketing, targeted at individuals experiencing credit
problems.

The debt management services ORG provides consist of
enrolling individuals into a debt management plan to payoff
their unsecured debts. The DMP enrollment process consist of
preparing a budget plan for an individual, negotiating with
the individual's unsecured creditors to obtain lower
payments, reduce interest rates, re-age accounts, and
provide waivers for late and over-the-limit fees. Once an
agreement is reached with an individual's creditor, he or
she makes one monthly payment to ORG. Then ORG disburses the
payment to the individual's creditors. Below is a table
setting forth the maximum amounts of fees charged to
individuals who enroll in debt management plans.

Monthly Start Monthly
DMP Up Fee
Payment Fee

Sx-Sx $x Sx
SX-SX Sx Sx
$x-$xX SX SX

$x-x Sx Sx

$xt $x $x

Credit counselors (hereafter referred to as service
employees) and customer service representatives (hereafter

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended —
ORG Decemberx, 200X
and December x,

200X

referred to as CSRs) make up almost half of ORG's employees.
Service employees are hired to perform personal financial
management counseling and DMP enrollments. DMP enrollments are
conducted at ORG’s in-bound call center by service employees
who are not paid on a commission basis. However, some calls
were made by two independent contractors who were compensated
on a total of $x commission basis. ORG also purchase leads to
help increase DMP enrollments. ORG claims that most in-bound
calls are generated from the general public in response to
employee assistance programs and by word-of-mouth. They also
claim to only purchase up to x leads per month. CSRs are only
responsible for clients that are enrolled into DMPs. CSRs
serve as a liaison between clients and creditors. Clients are
assigned a specific CSR, who will research and answer all
questions regarding their accounts. During the examination
year, ORG employed the following number of service employees,
CSR's and other employees at the end of the year:

(Credit Counselors) x
CSR's x
Administrative/Clerical X
Employees

Total Employees x

Service employees are hired by ORG without any prior credit
counseling experience. During the examination years, training
consisted only of on-the-job training. There was no training
manuals or workshops provided to the employees. In addition,
none of the service employees possess any certificates or
licenses related to counseling.

As previously stated, in-bound calls to ORG's call center are
generated by advertising, marketing, purchasing of leads, and
word-of-mouth. ORG markets and advertises its services ina
variety of media. The media used include television, radio,
yellow pages, and the internet. Radio scripts, pamphlets and
brochures that described the services and benefits of ORG did
not mention educational services. During the examination year
ending December x, 200X, ORG expended the following amounts on
advertising, marketing and leads:

Advertising Sx

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
Name of Taxpayer Year/Period Ended
ORG Decemberx, 200X
and December x,
200X
Marketing Sx
Leads $x
Totals $x

Asa result of the volume of in-bound calls to its call
center generated by its advertising, marketing and the
purchasing of leads, ORG enrolled over x individuals into
DMP's during the year ending December x, 200X. DMP
enrollment activities during the examination year are
provided below:

DMP clients at the beginning of year x
New clients enrolled during the year x
DMP clients at the end of the year x

During the examination year ending December x, 200X, ORG's
revenue was derived from five sources. See the table below
for a breakdown of those sources:

Fee Income Sx
Fair Share Income Sx
Credit Report Income xX
Commission Income x
Interest Income Sx

Totals $x

Excluding interest income, revenue from ORG's DMP services was
its primary source of income. The DMP services that ORG
provided generated revenue from four sources. When an
individual enroll in a DMP they are required to pay for a
copy of their credit report. Secondly, they are requested to
make a one-time setup fee to ORG. While they are on the program
they are then requested to make monthly fee payments

to ORG.

One aspect of a DMP involves individuals making one monthly
payment to ORG and in turn ORG disburses parts of the payment
to each of the individual's creditors in the amount it
negotiated for the individual. For its efforts, creditors
return a percentage of the payments they receive through ORG
back to ORG. The amounts received back from the creditors are
called "fair share payments" in the credit counseling

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

Page: -6-

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

Explanation of Items

Year/Period Ended
Name of Taxpayer December x, 200X
ORG and December x,
200X

industry. The fair share payments from creditors is the
fourth source of revenue ORG receives from its DMP services.

During the examination year ending December x, 200X, the
breakdown of ORG’s Fee Income is presented below:

Client setup fees $x
Client monthly fees $x
Totals Sx

ORG claims that its setup fees are waived if a client is
unable to pay. However, ORG did not or was not able to
indicate the total number of clients who did not pay the
initial set-up fee.

Educational Activities

During the examination years, ORG conducted several
educational activities. The educational activities that were
conducted during the year ending December x, 200X were as
follows:

-Maintained a web site on credit and money management.
-NLBB (Newsletter)

Beginning in September of 200X, ORG began providing a
monthly newsletter called, NLBB to their existing client
database and to recent inquires. The newsletter focused on a
timely subject that would be of great interest and education
for the reader.

~ NLBB(Brochure)

In January of 200X, ORG created and distributed a brochure
called "NLBB". This was sent to their entire client database
and to recent inquires. The brochure focused on clients that
were not appropriate for Debt Management Plans.

-Fannie Mae's NLBB
Form 886-A. (Rev.4-68, Department of the Treasury - Internal Revenue Service

Page 7

200X, ORG became |
a recogni zed |
housing
consultant through Fannie Mae credit. In addition to
assisting clients purchase their first home, they provided
this free booklet to help individuals understand various
credit terms and facts.

