internal_revenue_service number release date index number ------------------------ ----------------------------------- ------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- telephone number -------------------- refer reply to cc psi b1 plr-127863-08 date date legend x ------------------------ -------------------------------------------------- -------------------------------- ----------------------- --------- y date state dear ------------ this letter responds to a request dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to be treated as an association_taxable_as_a_corporation for federal tax purposes under sec_301_7701-3 facts based on the information submitted and representations made within the relevant facts are as follows on date x was organized under state law as a limited_liability_company y is the percent owner of x although x intended that it be treated as an association_taxable_as_a_corporation for federal tax purposes as of date x did not timely file a form_8832 entity classification election plr-127863-08 x represents that it has acted reasonably and in good_faith that granting relief will not prejudice the interests of the government and that it is not using hindsight in making the election law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that unless a domestic eligible_entity elects otherwise the entity is disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer plr-127863-08 acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an extension of time of sixty days from the date of this letter to elect to be treated as an association for federal tax purposes effective date the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter will be sent to your authorized representative sincerely william p o’shea william p o’shea associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number -------------------------- ------------------------------------------------------ ----------------------------------- --------------- --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b1 plr-106435-09 date date legend x ------------------------------------------ --------------------------- state ----------- date ---------------- dear --------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a corporation for federal tax purposes and relief to file a late s_corporation_election under sec_1362 of the internal_revenue_code facts according to the information submitted x was formed on date as a limited_liability_company under the laws of state x intended to elect to be treated as an association_taxable_as_a_corporation and to then elect to be treated as an s_corporation for federal tax purposes with both elections effective date however neither form_8832 entity classification election nor form_2553 election by a small_business_corporation was timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible plr-106435-09 entity can elect its classification for federal tax purposes a business_entity is an entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the code sec_301_7701-2 an eligible_entity with a single owner can elect either to be classified either as an association or as an entity separate from its owner sec_301_7701-3 provides that unless a domestic eligible_entity elects otherwise the entity is disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the service_center designated on the form sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed nor more than months after the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 sec_1362 provides that a small_business_corporation can elect to be treated as an s_corporation sec_1362 provides when an s election becomes effective if an s election is made within the first two and one-half months of a corporation's taxable_year then plr-106435-09 that corporation will be treated as an s_corporation for the year in which the election was made if an election is made after the first two and one-half months of a corporation's taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year conclusion based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result x is granted an extension of time of days from the date of this letter to file a properly executed form_8832 with the appropriate service_center electing to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date a copy of this letter should be attached to the election in addition based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be recognized as an s_corporation effective date a form_2553 along with a copy of this letter must be forwarded to the appropriate service_center within days from the date of this letter except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-106435-09 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely curt g wilson curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service tege eo examinations mail stop dal commerce st dallas texas - uil tax_exempt_and_government_entities_division release number release date date date legend org organization name xx date address address org address certified mail dear taxpayer_identification_number person to contact employee identification_number employee telephone number last date for filing a pleading with the tax_court the claims_court or the united_states district_court for the district of columbia 20xx this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code our favorable determination_letter to you dated august 19xx is hereby revoked and you are no longer exempt under sec_501 of the code effective january 20xx the revocation of your exempt status was made for the following reason s you are not operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 you are not and have not been engaged primarily in activities which accomplish one or more exempt purposes you are not a charitable_organization within the meaning of sec_1_501_c_3_-1 rather your activities further a substantial nonexempt commercial purpose and serve private rather than public interests contributions to your organization are no longer deductible under sec_170 after december 20xx you are required to file income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the tax_year ending december 20xx and for all tax years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code lf youdecide to contest this determination under the declaratory_judgment provisions of sec_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 day after the date please contact the clerk of the appropriate court for rules this determination was mailed to you regarding filing petitions for declaratory judgments by referring to the enclosed publication you may write to the united_states tax_court at the following address taxpayer_advocate you also have the right to contact the office_of_the_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 and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at see the enclosed notice taxpayer_advocate_service - your voice at the irs for taxpayer_advocate telephone numbers and addresses we will notify the appropriate state officials of this action as required by code sec_6104 you should contact your state officials if you have any questions about how this final_determination may affect your state responsibilities and requirements if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely doug shulman commissioner by vicki l hansen acting director eo examinations enclosures publication notice notice legend org organization name service service bm-3 bm-1 bm-2 co-3 co-1 co-2 br oe xx date author - author website website emp-1 employee agreement agreement xyz state bm-4 bm-5 co-4 co-5 avail 6th bm-6 co-6 bm-7 co-7 co-8 2nd 6th co-9 co-10 co-11 sth 4th 7th board members co-12 co-13 co- 7th gth gt companies table table issue whether org is operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 whether org had the substantial nonexempt purpose of providing debt management program services to the general_public whether org was operated for the purpose of serving private rather than public interests facts background org org was incorporated on june 19xx as a domestic non-profit corporation in the state of xyz located in city org’s stated purpose was exclusively for charitable and educational_purposes including for such purposes the making of distributions to organizations that qualify as exempt under the sec_501 of the internal_revenue_code or corresponding section of any future federal tax code the articles of incorporation also stated org’s purpose was to enable the general_public to avoid bankruptcy and bad_debt write-offs and to repay all outstanding debts including collections judgments and liens accomplished by counseling clients establishing a budget with them and developing a repayment schedule which fits their budget and also satisfies their creditors the client's funds will be disbursed on a regularly scheduled basis until all creditors are paid in full education will be provided to the client’s so they can avoid the same pitfalls in the future this will be done through personal counseling classes and seminars provide books brochures and audio and video tapes as necessary this shall be we will also on august 19xx the internal_revenue_service irs issued letter stating org was exempt from federal_income_tax as an organization described under sec_501 of the internal_revenue_code irc or the code org also received an advanced ruling that it was publicly supported within the meaning of sec_509 and sec_170 of the code on april 20xx the irs issued letter reaffirming exempt status under sec_501 with a definitive ruling that org was a publicly_supported_organization described under sec_509 and sec_170 on january 20xx the irs notified org of a pending examination of its books_and_records to be conducted beginning february 20xx specifically form_990 for the tax_year ended december 20xx was selected for examination the examination has not been expanded only the p o box mailing address is prominently displayed and made available to the public there was no record of in-person counseling sessions with clients face-to-face sessions were not advertised org did not disclose its physical street address to the public org leases space in an industrial business park there was no free educational material in the lobby hours of operation were not posted on the doors org had no library archive or educational center