Credit counseling organization loses exemption

Plain-English summary

The IRS revoked a credit counseling organization's exemption under IRC § 501(c)(3). The organization enrolled clients in debt management plans and received its income from those plans, but it did not document the educational outreach and free counseling described in its exemption application. The examination also found that it worked alongside a same-name for-profit organization with the same founder, commingled some funds, and could not clearly distinguish which clients belonged to each entity. The IRS concluded that the organization failed to show that substantially all of its activities furthered exempt purposes. Revocation was effective April 24 of a redacted year.

Ruling snapshot

• Question: Did the credit counseling organization operate exclusively for charitable and educational purposes under IRC § 501(c)(3)?
• Outcome: Revocation, effective April 24 of a redacted year
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE — EO Mandatory Review
1100 Commerce Street, MC 4920-DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Employer Identification Number:
Release Number: 201503017

Release Date: 1/16/2015 Person to Contact:
Date: June 10, 2009
UIL Code: 501.03-08 Identification Number:

Contact Telephone Number:

In Reply Refer To:

TE/GE Review Staff
LAST DAY FOR FILING A
CERTIFIED MAIL — Return receipt requested PETITION WITH TAX COURT:
September 8, 20XX

Dear

This is a final adverse determination that you do not qualify for exemption from income tax
under section 501(a) of the Internal Revenue Code (I.R.C.) as an organization described in
I.R.C. section 501(c)(3). Internal Revenue Service recognition of your status as an organization
described in I.R.C. section 501(c)(3) is revoked, effective April 24, 20XX. Our adverse
determination is made for the following reason(s):

You have failed to establish that you are operated exclusively for exempt purposes within the
meaning of Internal Revenue Code section 501(c)(3) as you have failed to provide evidence
of your charitable activities. Per your application you were created to provide debt
management assistance and to educate the public with regard to financial responsibility;
however, you have not engaged in these endeavors or other activity that would satisfy
501(c)(3) statutes.

Contributions made to you are no longer deductible as charitable contributions by donors for
purposes of computing taxable income for Federal income tax purposes. See Rev. Proc. 82-39
1982-2 C.B. 759, for the rules concerning the deduction of contributions made to you between
April 24, 20XX and the date a public announcement, such as publication in the Internal Revenue
Bulletin, is made stating that contributions to you are no longer deductible.

You are required to file income tax returns on Form 1120 for all years beginning after April 24,
20XX. Returns for the years ending November 30, 20XX, November 30, 20XX and November
30, 20XX must be filed with this office within 60 days from the date of this letter, unless a request
for an extension of time is granted. Send such returns to the following address:

Internal Revenue Service
1100 Commerce Street
MC 4920-DAL Mandatory Review
Dallas, TX 75242

Tax returns for subsequent years are to be filed with the appropriate Campus identified in the
instructions for those returns.

If you decide to contest this determination under the declaratory 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. You may write to the United
States Tax Court at the following address:

United States Tax Court,
400 Second Street NW
Washington, D.C. 20217

The processing of income tax returns and assessment of any taxes due will not be delayed
because a petition for declaratory judgment has been filed under I.R.C. section 7428.

If you have questions about this letter, please write to the person whose name and address are
shown on this letter. If you write, please attach a copy of this letter to help identify your account.
Keep a copy for your records. Also, please include your telephone number and the most
convenient time for us to call, so we can contact you if we need additional information.

You also have the right to contact the office of the Taxpayer Advocate. However, you should first
contact the person whose name and telephone number are shown above, since this person can
access your tax information and can help you get answers. You can call 1-877-777-4778 and
ask for Taxpayer Advocate assistance. Or you can contact the Taxpayer Advocate office located
nearest you by calling , faxing or writing to: Internal Revenue
Service, Taxpayer Advocate’s Office,

Taxpayer Advocate assistance cannot be used as a substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically
correct tax determinations, nor extend the time fixed by law that you have to file a petition in the
United States Tax 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.

We will notify the appropriate State officials of this action, as required by I.R.C. section 6104(c).
This is a final revocation letter.
Sincerely,

Sunita Lough
Director, EO Examinations

Internal Revenue Service Department of the Treasury
801 Tom Martin Drive, Room 263

Birmingham, AL 35211

Taxpayer Identification Number:

Date: August 8, 2008
Form:

990

Tax Year(s) Ended:
November 30, 20XX and 20XX

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.

