Counseling organization loses exemption after shifting from charitable work

Plain-English summary

An organization originally received section 501(c)(3) status to help unemployed people through training, counseling, and prayer. By the examined years, that activity had ended or become minimal, while the organization primarily provided broad mental-health counseling to the general public at fair market value. It also promoted executive coaching and a related consulting firm focused on improving for-profit businesses, which furthered the creator's professional interests. The IRS concluded that the organization no longer operated exclusively for charitable or religious purposes and provided private benefits to its creator. It revoked the exemption effective on the redacted January 1 date and required taxable returns and federal unemployment tax treatment from that date forward.

Ruling snapshot

• Question: Did the organization continue to qualify for exemption under section 501(c)(3)?
• Outcome: Revocation because its primary activities no longer served an exempt charitable class and provided private benefit.
• Key authorities: IRC §§ 501(c)(3) and 3301; Treas. Reg. § 1.501(c)(3)-1.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

Internal Revenue Service

TE/GE EO Examinations
1100 Commerce Street
Dallas, TX 75242
TAX EXEMPT AND
GOVERNMENT ENTITIES Date: November 21, 2014
DIVISION
Release Number: 201515034 Person to Contact:

Identification Number:

Release Date: 4/10/2015 In Reply Refer to:

UIL code: 501.03-00

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:

CERTIFIED MAIL — Return Receipt Requested
Dear:

This is a Final Adverse Determination Letter that your organization was not exempt from
taxation under section 501(a) as described under section 501(c)(3) of the Internal Revenue
Code (IRC). The revocation of your tax exempt status is effective January 1, 20XX.

Our adverse determination was made for the following reasons:

You have not established that you are organized exclusively for an exempt
purpose, or that you have been engaged primarily in activities that accomplish
one or more exempt purposes. You have not established that no part of your
net earnings inure to the benefit of any private shareholder or individual.

Contributions to your organization are not deductible under section 170 of the Internal
Revenue Code.

You are required to file Federal income tax returns on Form 1120. These returns should be
filed with the appropriate Service Center for the year ending December 31, 20XX and for all
years thereafter.

Processing of income tax returns and assessment 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 in court, you must initiate a suit for declaratory
judgment in the United States Tax Court, the United States Claim Court or the District
Court of the United States for the District of Columbia before the 91st day after the date this
determination was mailed to you. Contact the clerk of the appropriate court for the rules for
initiating suits for declaratory judgment.

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 from the site where the tax deficiency was determined by calling,

Tel: or write :

Taxpayer Advocate

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 section 6104(c) of
the Internal Revenue Code.

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

Sincerely yours,

John A. Koskinen
Commissioner

By:

Stephen A. Martin
Acting Director, EO Examinations
Enclosures:
Publication 892

Department of the Treasury Date:

yi Internal Revenue Service August 21, 2014

IRS Tax Exempt and Government Entities Division Taxpayer Identification Number:
M/S 1112 PO Box 12307
Ogden, UT 84412 Form:

Tax year(s) ended:
December 31, 20XX, 20XX & 20XX

Person to contact / ID number:

Contact numbers:
Phone Number:

Fax Number:
Manager's name / ID number:

Manager's contact number:
Phone Number:
Response due date:

Certified Mail - Return Receipt Requested
Dear:

Why you are receiving this letter
We propose to revoke your status as an organization described in section 501(c)(3) of the Internal Revenue
Code (Code). Enclosed is our report of examination explaining the proposed action.

What you need to do if you agree
If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action — Section

7428, and return it to the contact person at the address listed above (unless you have already provided us a
signed Form 6018). We'll issue a final revocation letter determining that you aren't an organization described in

section 501(c)(3).

After we issue the final revocation letter, we’ll announce that your organization is no longer eligible for
contributions deductible under section 170 of the Code.

If we don't hear from you

If you don't respond to this proposal within 30 calendar days from the date of this letter, we’ll issue a final
revocation letter. Failing to respond to this proposal will adversely impact your legal standing to seek a
declaratory judgment because you failed to exhaust your administrative remedies.