freely available to the public org’s website and correspondence did not disclose its physical location based on return_information the books_and_records were in the care of bm-1 bm-1 was the executive director and ceo of org and is the son of bm-2 and bm-3 bm-2 created org and furnished all of org’s initial capital however the application_for exemption and the subsequent foundation follow-up information on form_8734 did not list bm-2 as a substantial_contributor or a disqualified_person with respect to org while bm-1 was officially ceo of the organization bm-2 and the bm family have always exercised substantial influence and control_over the company board members outside the bm family had no authority to veto or override votes of the family they were not provided written instructions agreements guidance duties and responsibilities in connection with their fiduciary duties as board members non-family board members were never advised in writing of the extent of their authority and their right to review books_and_records some non-family board members’ decisions were primarily based on their trust of bm-2 non-family board members were added primarily to satisfy requirements of bankruptcy laws and creditors for example on 20xx org decided to add one new board member in response to the enactment of new bankruptcy laws the list of directors of the organization as compiled from the forms for the years ended december 20xx through december 20xx and from the articles of incorporation is shown on exhibit a minutes four board meetings were held in 20xx attachments to the minutes that were mentioned in the minutes were not available to examiners such as budgets education was not mentioned in the minutes until after the irs examination began and lack of documentation of public education was never questioned by the non-family board members org’s bylaws indicated that regular monthly meetings should be held the last week of every month unless otherwise designated by the board_of directors and stated in the notice of the meeting org’s board meetings were actually held on the following dates between 20xx and 20xx e e e e e e 20xx 20xx 20xx 20kx 20xx 20xx 20xx 20kx e 20xx all board members in attendance are family members all board members in attendance are family members four out of five board members in attendance are family members the majority in attendance are family members two new non-family board members added bm-4 and bm-5 resulting in a split of the board the majority in attendance are family members the majority in attendance are family members all board members in attendance are family members the majority in attendance are family members one new non-family board member added bm-6 resulting in a split in attendance and an overall majority of non- family on the board_of directors the majority in attendance are non-family members each the three family members in attendance abstained from this vote regarding the purchase of servers from co-1 statistics important to the board were labeled updates below are the only statistics identified by irs examiners as being presented to the board as of december 20xx o o o o total active clients dollar_figure total active consumer debt dollar_figure total client monthly disbursements average collected fair share and donations projections were made in terms of client enrollment and collected fair-share and donations related_organizations the chart on exhibit a indicates the related businesses the overall organizational structure and the composition of owners co-2 co-1 bm-2 formed co-2 as a dialing service and telemarketer for business clients bm-2 was co-2’s defacto owner since he also owned co-3 co-2’s only general_partner co-2 changed its name to co-1 in june 20xx org contracted with co-2 to perform dialing services making cold calls on its behalf and to serve as a pilot customer in order to launch the telemarketing business for the bm family in the event of org’s demise resulting from a decline in fair share solicitation calls were automatically generated by special computer servers located offsite and owned by co-2 org purchased the phone lists the dialing servers randomly called numbers in five states where the solicitations were legal org the high call volume was expected to result in a number of inquiries co-2 operated out of org’s corporate offices and shared one technical employee with org below are transcripts of co-2’s telephone solicitations on behalf of org in 20xx and 20xx co-2 made big_number and big_number calls respectively on behalf of did you know there are secrets to getting out of credit card debt paying less money and getting out quicker than your creditors want you to and that the creditors fund programs to make this possible hi i’m emp with org a nonprofit organization funded by donations call now for this free information at that’s or visit our website your credit card payments are about to double some of the major credit card companies have announced they are doubling your minimum monthly payments with the rest soon to follow if you’re one of the millions who are barely able to pay your minimums now this could become a real problem hi my name is emp and iam with org we are an accredited nonprofit organization call us today to find out what program and free educational material is available to help you prepare for this major change or visit that's call regarding org’s sources for clients org’s application_for exemption stated most of our clients are referred to us from the area churches that see us as a ministry to help others been sending us people and the co-5 also the local co-4 bases have the telemarketing contract was referred to as the agreement however org referred to this service as service on form_990 for the tax years ending december and 20xx org paid co-2 dollar_figure and dollar_figure ' co-2 is short for respectively for this service when asked why org should pay co-2 co-1 over dollar_figure when internal staff could do the same thing for a much lower price org could not respond there were no bids on the acquisition of a comparable telemarketing service from third parties org has stated to irs examiners that television and radio ads would have been too expensive and such ads don’t target specific markets as a result of the new laws in 20xx relating to the do-not-call registry enforced by the federal trade commission co-2 could no longer operate feasibly and needed to dispose_of its assets including the dialing servers the contract with co-1 ended on 20xx org purchased the dialer servers from co-1 for its own marketing and advertising activities org solicited two more bids prior to the purchase all bids were as follows co-6 dollar_figure new servers to be acquired installed and serviced co-7 co-1 dollar_figure new servers to be acquired installed and serviced dollar_figure servers are already in place installed and operational as of the year ended 20xx co-2’s fund balance reflected a deficit of dollar_figure dollar_figure in the decision to acquire the dialing servers bm-2 bm-7 and bm-1 abstained from the vote and four non-family board members voted and approved the purchase of the equipment from co-1 on 20xx for dollar_figure as of the end of 20xx the net_book_value of co-1’s fixed depreciable assets was dollar_figure total assets on co-2’s books at that time was dollar_figure org paid co-1 dollar_figure more than the gross book_value of co-2’s assets dollar_figure - dollar_figure and dollar_figure more than the net_book_value the approximate adjusted_basis for the assets dollar_figure - dollar_figure the acquired property was not appraised by a certified independent_appraiser in 20xx all family members except for emp owned a limited_partnership_interest in co-2 co-1 such that over half of org’s board in 20xx had a partnership_interest in co-2 however co-2 was not disclosed on part vi line of the 20xx form_990 co-8 bm-2 started co-8 which was a subchapter_s_corporation performing a marketing and consulting service for org and other businesses for the years 20xx and ending on 20xx the purpose for its formation was to explore business opportunities for the family in the event something happened to org as creditors began cutting fair share in early 20xx co-8 paid bm-2 a salary in 20xx and 20xx for providing org with consulting services consulting included the marketing and advertising function this was the only time org did not pay a salary to bm-2 when the contract with org terminated in 20xx bm-2 was again placed on org’s payroll co-9 co-9 co-9 was formed to develop the remittance and computer programs utilized by org co-9 also operated out of the offices of org it was owned by members of the bm family limited_partnership interests and co-9 filed form_1065 and flow-through income was reported on individual form sec_1040 never filed returns on form_1120 although over half of org’s board members were partners in co-9 co-9 was not listed on part vi line of the 20xx form_990 part iii of schedule a of form_990 disclosed that org did not furnish facilities or lease property with disqualified persons or their related companies was owned by bm-2 though general_partner conference dated 20xx the question was asked of bm-1 august 20xx minutes flow of exempt organization’s funds during normal operations org funds were used to pay fees for consultants telemarketing and advertising which was labeled as service on form_990 these funds ultimately flowed to the family in 20xx org paid co-2 co-1 and reported it as payment of consultant fees for service amounts to of org’s total expenses and does not include salaries wages and benefits dollar_figure co-2 co-1 reported sales of dollar_figure and paid dollar_figure in telephone expenses and in professional fees the professional fees were paid to co-8 co-2 co-1 reported ordinary_income of dollar_figure for the tax_year ending 20xx co-8 reported dollar_figure income of dollar_figure ordinary_income was distributed to the family and reported on forms k-1 in gross_sales co-8 paid bm-2 dollar_figure in compensation and reported ordinary org’s application_for exemption further stated in response to irs inquiries on letter that none of the board members or trustees has any business or consults with any organizations that could benefit from these activities employees family compensation during