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,

Vicki L. Hansen
Acting, Director EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

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

Form 886-A
Exhibit I

TAX YEARS ENDING NOVEMBER 31, 20XX AND 20XX

ISSUES PRESENTED:

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

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

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

FACTS

Background

was incorporated under the laws of the State of
pursuant to the Nonprofit Corporation Act on April 24, 20XX. In a
determination letter dated July 23, 20XX, was
determined to be exempt from federal income tax as an organization described in IRC
Section 501(c)(3). is located at

In its Articles of Incorporation, stated its purpose is
"to Provide information and/or counseling to the general public and /or debt distressed
individuals and families on the subject of budgeting and the wise use of consumer
credit. To promote debt management receiving money from debtors for the purpose of
distributing the same to creditors. To receive and maintain a fund or funds of real or
personal property, or both , and subject to the limitations and restrictions herinafter set
forth, to use and apply the whole or any part of the income thereof and principal thereof
exclusively for charitable and educational purposes, either directly or by contributions to
organizations that qualify as exempt under Section 501(c)(3) of the Internal Revenue
Code of 1986, as amended, and its Regulations as they now exist or as they may
hereafter be amended. To engage in the transaction of any and all lawful activities for
which nonprofit corporations may be organized under the . No part of the
net earnings of the Corporation shall inure to the benefit of any Director, officer of the
Corporation, or any private individual, except that reasonable compensation may be
paid for services rendered to the Corporation to employees other than it Directors and
officers. No Director, Officer of the Corporation or private individual shall be entitled to
share in the distribution of any of the corporate assets on dissolution of the Corporation.
The Corporation shall carry on no propaganda or attempt to influence legislation or

Form 886-A

Exhibit I

participate or intervene in any political campaign on behalf of or in opposition to any
candidate for public office. Under no circumstances will the Corporation make loans to
employees, officers and/or Directors.

According to the form 1023 application for recognition of exemption,

was formed to provide 75% of the organization’s time doing debt management
assistance, free of charge, to those who need financial assistance but could not
otherwise afford it. Debt management assistance will include, but not be limited to,
establishing revised repayment schedules with creditors and securing reduced and/or
eliminate interest, late fee, over the limit fees with creditors. Delinquent accounts may
be brought current through the use of extension fees, recycling/re-aging agreements,
etc. The amount of assistance and the amount of intervention required will be
determined by debtor/client budget analysis, in conjunction with creditor needs. Debt
management assistance to be provided will be done so in an effort to prevent
bankruptcy on the part of the debtor client, as an alternative to resolving financial
difficulties.

In as much as the service will be provided free of charge, our tax exemption will enable
us to solicit contributions to cover inherent costs from both the creditor community, as
well as from the debtor clients, once they have achieved the desired benefits and
results of the program. The activity will commence upon receipt of theirs approval.

The activity will be conducted at
by unpaid volunteers, with considerable skill, experience in the area of debt
management.

25% of the time will be devoted to educating and providing knowledge to the general
public, with regard to financial responsibility. In many cases, debtors who have become
over-extended can be taught how to resolve their problems, on their own, by
themselves. People can be taught how to communicate with their creditors. People
can be taught the options available to them for resolving different types of financial
problems. People can be taught how much interest is too much. People can be taught

how to live within their means and how to prepare of unexpected expenses. Education
and knowledge can oftentime enable people to resolve existing financial problems,
imparted through seminars, one-on-one counseling, distributed literature, news
releases, financial columns in various newspapers, etc. and, hopefully, through
curriculum additions in schools.

Tax exemption will enable us to solicit contributions to cover the cases of printed matter,
travel to and from the locale and possibly enable donation of or access to a forum (a
place for the seminar).

One-On-One counseling would take place at our offices and/or over the phone.
Seminars will take place wherever a forum and audience can be achieved. We
anticipate going to churches, civic group, large employers, school boards, etc. All of

Form 886-A

Exhibit I
these activities will be conducted by unpaid volunteers, with much skill, experience and
expertise in debt management.