Effect of revocation status
If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax year(s)

shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation
If you disagree with our proposed revocation, you may request a meeting or telephone conference with the
supervisor of the IRS contact identified in the heading of this letter. You also may file a protest with the

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

IRS Appeals office by submitting a written request to the contact person at the address listed above within 30
calendar days from the date of this letter. The Appeals office is independent of the Exempt Organizations
division and resolves most disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of the facts, the
applicable law, and arguments in support of your position. For specific information needed for a valid protest,
please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status,
and page six of the enclosed Publication 3498, The Examination Process. Publication 3498 also includes
information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation
referred to in Publication 3498 generally doesn’t apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication 892. Please
contact the individual identified on the first page of this letter if you are considering requesting technical
advice. If we issue a determination letter to you based on a technical advice memorandum issued by the Exempt
Organizations Rulings and Agreements office, no further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn’t a substitute for
established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can't reverse a legally
correct tax determination or extend the time you have (fixed by law) to file a petition in a United States court.
They can, however, see that a tax matter that hasn't 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

For additional information

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,

For Barbara L Harris
Acting Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Form 886-A SCHEDULE NO. OR
(REV JANUARY 1994) EXPLANATION OF ITEMS EXHIBIT
: NAME OF TAXPAYER TAX IDENTIFICATION NUMBER YEAR/PERIOD ENDED
December 31, 20XX,
20XX and 20XX
ISSUE:
Does , continue to qualify as an exempt organizations described in section
501(c)(3) of the Internal Revenue Code?
FACTS:
was formed on December 17, 19XX in the State of as a nonprofit
corporation.

applied for tax exempt status from the Internal Revenue Service on February 12, 19XX by filing
Form 1023, Application for Recognition of Exempt Under Section 501(c)(3) of the Internal Revenue
Code.

Form 1023 states that, “The organization was formed to help the unemployed. Through a series
of lectures and training and prayer the attendees will be helped in the areas of personal self esteem,
guidance in preparation for job interviews and all areas of personal conduct and grooming etc.”

received a favorable determination on April 23, 19XX as exempt from Federal income tax under
section 501(c)(3) of the Internal Revenue Code.

, founder and president of _ is listed in
listing states:

“I have been a counselor since 19XX. I completed my in counseling from
in 19XX and my in counseling from the
in 19XX. I am ordained as a through the
. I am a with

. I specialize in sexual issues, eating disorders, anxiety,
grief, depression, anger, interventions, and ADD/ADHD, also offering group
psychotherapy. I provide therapy for all adults, children, and adolescents. I
have extensive experience in executive coaching for individuals wanting specific
coaching to advance their career.

“I founded in 19XX as a Christian alternative to traditional
counseling. We offer services to both Christians and non-Christians of all ages
and ethnic backgrounds.”

Form 886-A (Rev. 01-94) Cat. No. 20810W Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886-A SCHEDULE NO. OR
(REV JANUARY 1994) EXPLANATION OF ITEMS EXHIBIT
NAME OF TAXPAYER TAX IDENTIFICATION NUMBER YEAR/PERIOD ENDED

December 31, 20XX,
20XX and 20XX

states:

website, , lists mission statements as:

“Our purpose is to provide genuine, caring, client-centered, directive,
professional, Christian mental health counseling, which includes psychological
assessment, training, and consultations to individuals, couples, families, and
groups at a fair market value, in a manner that is glorifying to God.

continues to be a viable non-profit ministry meeting the
psychological and educational needs for the entire state of

website also has information about Seminars & Speaking Engagements. This web page

• spends considerable time in corporate circles addressing
  issues like conflict resolution, human resource planning, and strategic coaching.”

“Through his consulting firm, has spent the past 25
years collaborating with companies and organizations to effectively manage
strategic change, positive conflict resolution, and employee personal
development. goal is to see your objectives accomplished and
maximized; to meet that goal, we employ industry tenured professionals who are
dedicated to seeing your plans succeed, whatever they are.”

website also states the following information about executive coaching:

“Executive coaching is different from psychotherapy. It is working one on one,
and groups with corporate executives on their need to improve areas, to be more
effective, productive, and manage better.

“Areas such as:
Communication
Inner Personal Skills
Motivation
Conflict Resolution
Hiring/Firing

“Each person has unique needs and the coaching is customized. Contact our
office for more in depth discussion on how this could help you and your business
today.”

Form 886-A (Rev. 01-94) Cat. No. 20810W Department of the Treasury - Internal Revenue Service

Page: -2-

Form 886-A SCHEDULE NO. OR
(REV JANUARY 1994) EXPLANATION OF ITEMS EXHIBIT
NAME OF TAXPAYER TAX IDENTIFICATION NUMBER YEAR/PERIOD ENDED

December 31, 20XX,
20XX and 20XX

LAW:

Internal Revenue Code section 501(c)(3) provides exemption from Federal income tax for
corporations organized and operated exclusively for religious, charitable, scientific, literary, or
educational purposes no part of the net earnings of which inures to the benefit of any private
shareholder or individual.

Treasury Regulation section 1.501(c)(3)-1(a)(1) 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.