the year under examination org had nine to ten employees three phone operators called counselors a computer specialist a processor a receptionist manager and three more in management managers sometimes performed phone operator duties top management is defined as emp and bm-2 phone operators communicated with the clients by telephone to discuss the client’s financial difficulties the phone operators then generated a plan of action and attempted to enroll individuals in a dmp for the years under examination the following family members were employed by org family salaries wages total payments to family members and to related companies in 20xx was dollar_figure or of total expenditures of dollar_figure family members are salaried employees and only family members were entitled to heath insurance benefits org’s hourly phone operators counselors were paid of total payments signed up for the dmp the application_for exemption provided that there would be no annual compensation to bm-2 and other board members and officers from his family ’ the budget part of the application indicated amounts for payroll but did not separately identify compensation_for officers as required by the form activities for the year 20xx org handled over big_number telephone calls of these inbound calls big_number calls lasted up to twenty minutes in length of these big_number calls were recorded sessions lasting more than minutes within these sessions org stated that of the time on calls by counselors was spent on educating the other of the operator’s time was spent enrolling clients ona dmp the operators’ time amounts to the ratio of the enrolled clients divided by the big_number inbound calls org regards the balance of the big_number calls as enrolled ina dmp in a conference with irs examiners on 20xx counseling education see item part il of form_1023 page see also item part iv of form_1023 page and the supporting budget attached to the application_for exemption response to idr in the year under examination org had clients to account for in 20xx org’s policy requires that deposits are to be refunded within days of the successful completion of the program as long as the client has paid on time and has had no nsf or stop payments and has paid all listed debts on the program through org org pays no interest on this deposit based on general ledger analysis of refunded deposits there were clients who had successfully completed a dmp total deposit refunds for these _ clients were dollar_figure however the audit financial statements discloses dollar_figure of client refunds meanwhile the 20xx database of clients shows _ accounts to be paid in full in the same year this accounts for a full success rate of divided by org’s dmp is a service for both individuals and creditors org serves as a debt consolidation service by collecting monthly deposits from indebted clients and immediately disbursing these funds to creditors proposal letters to creditors state our goal is to help the client repay the entire amount due to you dmp is a tool used to restructure unsecured debt and to prevent clients from filing bankruptcy as creditors do not collect on bankrupt debtors a under org’s dmp process a consumer signs a contract agreeing to make monthly payments to org org then makes arrangements with the consumer’s creditors to distribute payments to them creditors set criteria as to who is eligible fora dmp operators are not trained to determine when a dmp is appropriate there are no formulae computations guidelines rules triggers or other facts and circumstances used to determine whether a dmp is appropriate for a client recordings showed that the dmp process was scripted one employee was terminated for not following the script two employees were given warning notices for not following the verbal script for those customers who chose to participate in a dmp org entered into contractual recordings for legal reasons this was a part of the session that was recorded in these recordings org’s operator identified himself herself and their employer the operator then confirmed the agreement to enroll into a dmp clients were sometimes told that the session was recorded for quality assurance purposes the operator confirmed the date of the session and the identity of the client the client then confirmed their identity by providing date of birth and social_security_number the operator then confirmed the client’s address and phone number s clients were then told that the service was consolidating debt or credit cards and the total debt was restated sometimes clients were told that org was a debt consolidation service operators confirmed that clients understood that credit card accounts would be closed and that the service was not a loan operators then advised clients of the security deposit amount monthly deposits and their respective due dates they were then informed that the security deposit was refundable at the end of the service unless clients forfeited the deposit by not completing the dmp while restating the monthly deposit clients were advised that org’s dollar_figure monthly donation was included in the deposit clients were sometimes led to believe that the donation might be tax deductible the operator then confirmed the authorization to draft funds and the bank routing and account numbers operators then advised clients that the dmp packet would be furnished for the client to read and sign clients were then told to send or fax the agreement with attached creditors’ statements back to org clients were then congratulated and welcomed into a program that would save them interest fees or both an enrollment number was then provided to the client proposals were then issued to the clients’ creditors proposals were either accepted or rejected by the creditor creditors maintained their own criteria regarding an acceptable proposal if rejected org must resubmit the dmp proposal after reworking it with the client once accepted org would proceed to collect the payments from the clients and make the regular disbursements to clients’ creditors clients in 20xx irs examiners requested electronic client records for all clients existing in 20xx electronic records among the data fields with specific fields the response to this request yielded requested were the number in household and the number of dependents but almost all records had no data in these fields a total of records of the were fewer computerized records containing the number of dependents irs examiners requested the following fields from the client database in idr ca sec_1 however data from these fields were not provided records contained number-in-household data there age of client fees discounts reductions in fees waiver of fees there were electronic records that showed a monthly fee of which showed a lower fee than the normal fee of dollar_figure all other records had no amounts in these fee-related fields there were records of clients with both social_security checks and food stamps however there was no documentation of fees charged to these clients ’ crisis event is unknown because some records have no data however the data furnished is as follows the overall percentage of clients who were in their financial position due to a life of records reasons for financial problems for clients reduced income unemployment no data blank poor money management medical expense accident or disability personal conflicts divorce or separated not classified other death of a family_member pct total records electronic records the electronic records did not present total expense budget of the client of the records represented clients receiving food stamps but all others contained a blank field regarding the use of food stamps records showed clients receiving social_security checks but all other records contained a blank field for social_security twelve records of the receiving both social_security and food stamps there was no indication that these clients received a waiver or reduction of fees total records reflected clients who were examiner’s sample examiners then selected a sample of dmp records from the dmps using a random number generator in order to review the paper files of this sample the client’s total expenditure- to-total income ratio a measure of solvency of the clients ranged from to one file documented a lower monthly fee of dollar_figure because the client was not pleased with the service of the hardcopy dmp files did not provide the number in the household though they stated the number of dependents most of the others stated the number in the household but not the number of dependents five records had no documentation of both the number of dependents and number in household at least three of the records were senior individuals or older and two of these were within of the hhs federal poverty see irs _clientinfo xls in response to idr ca sec_1 clients client guidelines but there was no indication that the fee was reduced or waived there were five dmps that represented clients relying on social_security - and there was no indication that the fee was waived in these cases using hhs federal poverty guidelines and u s census bureau poverty thresholds one client was considered low-income and a member of a charitable_class - there was no indication that the fee was waived in this case one client was on food stamps and there was no indication the fee was waived or reduced ' there were eleven more clients in addition to the two senior clients who were within of federal poverty guidelines but there were no reductions sliding-scale fees or discounts indicated ' five of the sampled hardcopy files had no budget information for the client ’ contained budget information bring home income was documented - there was no information on gross_income and withholdings none of the files contained information regarding assets owned and there was no detailed description of automobiles and terms of installment notes the files contained no references or details as to employer fringes healthcare coverage retirement accounts education level lifestyle descriptions skills and hobbies the ages and medical_condition of dependents and children were not in the files almost all files contained no specific information on mortgages other than the monthly payment of the dmp records had no known cause for the client’s financial troubles ' for those files that while all files contained typewritten notes the notes were primarily documentation of communications relating to utility matters of the dmp such as accuracy of creditor information follow-up on missing payments unexpected increases in interest rates and creditor fees adding creditors adjusting payments and similar items none of these typewritten notes made references to areas counseled referrals to specified government and non-profit agencies educational materials provided nor specific areas being counseled or taught there were no references to informing clients of specific seminars workshops and public ‘educational events in any of the notes org did not provide a list of specific agencies to its employees in order to assist them in referring clients with life crisis problems there was no documentation of specific publications provided and reviewed with the clients in all of the client notes from the sample there was no mention of the company’s website as an educational source there was nothing in the file that indicated whether the session was in-person and there was no documentation of viable alternatives for the clients of the files three dmps were successfully completed however examiners could not identify the ultimate outcome of most of the others as some were ongoing earlier versions of the budget worksheet in these folders contained expense item fields later versions of budget worksheets used in 20xx contained major expense categories with no documentation of details below is a breakdown of the sample of clients who were elderly low-income or unknown as to either of these characteristics clients clients client client client '4 client '5 client breakdown of sample clients clients within hhs poverty guideline sec_1 clients within of hhs poverty guidelines clients above hhs poverty guidelines unknown total sample total clients age or above of which are within of fed poverty guidelines - j - records indicated client s have paid accounts in full reflecting a rate however a review of the accounting_records showed refunds of deposits and of that de-activated records in 20xx there were a total of deactivated records a deactivated record is a terminated dmp of that total of eight were not present in the list of deactivated records in the client s have paid accounts in full category were dollar_figure client refunds due to successfully completed dmps based on the general ledger was dollar_figurefor according to contract provisions a deposit refund is required to be made when a client successfully completes the dmp program by making all payments directly to org with no nsfs and no stop payments below is a summary of de-activated dmps in 20xx audited financial statements for the year ended december 20xx show that client refunds clients summary count de-activated dmps in reason for de-activation count pet no reason given client s have paid accounts in full client s have requested to be dropped from payment plan bankruptcy client s have been unable to follow plan other total count of de-activated dmps in other information org did not send or mail statements to clients that presented the status of their accounts only clients with computer access could view statements online org stated on its application_for exemption on form_1023 that it would conduct credit counseling and debt management the statement of program service accomplishments on part iii of forms stated the organization provides credit counseling and debt management services to individuals who have had trouble managing their consumer and credit card debts these individuals on debt responsibility the service is offered in an attempt to educate fees and fair share almost all of org’s revenue is derived from the sale of dmps dmp revenue consisted of two components client fees and fair share total fair share for the year ending 20xx was at least dollar_figure or of total revenue of dollar_figure approximately of the funds are electronically transferred there were no statistics on waivers or reduction of fees org solicited fair share contributions from credit card companies the term fair share is actually a collection fee charged to creditors who are receiving payments pursuant to a dmp although fair share is voluntary and dictated by the creditors creditors receive a valuable service in return for their fair share payments fair share is a stated percentage of debt and the amount payable to org is determined in advance by the creditors org must meet certain guidelines and utilize certain electronic remittance organizations or it will not be paid org charges consumers a monthly processing fee that it refers to as donations the monthly fee charged to clients in 20xx was dollar_figure although payments were voluntary clients received a valuable service in return for their payments while there were no setup fees an additional_amount referred to as a security deposit was required up front the security deposit was only returned to the client if the client successfully completed the dmp see de-activated records on previous page security deposits were not separately disclosed on the return or on the audited financial statements note of the audited financial statements provided that there were no contingent liabilities org charged a dollar_figure nsf fee org also charged a dollar_figure add-on fee for each additional account not previously disclosed at the time of enrollment org also charged a fee of of any direct payments a client makes to acreditor some contracts are not specific as to the additional_amount to charge there was also a dollar_figure fee if a payment was made without a name and client number on the payment itself org asserted on the application_for exemption on form_1023 that credit counseling and debt management will be done free of charge with no maintance sic fees the application also stated that the company would be partially supported by religious organizations or other non-profit groups the company also categorized fair-share as contributions in the application_for exemption for purposes of the exemption and foundation classification org’s letter dated july 19xx in response to the irs belief that the amounts received are sales org stated since we have nothing to sell and rely on voluntary donations we believe we fit under the a and not the a the audited financial statements refer to the sales revenue as cash commissions training and evaluations org’s counselors must have a high school diploma prior to 20xx org did not conduct background checks on employees and not until 20xx did org began requiring applicants with financial banking or credit backgrounds org did not announce job openings but rather used a for-profit employment service due to their experience with staffing org of city and their screening processes org trained employees by requiring them to observe sessions and then perform supervised sessions employees were evaluated on whether they were able to sign the client up for a dmp and if not an explanation was required not all personnel files contained evaluations for the supervised sessions for those that were available the evaluation was limited to whether or not the client signed up for the dmp or not and if not a reason is stated in other evaluations productivity referred to dmp volume and the quality of sessions there was no consistency regarding the use of training materials for employees one employee completed the book by author another employee took an exam of multiple choice questions on the debtguard financial literacy program which includes an examination several months after being hired the course included e e e sec_1 understanding money course multiple choice sec_2 understanding debt course multiple choice sec_3 understanding credit course multiple choice one employee took an internally devised study test with multiple choice questions the remainder of employees didn’t have any specific educational accomplishments documented in their personnel file in 20xx new employees were also required to take the internal online education course which was placed on org’s website some files had no training evidence in them evaluations were not consistent within two weeks of being hired employees conducted sessions with the public counselors are not necessarily certified in 20xx only management level employees were certified by the co-11 co-11 which was sponsored by the co-12 co-12 some employees were not independently certified until long after they were conducting sessions for example emp-1 was hired on may of 20xx and became independently certified on june of 20xx some employees had internally created certification forms in their files there are no certified mortgage counselors and org does not provide hud counseling nor reverse mortgage counseling org stated in its application_for exemption that this activity credit counseling and debt management will be conducted by various individuals who have experience in the credit counseling field the website in 20xx stated all of our counselors are certified in credit and debt management advertising during the year under examination org advertised in the yellow pages some clients were referred to org from the internet however the vast majority of clients are obtained by cold calling from the automatic telemarketing server calls to five states where org is permitted to engage in this activity the five states are xyz xyz xyz xyz and xyz the website included the following advertising messages debt consolidation without a loan stop creditor hassles payment reductions up to reduce interest up to one payment debt consolidation safe alternative to equity-loans or bankruptcy bible based financial seminars total telemarketing and advertising expenditures_for 20xx was dollar_figure which wa sec_44 of total expenditures of dollar_figure co-2 co-1’s invoices refer to the service as either calls or advertising 20xx totals org’s application_for exemption stated that most of our clients are referred to us from the area churches that see us as a ministry to help others also the budget provided with the application_for exemption stated that advertising expenses would be dollar_figure dollar_figure and for the first second and third years of operation respectively which amounted to and of total projected expenditures respectively the local co-4 bases have been