Activity Description

The primary activity of the (hereinafter ) during
the year ending November 30, 20XX is enrolling clients in debt management plans
(hereinafter DMP’s). Potential clients are individuals with unsecured debt. A DMP is a
plan where a client makes monthly payments to _to satisfy their unsecured debt over
a certain period of time. The debts handled in the DMP’s were credit card debts, but
other unsecured debts were also included. The monthly payment made by the client
included the payment to the creditors and a service fee. The client agreement stated
that the client shall make payments to the Company as follows: The first initial payment
made will be the amount agreed upon by the creditors and it also states that may
charge a one time retainer fee. This fee will be assessed based upon the customer's
ability to pay up toa maximum of also stated they may charge a monthly
service fee. The fee will also be assessed based on the client’s ability to pay up toa
maximum of

had one counselor doing the budget analysis with the clients and trying to help
set them up on a DMP plan. The counselor did not have on going credit counseling
education. Even though the materials provided by states that they also helped clients
in other ways besides the DMP’s they have no proof of the other programs that was
provided. The only income received by the organization was from DMP’s. There were
no phone calls recorded to review. During the audit, there were no activities so the
agent could not monitor any calls.

During the examination it was discovered that the is working along side another for-
profit organization with the same name, . Both
organizations have the same founder, . During the examination it was
discovered that a portion of the funds were commingled with the for profit organization.
The funds were deposited in the account of the for- profit and transferred to the non-
profit account. Even though there were separate accounts it was not clear as to which
client was non profit and which was for-profit.

stated that a good portion of both businesses was derived from
current and former satisfied customers as well as from referrals from such nationally
prominent creditors as etc. He stated if a resident
of a state requiring non-profit status for administering debt management plans would
call the for- profit for information, they would be turned over to the non-profit for their
assistance.

Form 886-A

Exhibit I
Education
In addition to its activities, they claim to have engaged in educational outreach

presentations to local churches. However, provided no documents to verify that any
educational activities were conducted. There is no evidence that _or its employees
were engaged in any activity other than the telephone solicitation of potential clients for
DMP’s. does not presently solicit new clients at this time. They claim the only form
of education at this time is in the form of mail outs. There is no evidence that any
employees of were engaged in any activity other than the telephone solicitation of
DMPs to individuals in debt, which was done during the year of examination.

claims they solicited clients from outreach activities but there is no evidence that any
outreach activities were conducted. However, any amount of time devoted to these
“outreach” activities would have been minimal or non-existent compared to primary
activity of selling DMPs. cannot provide any information such as where the outreach
activities were held, who conducted the outreach activities, number of people that were
helped because of the outreach activities. claims that they went to different churches
and inserted pamphlets in the church bulletins, however the pamphlets were not
provided.

LAW

Section 501(a) of the Internal Revenue Code provides that an organization
described in section 501(c) (3) is exempt from income tax. 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). 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.

Form 886-A

Exhibit I

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)-1(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).

An organization formed to educate people in Hawaii in the theory and practice of
“est” was determined by the Tax Court to a part of a “franchise system which is
operated for private benefit,” and, therefore, should not be recognized as exempt under
section 501(c)(3) of the Code. est of Hawaii v. Commissioner, 71 T.C. 1067, 1080
(1979). Although the organization was not formally controlled by the same individuals
who controlled the for-profit entity that owned the license to the “est” body of knowledge,
publications, and methods, the for-profit entity exerted considerable control over the
applicant’s activities by setting pricing, the number and frequency of different kinds of

Form 886-A

Exhibit I
seminars and training, and providing the trainers and management personnel who are
responsible to it in addition to setting price for the training. The court stated that the fact
that the organization’s rights were dependent upon its tax-exempt status showed the
likelihood that the for-profit entities were trading on that status. The question for the
court was not whether the payments made to the for-profit were excessive, but whether
the for-profit entity benefited substantially from the operation of the organization. The
court determined that there was a substantial private benefit because the organization
“was simply the instrument to subsidize the for-profit corporations and not vice versa
and had no life independent of those corporations.”

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 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.

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, 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

Form 886-A

Exhibit I
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. 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.

