Marriage counseling fees shift public charity classification

Plain-English summary

The IRS changed a marriage-counseling organization's public-charity classification from sections 509(a)(1) and 170(b)(1)(A)(vi) to section 509(a)(2). The organization received its primary support from marriage-counseling fees rather than governmental units or the general public, so it did not meet the support test for its former classification. Section 509(a)(2) instead covers organizations supported by a combination of gifts, contributions, membership fees, and receipts from exempt-function activities, subject to limits on investment and unrelated business income. The change applied effective January 1 of the redacted year. The organization's section 501(c)(3) exemption remained in effect.

Ruling snapshot

• Question: Which public-charity support classification applied when marriage-counseling fees were the organization's primary support source?
• Outcome: Classification changed to IRC § 509(a)(2); exemption was unaffected.
• Key authorities: IRC §§ 170(b)(1)(A)(vi), 501(c)(3), 509(a)(1), 509(a)(2), 7428.

Full text (IRS public release)

UIL 501.03-02

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201445013 Date: June 5, 2014
Release Date: 11/7/2014
Taxpayer Identification Number:

Person to Contact:
Employee Identification Number:

Contact Numbers:

CERTIFIED MAIL
Dear :

This is a final determination regarding your foundation classification. This letter modifies our
letter to you dated May 20XX, in which we determined that you were an organization described
in sections 509(a)(1) and 170(b)(1)(A)(vi) of the Internal Revenue Code (Code).

Based on your sources of support, we have determined that you are not a private foundation
within the meaning of section 509(a) of the Code because you are an organization of the type
described in section 509(a)(2), effective January 1, 20XX. Your tax exempt status under section
501(c)(3) of the Internal Revenue Code is not affected.

The modification of your foundation status was made for the following reason:

The regulations under section 170 provide that an organization will be described in
section 170(b)(1)(A)(vi) if it normally receives at least 33 1/3 percent of its support from
governmental units or from the general public. Because your primary source of support
is from marriage counseling fees, your organization is not considered a publicly
supported organization under Code sections 509(a)(1) and 170(b)(1)(A)(vi). However,
effective for all tax years beginning with the tax year ending December 31, 20XX, you
are considered a publicly supported organization under Code section 509(a)(2) which
includes organizations that normally receive more than one-third of their support from a
combination of gifts, grants, contributions, membership fees, and gross receipts from
performing exempt function activities and not more than one-third of their support from
investment income and unrelated business taxable income.

Grantors and contributors may rely on this determination, unless the Internal Revenue Service
publishes a notice to the contrary. Because this letter could help resolve any questions about
your private foundation status, please keep it with your permanent records.

Processing of 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 Internal Revenue Code.

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: United
States Tax Court, the United States Court of Federal Claims, or the United States District Court
for the District of Columbia. A petition or complaint in one of these three courts must be filed
before the 91st day after the date this determination was mailed to you if you wish to seek review
of our determination. Please contact the clerk of the respective court for rules and the
appropriate forms regarding filing petitions for declaratory judgment by referring to the enclosed
Publication 892. Please note that the United States Tax Court is the only one of these courts
where a declaratory judgment action can be pursued without the services of a lawyer. You may
write to the courts at the following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

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 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:

Taxpayer Advocate Service

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

Mary A. Epps
Acting Director, EO Examinations

Enclosures:

Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues
Form 6018, Consent to Proposed Action - Section 7428

Return envelope

UIL 501.03-02

Internal Revenue Service Department of the Treasury
Tax Exempt and Government Entities Division

Date: January 7, 2014 - Taxpayer Identification Number:

Form:
990
Tax Year(s) Ended:
December 31, 20XX
Person to Contact/ID Number:
Contact Numbers:

Certified Mail - Return Receipt Requested
Dear :

We have enclosed a copy of our report of examination explaining why we propose modifying
your foundation status under section 509(a) of the Internal Revenue Code (Code).

Your exempt status under section 501(c)(3) of the Code is still in effect.

If you accept our findings, take no further action. We will issue a final letter modifying your
foundation status.

If you do not agree with our proposed modification of your foundation status, you may provide
additional information that you would like to have considered, or you may submit a written
appeal. The enclosed Publication 3498, The Examination Process, and Publication 892,
Exempt Organization 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.

If you request a conference with Appeals, you must submit a written protest within 30 days from
the date of this letter. 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. 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

Letter 3620 (Rev 11-2003)
Catalog Number 34811R

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 letter.

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

Internal Revenue Service
Office of the Taxpayer Advocate

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,

Nanette M. Downing
Director, EO Examinations

Enclosures:

Publication 3498
Publication 892
Report of Examination

Letter 3620 (Rev 11-2003)
Catalog Number 34811R

Form 886-A Department of the Treasury - Internal Revenue Service
Explanation of Items

Name of Taxpayer Year/Period Ended
20XX12

Issue 1: Counseling Fees

On the Form 886-A, you stated that the taxpayer provides biblical marriage counseling to couples and
families based upon need instead of the ability to pay; however, the Income Analysis workpaper did not
demonstrate that the organization served a charitable class and operated in a noncommercial manner.

• Organizations generally qualify under IRC section 509(a)(2) if the main source of their revenue is from
exempt function income such as fees for services, admissions, or sales of materials supporting their
exempt function. Contributions, gifts and grants are normally not substantial in nature.

• Reg. 1.501(c)(3)-1(d)(2) provide that the term "charitable" is used in IRC 501(c)(3) in its generally
accepted legal sense and includes relief of the poor and distressed or of the underprivileged;
advancement of religion; advancement of education or science; erection or maintenance of public
buildings, monuments, or works; lessening of the burdens of government; promotion of social welfare.

• Per IRM 7.25.3.5.1.1 - Rev. Rul. 69-441, 1969-2 C.B. 115, provides that an organization that assists
low income individuals and families with individual financial counseling, and assists them in
establishing budget plans where necessary, may be exempt.

• Per IRM 7.25.3.5.1.2 - Self-help programs are often used to ameliorate the problems of poverty.
Supplying materials and services for use in these programs can also be a charitable activity. How the
organization operates is usually a critical factor in determining whether it is charitable rather than a
commercial venture. For example, in Rev. Rul. 68-16, 1968-1 C.B. 255, an organization created to
market the cooking and needlework of needy women was held to be exempt even though it received a
small commission on each sale. The organization served a charitable class, and operated in a
noncommercial manner. The women it served could not otherwise find an outlet.

Action:
Analyze the fee structure to verify that the taxpayer serviced a charitable class and was operated in a
noncommercial manner.

Issue 2: Incorrect TIN on Letter 3597
You included the incorrect TIN on Letter 3597.

Form 886-A Department of the Treasury - Internal Revenue Service

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