sending us people and the co-5 education in the year under examination minutes to the meetings did not address the educational activities all discussion was pertaining to dmp’s procedures for processing payments client contracts and internal controls there was never a mention of an outreach education program education in the form of counseling was only addressed in the context of obtaining the necessary and correct information to insure the client would qualify for a dmp with respect to the bible based financial seminars listed above there were no lists of seminars or workshops to refer to workshops no attendance rosters no lesson plans no feedback and surveys and no publicity of seminars and workshops online education didn’t start until after 20xx there were no statistics on the number of persons attending seminars and bm-2 stated to examiners that org conducted many seminars back in 20xx however there was no explanation why these seminars would have stopped org claims to have had two educational projects in 20xx outreach project and outreach project these projects included a total of four presentations however there was no evidence of specific objectives lesson plans powerpoints evaluations feedback surveys names of attendees number attended reports letters to sponsors and material promoting the seminars to the public these presentations were not advertised on org’s website and there is no evidence of widespread notice of these events to the public phone operators labeled counselors were not apprised of these schedules so as to keep the public advised no lists of non-profit and government agencies were provided to any participants org began acquiring publications in 20xxx e booklets provided at the co-13 co-13 center and provide presentations at no charge org states that co-13 is an organization that provides shelter and helps those who lost everything org claims there was a week program at the co-13 shelter there is no record of this program actually taking place this is a dollar_figure book that org claims to provide for free - a chapter bilingual the course is not required for clients nor are the course there is also a login for the course results graded and feedback provided by org this program was not ordered until after august of 20xx e newsletter that is given out in complexes of the city housing authority the distributions of educational materials to clients started in june of 20xx however publications were not distributed to clients unless they asked for them a book b book c book d book e book the articles for incorporation stated education will be provided to the client’s so they can avoid the same pitfalls in the future we will also provide books brochures and audio and video tapes as necessary org’s application_for exemption further stated seminars will be offered to individual groups churches and schools provided with the application_for exemption stated that income from seminars would dollar_figure and dollar_figure in the second this will be done through personal counseling classes and seminars the budget der interview and third years of operation org also stated we do not only handle bills for people we also teach classes sree of charge on how to manage your budget the 20xx website stated that org would provide bible based financial seminars website the website doesn’t present org’s street address and precise physical location and there is no posting of the hours of operation the website does not disclose the identity of board members the bm family nor who is the ceo of the company and it does not inform the public that the return form_990 is available for public inspection the ask yourself link is a one page bulleted list which includes the following are you feeling like credit cards are dragging you down getting angry letters and phone calls from creditors and collectors contemplating bankruptcy gambling your future security on a home equity loan tired of high interest and just want to get out of debt if so don’t wait until you’re drowning in debt org can help all of our counselors are certified in credit and debt management the about us page advertises that org has certified counselor training the faq page states debt consolidation credit counseling is the process of negotiating with all of your creditors to obtain the lowest monthly payment and interest as possible in order to pay off all your debt as soon as possible while on the debt management you combine all of your payments into one low monthly payment which is then disbursed to each of your creditors in most cases this monthly payment is reduced by as much a sec_50 of what you are paying now also the educational materials link on the homepage doesn’t show up until 20xx org did not track statistics on completion of online courses the how we can help page is a one page bulleted list of seven areas org will provide assistance debt consolidation without a loan stop creditor hassles payment reductions up to reduce interest up to one payment debt consolidation safe alternative to equity-loans or bankruptcy bible based financial seminars return_information org believes it was not necessary to disclose the related_organizations on the return form_990 all sources of support were categorized as direct public support on page of form_990 for filing and public disclosure purposes and for foundation classification purposes on schedule a schedule a of form_990 for 20xx 20xx and 20xx asks if during the year org has directly or indirectly engaged in certain transactions with officers directors or board members and their affiliated companies including the furnishing of goods services or facilities for all transactions other than compensation the answer was no each time when reviewing minutes and comparing the board members to those listed on the form_990 bm-3 was listed as a board member on the 20xx form_990 after terminating her appointment during the prior year though bm-2 exercised substantial control and oversight over the company he was not listed as a board member on the form_990 until 20xx if bm-8 was a director he was omitted from the form_990 prior to 20xx below is a year to year comparison of return_information table memberships ’s international standards for org is a member of the co-14 co-14 org also subscribes to quality management for purposes of securing fair share from creditors in terms of quality org states in its website in order to assure high standards of service org has achieved certification from accreditation is a rigorous review of operating practices with an external body that measures standards and policy manuals were provided effectiveness in delivering quality professional service to examiners but these were ineffective for a small family-run company and never actually incorporated within org’s operations these standards were required in order to assure creditors that the company was operating within established operational guidelines so that org can remain eligible to receive fair-share law sec_501 of the internal_revenue_code sec_501 provides that an organization described in sec_501 is exempt from income_tax sec_501 of the code exempts from federal_income_tax corporations that are organized and operated exclusively for charitable educational and other specified purposes provided that no part of the net_earnings inure to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 provides that in order to be exempt as an organization described in sec_501 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 sec_1_501_c_3_-1 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 sec_501 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 inc v united_states u s sec_1_501_c_3_-1 provides that the term charitable is used in sec_501 of the code in its generally accepted legal sense and includes relief of the poor and distressed or of the underprivileged as well as the advancement of education sec_1_501_c_3_-1 provides that the educational refers to e e the instruction or training of the individual for the purpose of improving or developing his capabilities or the instruction of the public on subjects useful to the individual and beneficial to the community educational or religious activity furthering commercial business purposes sec_1_501_c_3_-1 provides that an organization may meet the requirements of sec_501 although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization’s exempt_purpose or purposes and if the organization is not organized or operated for the primary purposes of carrying on an unrelated_trade_or_business in 326_us_279 the supreme court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university in 302_f2d_934 ct_cl the court considered the status of an organization that provided analysis of securities and industries and of the economic climate in general it sold subscriptions to various periodicals and services providing advice for purchases of individual securities the court noted that education is a broad concept and assumed arguendo that the organization had an educational purpose the court concluded however that the totality of the organization’s activities which included the sale of many publications as well as the sale of advice for a fee to individuals was more indicative of a business than that of an educational_organization the court held that the organization had a significant non-exempt commercial purpose that was not incidental to the educational purpose and that the organization was not entitled to be regarded as exempt in easter house v united_states ct_cl aff'd 846_f2d_78 fed cir the court found that adoption services were the nonexempt primary activity of the organization in deciding that the organization conducted adoption services for a business purposes rather than for a charitable purposes the court considered the manner in which the organization operated the record established a number of factors that characterize a commercial activity and reflected that these factors were evident in the operations of easter house the court determined that the organization competed with other commercial organizations providing similar services fees were the only source of revenue it accumulated very substantial profits because it set its fees in order to generate a profit and accumulated capital was substantially greater than the amounts spent on charitable and educational