Internal Revenue Code section 501(c)(3) specifies that an exempt organization
described therein is one in which “no part of the net of earnings inures to the benefit of
any private shareholder or individual.” The words “private shareholder or individual” in
section 501 to refer to persons having a personal and private interest in the activities of
the organization. Treas. Reg. § 1.501(a)-1(c). The inurement prohibition provision “is
designed to prevent the siphoning of charitable receipts to insiders of the charity... .”
United Cancer Council v. Commissioner, 165 F.3d 1173 (7th Cir. 1999). Reasonable
compensation does not constitute inurement. Birmingham Business College v.
Commissioner, 276 F.2d 476, 480 (5th Cir. 1960).

Where an organization provided a source of credit to companies of which a
private shareholder was either an employee or an owner, the court found that a portion
of the organization’s net earnings inured to the benefit of that private shareholder.
Easter House v. United States, 12 Cl. Ct. 476 (1987). That such loans were made
showed that the companies controlled by the private shareholder had a “source of loan
credit” in the organization.

The Credit Repair Organizations Act (CROA), 15 U.S.C. § 1679 et seq., effective
April 1, 1997, imposes restrictions on credit repair organizations, including forbidding
the making of untrue or misleading statements and forbidding advance payment, before
services are fully performed. 15 U.S.C. § 1679b. Significantly, section 501(c)(3)
organizations are excluded from regulation under the CROA.

Form 886-A
Exhibit I

The CROA defines a credit repair organization as:

(A) any person who uses any instrumentality of interstate commerce or the mails
to sell, provide, or perform (or represent that such person can or will sell,
provide, or perform) any service, in return for the payment of money or other
valuable consideration, for the express or implied purpose of—

(i) improving any consumer's credit record, credit history, or credit rating,
or

(ii) providing advice or assistance to any consumer with regard to any
activity or service described in clause (i).

15 U.S.C. § 1679a(3). The courts have interpreted this definition broadly to apply
to credit counseling agencies. The Federal Trade Commission’s policy is that if an
entity communicates with consumers in any way about the consumers’ credit situation, it
is providing a service covered by the CROA. In Re National Credit Management Group,
LLC, 21 F. Supp. 2d 424, 458 (N.D.N.J. 1998).

Businesses are prohibited from cold-calling consumers who have put their phone
numbers on the National Do-Not-Call Registry, which is maintained by the Federal
Trade Commission. 16 C.F.R. § 310.4(b)(1)(iii)(B); 47 C.F.R. § 64.1200(c)(2). Section
501(c)(3) organizations are not subject to this rule against cold-calling. Because
501(c)(3) organizations are exempt from regulation under the CROA and the cold-
calling restrictions, organizations that are involved in credit repair have added
incentives to be recognized as section 501(c)(3) organizations even if they do not intend
to operate primarily for exempt purposes.

Exempt Organization’s Position

The exempt organization will have a chance to respond when the report is sent to them.

GOVERNMENT POSITION

During the examination it was discovered that the is working along side another for
profit organization with the same name, . It is not
clear as to how the client distinguish between the non profit and the for- profit when they
call. Both organizations have the same founder, . During the
examination it was discovered that a portion of the funds were commingled with the for
profit organization. The funds were deposited in the account of the for- profit and

Form 886-A

Exhibit I
transferred to the non-profit account. Even though there were separate accounts it was
not clear as to which client was non profit and which was for profit.

According to the Articles of Incorporation, The Corporation is organized exclusively for
charitable, educational, religious or scientific purposes, within the meaning of section
501(c) (3) of the Internal Revenue Code.

It is the service’s position that failed to provide proof of adequate amount of
education such as workshops, seminars, one on one counseling sessions to the public,
going out to churches, civic groups, large employers, school boards, etc. as was stated
in the initial 1023 application.

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). In other words, the two components of education are public
education and individual training.

CONCLUSION

In conclusion, was not operated exclusively for exempt purposes. In fact,
did not verify that substantially all of its activities was for the exempt purpose of the
organization. Accordingly, it is determined that is not an organization described in
section 501(c)(3), and is not exempt from income tax under section 501, effective April
24, 20XX.

Form 1120 returns should be filed for the tax periods ending on or after December
31, 20XX and any subsequent years.