~NLBB

Beginning in the year 200X, ORG created a library of
books in catalog form that was available to existing
clients and recent inquiries at reduced prices. The
library consist of over x publications that cover
various topics (i.e.

spending, saving, investing and budgeting) .
Publications can be ordered by mail or phone.-
Conducted Seminars and Provided Educational Literature

Conducted seminars and provided educational
literature to various employers of schools,
charities and numerous businesses through their
Employee Assistance Programs. See attached Summary
of Seminars and Educational Efforts

On April x, 200X, a questionnaire developed by the
TE/GE Credit Counseling Coordinator was given to
xX service employees. The results from the
questionnaire concluded that:
*ORG does not provide any workshops or
seminars to the general public. Seminars
conducted through Employee Assistance
Programs are only held to sign individuals
to DMP's.

*Some employees stated that they never
viewed the website by ORG.

*Some service employees stated that they have
never asked clients to review the website
and they all stated that they are not
required to do so.

Law

Section 501(a) of the Code provides that an
organization described in section 501(c) (3) is
exempt from income tax. Section 501(c) (3) of the
Internal Revenue Code exempts from federal income tax
organizations organized and operated exclusively for
charitable, educational, religious and

Page: -8-

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

F Exhibit
Service - Year/Period Ended
Explanation of Items Becemberx;
Name of Taxpayer and December x,
ORG 200X

scientific purposes. No part of the net earnings can inure
to the benefit of any private shareholder or individual.
Section 1.501(c) (3)-1(d) (2) of the income regulations
provides, the term charitable includes relief of the poor
and distressed.

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
subject useful to the individual and beneficial to the
community. Regulations 1.501(c) (3)-1(d) (3). In other
words, the two components of education are public education
and individual training.

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 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. 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. Regulations 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 purpose, if substantial in
nature, will destroy the exemption regardless of the number
of importance of truly exempt purposes. The Court found that
the trade association had an “underlying commercial motive"

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service |
Page: -9- |

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

Name of Taxpayer Year/Period Ended
DBecemberx, 2003—
ORG >

and December x,
200X

Explanation of Items

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
that status of an organization that provided analysis 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
purpose that was not incidental to the educational purpose
and was not entitled to be regarded as exempt.

The service has issued two rulings holding credit counseling
organizations to be tax exempt. Revenue Ruling 65-299, 1965-
2 C.B. 165, granted exemption to a 501(c) (4) organizations
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.

Revenue Ruling 69-441, 1969-02 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

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

‘ : Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Exhibit
Explanation of Items Year/Period Ended
Name of-Faxpayer Decemt ;
ORG and December x,
200X

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. Regulations
1.501 (c) (3)-1(d) (3) (i) (b). For this, it 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 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.

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.

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

Page: -11-

Form 886A Department of the Treasury - Internal Revenue Schedule No. or
. Exhibit
Service
Explanation of Items
Name of Taxpayer Year/Period Ended
ORG December x, 200X
and December x,
200X

Rul. 76-205, 1976-1 C.B. 154 (free counseling and English
instructions 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.

Taxpayer's Position:
At the time of issuance of the report, no position statement
had been provided by the taxpayer.

Government's Position:

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. In this case, ORG engages in minimal activities
which further an exempt purpose. Its "counseling" activity
is nothing more than a sales activity: ORG markets and sells
debt management plans to any consumer. There is no actual
counseling provided to consumers who contact, or are
contacted by ORG In addition, employees received no
training on how to provide educational counseling to clients
on personal money management. There are no training manuals
or special courses given to employees (counselors).
Employees are only trained to sell debt management plans,
whether the consumers' situation warranted it or not. In
fact, the training employees (counselors) received did not
enable an employee to determine whether a DMP would serve
the best interests of a potential client. ORG also paid
independent contractors to sell debt management plans on
their own time, in their own homes. Unlike the credit counseling organizations described in the Revenue Ruling
referred to above, and in Consumer Credit Counseling Service
of Alabama, Inc. v. U.S., ORG provides no counseling or
education to its clients.

ORG claimed to provide education through their pamphlets,
brochures and through their website. However, during the
years of examination it was learned that their pamphlet and

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

brochure are rarely updated and their website is
updated semi-annually and contains very little
educational information. In addition, some service
employees have never visited the company website, and
clients are never required to visit the website. The
minimal amount of activity that was verified
involved the president marketing the debt
management plan services of ORG. There was no evidence
that a substantial amount of the organization's
activities were anything other than to market and
sell the debt management plan product.

ORG has a substantial non-exempt purpose of
selling a product, the DMP, and of providing
business to RR. ORG is not furthering any
charitable or educational purpose when it mass
markets debt management plans. ORG advertises and
purchases leads in order to increase its
business.

The reason why ORG which is related to RR through
common officers, is organized as an exempt
organization is to avoid the regulatory scheme of the
Credit Repair Organizations Act (CROA), 15 U.S.C.
section 1679, et. seq. CROA was enacted to protect
consumers by banning certain deceptive practices in
the credit counseling industry. If ORG was a for-
profit entity, the CROA would prohibit it from
charging fees in advance of fully providing services.
In addition, federal law would prohibit it from
purchasing leads and making cold calls to
potential customers. Because section 501 (c) (3)
organizations are exempt from the provisions of CROA,
ORG is able to engage in deceptive business
practices that Congress intended to prohibit when
it passed the CROA law. As such, ORG is operated
for a substantial non-exempt purpose of carrying on a
business while avoiding federal regulations. In
addition, ORG could not collect "fair share" payments
from creditors if it did not have tax-exempt
status. The entire debt management plan business
depended on the organization having tax-exempt
status.

Conclusion:

In summary, ORG is not operated exclusively for tax-
exempt purposes, because it did not engage primarily
in activities that accomplish an exempt purpose.
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) (3), and is

not exempt from Federal income tax under section
501(a), effective January x, 200X.