activity and the organization did not solicit and did not plan to solicit contributions the court also found a corporate-type structure in the classes of memberships including a single life member having inherent power that the holder could transfer like stock and dependence on paid employees in 285_f2d_800 cert den 363_us_985 a separately organized publishing corporation sold a large volume of religious literature periodicals and sunday school supplies at a substantial profit was held not exempt the court found that operating profits and accumulated earnings were disproportionately large and there was no clear purpose to further any particular religious beliefs the general character of the operation was that of a commercial publishing house catering to religious customers thus the court concluded it was a trade_or_business and not exempt the existence of a modest program of expenditures_for religious and educational_purposes unconnected with the publishing did not have a decisive effect see also 71_tc_661 in 263_fsupp_924 n d ind a corporate publisher of religious books priced at commercial levels that showed moderate but consistent operating profits was held not to be exempt the court said that although the publishing activities further the exempt_purpose of educating the lay apostolate nevertheless there was a substantial nonexempt purpose- the publication and sale of religious literature at a profit in 950_f2d_365 th cir the court_of_appeals upheld a tax_court decision tcmemo_1990_484 that an organization operating restaurants and health food stores in a manner consistent with the doctrines of the seventh day adventist church does not qualify under sec_501 the court found substantial evidence to support a conclusion that the organization's activities furthered a substantial nonexempt purpose including a the organization's operations were presumptively commercial b the organization competed directly with other restaurants and food stores c the organization used profit-making pricing formulas common in the retail food business d the organization engaged in a substantial amount of advertising e the organization's hours of operation were competitive with other commercial enterprises and f the organization lacked plans to solicit donations counseling and education outside the context of credit counseling individual counseling has in a number of instances been held to be a tax-exempt charitable activity revrul_78_99 1978_1_cb_152 free individual and group counseling of widows revrul_76_205 1976_1_cb_154 free counseling and english instruction for immigrants revrul_73_569 1973_2_cb_179 free counseling to pregnant women revrul_70_590 1970_2_cb_116 clinic to help users of mind-altering drugs revrul_70_640 1970_2_cb_117 free marriage counseling revrul_68_71 c b 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 rey rul 1969_2_cb_115 granted exempt status under sec_501 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 ie 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 sec_501 status in consumer credit counseling service of alabama inc v united_states a f t r 2d d d c u s t c para d d c the district_court for the district of columbia held that a credit_counseling_organization qualified as charitable and educational under sec_501 it fulfilled charitable purposes by educating the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 the court held that an organization that provided free information on budgeting buying practices and the sound use of consumer credit qualified for exemption from income_tax because its activities were charitable and educational the consumer credit counseling service of alabama is an umbrella organization made up of numerous credit counseling service agencies these agencies provided information to the general_public through the use of speakers films and publications on the subjects of budgeting buying practices and the sound use of consumer credit they also provided counseling on budgeting and the appropriate use of consumer credit to debt-distressed individuals and families they did not limit these services to low-income individuals and families but they did provide such services free of charge as an adjunct to the counseling function they offered a debt management plan approximately percent of a professional counselor’s time was applied to the debt management plan as opposed to education the agencies charged a nominal fee of up to dollar_figure per month for the debt management plan this fee was waived in instances when payment of the fee would work a financial hardship the agencies received the bulk of their support from government and private_foundation grants contributions and assistance from labor agencies and the united way an incidental amount of their revenue was from service fees the court concluded that the limited debt management services were an integral part of the agencies’ counseling function and thus charitable but stated further that even if this were not the case these activities were incidental to the agencies’ principal functions see also credit counseling centers of oklahoma inc v united_states u s t c d d c - 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 impermissible private benefit sec_1_501_a_-1 of the federal_income_tax regulations sec_1_501_a_-1 provides that the words private_shareholder_or_individual in sec_501 refer to persons having a personal and private interest in the activities of the organization the inurement prohibition provision is designed to prevent the siphoning of charitable receipts to insiders of the charity 165_f3d_1173 7th cir business college v commissioner 276_f2d_476 sth cir reasonable_compensation does not constitute inurement birmingham sec_1_501_c_3_-1 provides that 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 her family shareholders of the organization or persons controlled directly or indirectly by such private interests prohibited private interests include those of unrelated third parties as well as insiders 70_tc_1037 92_tc_1053 private benefits include an advantage profit fruit privilege gain or interest 78_tc_280 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 sec_501 of the code 71_tc_1067 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 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 in international postgraduate medical foundation tcmemo_1989_36 one individual controlled both a nonprofit that ran tours aimed at doctors and their families and a for-profit travel agency that handled all the nonprofit’s tour arrangements the non-profit spent percent of its revenue on travel brochures prepared to solicit customers for tours arranged by the travel agency the tours were standard sightseeing trips with little of the alleged medical education that was the basis for exemption the tax_court held the petitioner was not tax exempt finding that it was operated for the benefit of private interests namely the founder’s travel agency the court found that a substantial purpose of the nonprofit was to increase the income of the travel agency in this case there was both inurement and private benefit also its activities were directed at providing opportunities for recreation not education in 82_tc_196 bingo_games were conducted by a scholarship fund in a commercial establishment serving food and drink and were found not to be operated exclusively for exempt purposes the owners of the establishment pastime lounge ltd p l l controlled the organization and allowed players to be solicited for food and drinks sold by their employees the court stated that a realistic look at the operations of these two entities the p l l and the pastime lounge however shows that the activities of petitioner and the pastime lounge were so interrelated as to be functionally inseparable separate_accounting of receipts and disbursements does not change that fact government ’s position based on the examination and the analysis of sample client records org is a debt consolidation service receiving cash on commissions fair share on the sale of debt management plans it is not a credit counseling agency an examination of the client files revealed that org was only interested in basic data sufficient to enroll a client ina dmp sessions were short and scripted and phone operators were not necessarily certified or experienced counselors when conducting their sessions phone operators were partially compensated on the basis of dmp enrollments they were also evaluated on their ability to sell dmps there was no reliable record of face-to-face counseling the organization made it very difficult for the public to identify its location org had a stated goal of serving the interests of the creditors the creditors dictate the criteria for qualification into a debt management plan which serve their commercial interest org provides for no intervening criteria in order to ensure that clients qualifying for dmps are provided other options in the clients’ best interests org also benefits the interests of the bm family more than incidentally org’s exempt status was exploited to initiate new businesses and to test the market for the telemarketing business prospects of the bm family bm family businesses provided flow-through income earned from org to the bm family such as through various family owned partnerships org was in effect a mass dialing telemarketing company the existence of the related companies jointly involved in this business was not disclosed to the public such as through form_990 in the acquisition of the dialing servers in 20xx org did not acquire a fair appraisal of the property which was owned by a corporation controlled by family members the cost of these assets were not more than dollar_figure on co-2 co-1’s books but org paid dollar_figure for them the excess_benefit to co-2 co-1 was at least dollar_figure assuming no depreciation of these assets with depreciation the excess_benefit is higher the non-family board members who participated in the decision to purchase this property did not question the excess payment educational activity was practically nonexistent there were virtually no workshops speeches presentations seminars or other media for presenting educational information there was no meaningful public outreach program the website was not elaborate with educational information publications were