Treasury Regulation section 1.501(c)(3)-1(c)(1) specifies the operational test for a 501(c)(3)
organization. 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 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.

Treasury Regulation section 1.501(c)(3)-1(d)(1)(ii) clarifies the meaning of the term exempt
purpose. An organization is not organized or operated exclusively for one or more exempt purpose
unless it serves a public rather than a private interest. To meet this requirement 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.

Treasury Regulation section 1.501(c)(3)-1(d)(2) provides that the term “charitable” is used in section
501(c)(3) in its generally accepted legal sense. Such term includes: Relief of the poor and distressed
or of the underprivileged; advancement of religion; advancement of education or science; lessening
of the burdens of Government; and promotion of social welfare by organizations designed to
accomplish any of the above purposes, or (1) to lessen neighborhood tensions; (2) to eliminate
prejudice and discrimination; (3) to defend human and civil rights secured by law; or (4) to combat
community deterioration and juvenile delinquency.

TAXPAYER’S POSITION:

power of attorney, , has indicated that has reluctantly agreed that
the organization should be operated as a for profit organization.

Form 886-A (Rev. 01-94) Cat. No. 20810W Department of the Treasury - Internal Revenue Service
Page: -3-

‘Form 886-A SCHEDULE NO. OR
. (REV JANUARY 1994) EXPLANATION OF ITEMS EXHIBIT
NAME OF TAXPAYER TAX IDENTIFICATION NUMBER YEAR/PERIOD ENDED

December 31, 20XX,
20XX and 20XX

GOVERNMENT’S POSITION:

_ was initially formed to help the unemployed. Services to the unemployed are considered relief of
the poor and distressed or of the underprivileged as outlined in Treas. Reg. 1.501(c)(3)-1(d)(2). It
was on the merit of this activity that the organization was granted tax exempt status under section
501(c)(3) on April 23, 19XX. However, as of 20XX this activity has either been discontinued, or
constitutes a very minimal activity of

The Internal Revenue Service, Service, recognizes that does provide meaningful services to those
struggling with addiction, including pornography, and those recovering from sexual abuse. However,
it does not appear that operates exclusively for these activities.

For the past several years, the principle activity of , doing-business-as

, is to provide mental health counseling. As has been detailed in the Facts section of this
report, these services entail a very broad range of mental health services and are provided to
“Christians and non-Christians of all ages and ethnic backgrounds,” and “individuals, couples,
families, and groups at a fair market value.”

Because of the broad nature of these services and the fact that they are provided to the general
public, these activities do not meet the requisite charitable class that is necessary to be considered a
charitable purpose as described in Treas. Reg. section 1.501(c)(3)-1(d)(2).

_ does provide a “Christian alternative to traditional counseling,” and the mental health counseling is
provided “in a manner that is glorifying to God.” However, does not preach a specific religious
doctrine. Providing mental health services using a Christian philosophy is not sufficient to be
considered operating exclusively for religious purposes.

is used to promote consulting firm, . This consulting
appears to be focused on the increasing profitability of for profit corporations. This use of _ to
further the professional interest of the creator, , is in violation of Treas. Reg.

1.501(c)(3)-1d(1)(ii).

Again, does provide good services to those in need. However, because __ is not operated
exclusively for charitable purposes and is used to provide private benefits to , has
failed to meet the operational test required by Treas. Reg. 1.501(c)(3)-1(c)(1). Since it has failed the
operational test, it is not organized and operated exclusively for one or more purposes described in
section 501(c)(3).

Form 886-A (Rev. 01-94) Cat. No. 20810W Department of the Treasury - Internal Revenue Service
; Page: -4-

’ Form 886-A SCHEDULE NO. OR
» (REV JANUARY 1994) EXPLANATION OF ITEMS EXHIBIT
NAME OF TAXPAYER TAX IDENTIFICATION NUMBER YEAR/PERIOD ENDED
December 31, 20XX,
20XX and 20XX

CONCLUSION:

is no longer described as an organization that is exempt from Federal income tax
under section 501(c)(3). It is proposed that tax exempt status be revoked as of January 1,
20XX and should pay Federal income tax from that date forward. The amount of Federal income tax
that is due is $ for the tax period ended December 31, 20XX plus applicable interest. tax is
currently due for the tax periods ended December 31, 20XX and 20XX because of net operating
losses incurred during these tax periods.

Also, since tax exempt status has been revoked, it is now liable for Federal
Unemployment Tax under section 3301. This tax will be computed in a separate report of
examination.

Form 886-A (Rev. 01-94) Cat. No. 20810W Department of the Treasury - Internal Revenue Service
Page: -5-