not distributed to all clients or callers during the year of audit org possessed no educational facilities open for the public the service relies on the information furnished to it during the application_for exemption and foundation follow-up processes in order to grant exemption and public charity status critical issues represented by org during its determination processes were compared to actual events per examination as follows table the application_for exemption does not inform the service that the nature of the income to be received was commonly referred to industry-wide as fair share the audited financial statements refer to the sales revenue as cash commissions the application_for exemption misled the service of org’s character method of operations and intentions annual returns on forms also never characterized and labeled the income for what it was fair share the forms consistently disclosed misleading information org presented the following misleading information e e e part vi line failing to disclose related_organizations schedule a part ii disclosing that there were no transactions with businesses owned by officers directors classifying all income as contributions on part i and on part vii for foundation classification purposes in all cases clients were misinformed that all their payments were contributions in some telephone sessions clients were led to believe that their payments to org were deductible as charitable_contributions in contrast to the lack of educational activity advertising was org’s highest non payroll budgeted item pincite of total expenses advertising was conducted by dialing servers sending telemarketing messages in mass also known as cold calling the messages were commercial in nature such as call us today call now on the website messages such as lower your interest rates sign up today were posted regarding the actual conduct of debt management plans there was no regard for poor elderly and persons with special needs in telephone sessions there was no effort to furnish discounts sliding scale fees or free services for debtors of a charitable_class there was no attempt to identify who would constitute a charitable_class such as by using hhs federal poverty guidelines or u s census bureau poverty thresholds while the database had the ability to track clients on food stamps and social_security not all clients were asked if they had food stamps or whether they were on social_security org did not have an established policy or procedure to waive or reduce the fees for the indigent or to waive the fees for those to whom such fees would create financial hardship only clients with computer access had access to their dmp statements also paper files failed to identify the specific causes of the client’s financial position assets such as automobiles were not identified and analyzed for clients client files contained case chronologies documenting contacts with clients however these records never documented specific matters counseled only matters of utility value were documented such as adding creditors missed payments and changes to creditor’s terms information about the client’s lifestyles financial_assets obligations jobs and other relevant data to provide for a meaningful counseling session were not requested org only acquired enough information to qualify clients fora dmp org provided very little counseling to individuals on credit or debt management issues and to the extent any counseling was provided it was incidental to org’s purpose of selling dmps below is a table of comparison of key factors in order to distinguish org from cccs of alabama which retained its exempt status in consumer credit counseling service of alabama inc v united_states a f t r 2d d d c table org is not operated exclusively for educational or for any other exempt purposes within the meaning of sec_501 of the code org’s primary purpose is the sale of debt management plans org also operated for the private benefit of its creators within the meaning of sec_1_501_c_3_-1 org’s exemption under sec_501 of the code should be revoked effective january 20xx misleading information to the public on form sec_1023 and and characterizing its income as contributions to the public is indicative of an organization that is not educational for sec_501 purposes org isa family run business and the inclusion of outsiders in the board_of directors was no more than for purposes of perception outsider board members possess no real power and authority over org any claims of quality of service good communications trust sensitivity and customer service are neutral factors as for-profit businesses have the same goals taxpayer’s position at the time of issuance of the report no position statement had been provided by the organization except that part vi line of form_990 does not list related_organizations because family members did not have control of the board_of directors the power_of_attorney poa now asserts that the organization has taken action to dissolve and distribute its assets and should not be revoked of its exemption under sec_501 since it will no longer exist the poa further asserts the organization does not want to incur any additional costs in connection with the examination conclusion org is not operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 org had the substantial nonexempt purpose of providing debt management program services to the general_public org was operated for the purpose of serving private rather than public interests org’s exemption under sec_501 should be revoked effective january 20xx the state of xyz should be notified of this revocation under sec_6104 of the code org is liable for tax returns on forms beginning with the tax_year ending december 20xx organizational structure table exhibit a to b hi d cousin e bm-8 of f realtor of realty g bm-5 vp banking of note highlighted individuals are family members denotes service performed for org denotes cash_flow director partner shareholder officer key_employee former directors former employees internal_revenue_service department of the treasury n robinson ms 4900-okc oklahoma city ok date date org address certified mail - return receipt requested dear taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 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 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 the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication 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 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 rev catalog number 34809f if we do not hear from you within 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 days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shal 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 sec_6104 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 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 marsha a ramirez director eo examinations enclosures publication publication report of examination letter rev catalog number 34809f


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division uniform issue list feb se ti ep ras ts legend taxpayer a taxpayer b taxpayer c individual c individual d trust t state e subtrust d subtrust c individual e ‘amount f bank g date date page date date month account management h account management account management j ira x section y section z dear this letter is in response to a ruling_request dated supplemented by correspondence dated ' and ’ and submitted by your authorized representative in which you request aruling pursuant to which the internal_revenue_service service will waive the 60-day rollover requirement contained in sec_408 of the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a is the surviving_spouse of taxpayer b date date at the time of his death on taxpayer b wa sec_66 years of age taxpayer a’s date of birth was taxpayer b owned an individual_retirement_account ira ira page x and had been taking distributions from it the date of death value of ira x was amount f on or about date authorized representative has asserted is a valid trust under the laws of state e is the named beneficiary of ira x subtrust c and subtrust d were created pursuant to the provisions of trust t taxpayer b executed trust t trust t which your your authorized representative has asserted that trust t in relevant part provided that upon the death of taxpayer b taxpayer a became the sole successor trustee of trust t the provisions of trust t provided in relevant part that taxpayer a as sole trustee would transfer trust property to subtrust d that would equal the exemption equivalent for federal estate_tax purposes the remaining balance of the trust t estate would be held in subtrust c during her lifetime taxpayer a is the sole beneficiary of subtrust c the provisions of subtrust c provide for the payment of net_income at least annually to taxpayer a and as much principal as taxpayer a demands in writing to taxpayer a during her lifetime argues that subtrust c should be treated as taxpayer a’s own property accordingly your authorized representative your authorized representative has asserted that subtrust c was created in accordance with the provisions of sec_678 of the code and was intended to be treated as a grantor_trust distributions from ira x be shown as taxable_income on taxpayer a’s personal income_tax return form_1040 such treatment would require that the subtrust d provides for the payment of net_income and as much principal as the trustee believes desirable for her reasonable support and health considering her other resources known to the trustee to taxpayer a during her lifetime upon the death of taxpayer a subtrust d is to be terminated and the then principal remaining along with accrued or undistributed_net_income shall be distributed to taxpayer b’s descendants per stirpes subtrust d indicates that at the time of signature taxpayer b’s only child was taxparer c in summary the distribution provisions of subtrust c differ from those found under subtrust d article fourth of trust t provides in summary that the trustee shall pay from the trust estate directly or otherwise all of the debts expenses of estate administration and taxes associated with the death of taxpayer b the provisions of trust t do not wall off’ qualified retirement arrangements including page iras from article fourth thereof however your authorized representative has indicated that state e does have a statute that walls off’ iras from being used to defray estate expenses and taxes associated with an estate in this regard section y of the state e statutes provides as follows a debtor's interest in or right whether vested or not to the assets held in or to receive pensions annuities benefits distributions refunds of contributions or other_payments under a retirement_plan is exempt from judgment attachment execution distress for rent and seizure for the satisfaction of debts if the plan is i intended in good_faith to qualify as a retirement_plan under applicable provisions of the internal_revenue_code_of_1986 as now or hereafter amended subparagraph b of section y provides in relevant part that a retirement_plan includes an individual_retirement_account your authorized representative asserts that the intent of the estate plan was to allow taxpayer a to take ira x distributions based upon taxpayer b's life expectancy as needed and then to make a trustee to trustee lump sum transfer of the remaining balance in the account to subtrust c your authorized representative asserts that if taxpayer b’s estate plan had been effectuated subtrust d would not have been funded and ira x would have been allocated to subtrust c furthermore your authorized representative has asserted on your behalf that the estate plan would have minimized federal taxes and that allocating ira x to subtrust c was consistent with section z of the state e statutes below in this regard taxpayer a was and is the sole beneficiary of subtrust c and the sole successor trustee of trust t and the subtrusts created thereunder as sole trustee taxpayer a intended to allocate ira x to subtrust c once allocated to subtrust c pursuant to its provisions taxpayer a intended to demand payment of the entire ira x and contribute as a rollover_contribution the proceeds of the ira x distribution into another ira set up and maintained in the name of taxpayer a said rollover was intended to be completed within days of the date of distribution from ira x to trust t and subtrust c your representative asserts that this transfer was intended to be characterized as a non-taxable transfer subsequent to taxpayer b’s death ira x was moved in a trustee to trustee transfer from account management h to account management which is affiliated with account management j and which after the transfer became taxpayer a’s account broker page your authorized representative has asserted on your behalf that one or more meetings to discuss the way to effectuate taxpayer a’s estate plan occurred between individual c who is represented to be associated with account management and employed by bank g individual d taxpayer a’s counsel and individual e a certified_public_accountant cpa representing taxpayer a at these meetings individual c was advised that taxpayer a wanted the amount standing in ira x to be transferred by means of a trustee-to-trustee transfer into another ira that would benefit subtrust c of which taxpayer a was sole trustee and the beneficiary holding an unlimited right to wiothdraw principal therefrom it has been represented that individual c was also advised that the proposed transaction involving ira x had to insure that no taxable_distribution resulted therefrom on or about date due to a misunderstanding of the above described estate plan taxpayer a was advised by individual c to execute an ira distribution request form for non-spouse beneficiary which requested that account management j distribute the ira x account balance to taxpayer a taxpayer a executed this document in the belief that doing so would transfer the account balance in ira x in accordance with the estate plan described above and not result in a taxable_distribution to her it has been represented that the request for a distribution wags contrary to the estate plan and was the result of a misunderstanding by the representative s of account s management and j it has also been represented that individual c approached taxpayer a without notice to either individual d or individual e subsequent to executing the form described above a distribution was made and taxpayer a received a form 1099-r for amount f which she placed with other tax related documents the error was discovered by her tax preparer individual e in month your authorized representative has asserted on your behalf that ira x was payable to subtrust c through decedent's taxpayer b’s declaration of trust trust t for the benefit of taxpayer a furthermore your authorized representative states that subtrust c as the current owner of ira x has not encumbered ira x in any way the ira x account balance remains intact section z of the state e statutes provides in relevant part that in managing investing administering and distributing the trust property of any separate_account or trust and in making applicable tax elections the trustee may consider the differences in federal tax_attributes and all other factors the trustee believes page pertinent and may make disproportionate distributions from the separate trusts created based on the above facts and representations you request that the service waive the 60-day rollover requirement with respect to the distribution of amount f because failure to waive such requirement would be against equity or good conscience with respect to your ruling requests sec_408 provides the general requirements applicable to iras sec_408 in summary provides that the minimum_required_distribution rules of code sec_401 apply to iras sec_401iii of the code provides that a qualified_plan and ira must provide that in the case where a plan participant ira owner dies prior to his required_beginning_date having designated a beneficiary of his plan interest ira required distributions must begin no later than year after the date of death with an exception applicable to surviving spouses who are sole beneficiaries and the entire_interest of the employee must be distributed over the life of such beneficiary or over the life expectancy of such beneficiary sec_408 of the code provides that except as otherwise provided in ‘ sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if - i ii the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not page exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides in general that the ira rollover rules do not apply to inherited accounts the term inherited account does not apply to an ira that is acquired by the surviving_spouse of an ira owner by reason of the death of the ira owner sec_408 of the code provides in general that this paragraph paragraph d does not apply to any amounts required to be distributed pursuant to subsection a or b sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides - that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred in this case the service notes that taxpayer a was the sole trustee of trust t and the subtrusts created thereunder with the authority to allocate trust assets between said subtrusts thus taxpayer a could have allocated ira x to subtrust c and as asserted by her authorized representative was obligated to do so to effectuate taxpayer b’s estate plan which was to benefit taxpayer a page furthermore consistent with the estate plan once taxpayer a allocated said ira x to subtrust c she as sole beneficiary of said subtrust c could have demanded payment of said ira x thus based on the above taxpayer a could have rolled over said jra x into an ira set up and maintained in her name however as noted above taxpayer a did not do so within the requisite 60-day period thus the service must determine if she is entitled to relief under code sec_408 and revproc_2003_16 in this regard the service notes the representations made on behalf of taxpayer a to the effect her counsel and cpa advised individual c representing the custodian of ira x that taxpayer a wanted to incur no immediate tax consequences in effectuating her husband’s estate plan and that the ira x assets were to remain ira assets in spite of said instructions and without notice to either said counsel or said cpa individual c advised taxpayer a to sign a form requesting that the full amount standing in ira x be distributed to taxpayer a relying upon this advice taxpayer a signed the form and the distribution occurred taxpayer a did not understand the tax consequences of her action until her cpa individual e advised her of said consequences the discovery occurred after the 60-day rollover period applicable to the distribution of ira x had expired thus based on the above facts and representations pursuant to code sec_408 the service hereby waives the 60-day rollover requirement with respect to the distribution of ira x pursuant to this ruling letter taxpayer a is granted a period of days measured from the date of the issuance of this letter_ruling to make a rollover_contribution of an amount equal to the amount distributed from ira x except as indicated below to another ira or iras described in code sec_408 provided all other requirements of code sec_408 except the 60-day requirement are met with respect to such ira contribution the contribution will be considered a rollover_contribution within the meaning of code sec_408 please note that pursuant to code sec_408 this ruling letter does not authorize the rollover of amounts distributed from jra x to the extent said amounts were required to be distributed with respect to any calendar_year beginning with the the year of issuance of this letter_ruling calendar_year if any nor does this letter_ruling reach a determination as to whom if anyone was taxpayer b’s designated_beneficiary within the meaning of code sec_401 and section calendar_year and ending with the page a -4 of the final income_tax regulations questions and answers-3 and of his ira x at the time of his death no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office you are receiving the original of this letter_ruling and your representative is receiving a copy of the letter_ruling if you wish to inquire about this ruling please contact se t ep ra t3 d at - sincerely yours l v enclosures rances v sloan manager employee_plans technical group deleted copy of this letter notice of intention to disclose notice copy of notification letter form to authorized representative