qwhuqdo 5hyhqxh 6huylfh department of the treasury number release date index no washington dc person to contact telephone number refer reply to cc ita - plr-145990-01 date legend taxpayer company the brand card dear this responds to your letter dated date supplemented by correspondence on date date date date date and date in which you request rulings related to sec_61 and sec_170 of the internal_revenue_code issues your ruling_request presents the following issues does taxpayer as a company cardholder make a charitable_contribution under sec_170 when a rebate - a percentage of the price of an item less an administration fee purchased with a company card at a participating merchant - is transferred to a qualified charitable_organization in what tax_year can taxpayer claim a deduction under sec_170 for rebates transferred by company to a charitable_organization does sec_170 apply to amounts transferred by company to a charitable_organization does taxpayer realize income from participation in the program conclusion sec_1 if taxpayer using one of the procedures described in this ruling letter makes an affirmative election to donate merchant rebates to charity rather than receive them personally rebates transferred to charity pursuant to that election are charitable_contributions deductible by taxpayer to the extent provided by sec_170 unless and plr-145990-01 until taxpayer makes such an election the rebates even if they are transferred to charity are not charitable_contributions and are not deductible taxpayer is entitled to a charitable_contribution_deduction under sec_170 in the year that company transfers the rebate to charity taxpayer must be able to substantiate amounts of dollar_figure or more that are transferred in a lump sum from company to a particular charity the substantiation must be by a written acknowledgment from the recipient charity that satisfies the requirements of sec_170 the rebates are not includible in taxpayer’s gross_income whether they are donated to charity or retained personally facts taxpayer is an individual who itemizes deductions on schedule a of his federal_income_tax return taxpayer is the of company company is a for-profit corporation that has developed a brand-name affinity credit card program the program and owns intellectual_property and know-how in connection with the program company intends to implement the program by entering into agreements with banks merchants cardholders and charitable organizations eligible to receive deductible contributions under sec_170 of the internal_revenue_code charities company's program will use the brand-name affinity credit card the brand card to help charities raise funds in two ways through basis point donations made by issuing banks in connection with all general credit card purchases and through additional_amounts referred to for purposes of this ruling as rebates furnished by participating local and national retail merchants to company or its agent banks basis point donations bank basis point donations will be made as a fixed relatively small percentage of each credit card transaction cardholders will have the ability to designate a charity or charities to receive these donations and will be notified of the amounts of these donations in an annual or semi-annual statement statement however unlike rebates these amounts will not be available to cardholders and will not be deductible by cardholders as charitable_contributions for tax purposes explanations of the basis point component of the program and any statement furnished to cardholders showing the amount of their basis point donations will state that they are not deductible references to company in this discussion include its agent banks where applicable an annual fee may be charged to cardholders by the issuing bank and the annual fee if charged will be retained by the issuing bank and will not be a part of the revenue transferred to the charity plr-145990-01 rebates a in general in connection with the merchant rebate component of the program company will enter into contracts with individual merchants under which the merchants will transfer to company an agreed-upon percentage of the revenue generated by purchases made with the brand card company will inform cardholders of the percentage of the total purchase_price that each participating merchant will rebate and the program will offer cardholders the ability to make purchases either at the physical locations of merchants or over the internet after a sale by a participating merchant to a cardholder the agreed-upon rebate will be transferred from the merchant to company of this amount an administration fee will be retained by company the balance of the rebate will be held in a non-interest- bearing custodial_account maintained by company for a period of to days to allow for charge-backs returns and dispute resolution during this period cardholders who return merchandise or purchases will receive a credit on their account which will in turn reduce the applicable bank basis point donations and rebates to be contributed to the designated charity or charities within the later of days of the transaction or days after receipt of the funds the balance of the rebates will be distributed to a charity or charities or to the cardholder in accordance with the election procedures described below once funds are transferred to a charity the transfer is irreversible even in the event of a customer’s subsequent return of merchandise warranty claim or similar occurrence rebates associated with the item and already paid to a charity will not be returned to the cardholder company or the merchant cardholders who elect to donate rebates will receive nothing from company in exchange for the distribution of the rebates to their designated charity apart from the differences described in this ruling letter concerning the handling of basis points rebates and disclosures to cardholders taxpayer represents that cardholders who choose to donate rebates to charity and cardholders who choose to retain rebates personally will receive identical treatment with respect to the frequency and amount of rebates given special offers interest rates credit limits termination and other terms of service under sec_170 of the code no deduction is allowed for a charitable_contribution of dollar_figure or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution as described in sec_170 and sec_1_170a-13 of the income_tax regulations for cardholders who elect to donate 3no portion of the administration fees retained by company will be reported to cardholders as a charitable_contribution and no charitable_contribution_deduction will be allowed for these retained administration fees plr-145990-01 rebates to charity company intends to supply donee charitable organizations with information concerning the amounts of the cardholder’s contributions as well as the name and address of the cardholder so that charitable organizations will be able to provide the substantiation required by sec_170 in a timely manner company intends that the brand card will acquire participant cardholders in two ways direct solicitation by participating charities an overlay method under which participating banks offer the program on either an automatic or opt-in basis as an added benefit for all cardholders in an existing portfolio in both cases company will institute procedures described below procedures intended to ensure that before a participating cardholder can claim a charitable_contribution_deduction for rebates the cardholder has indicated in an unambiguous and affirmative manner that the cardholder is aware of the right to receive the rebates personally and has instead made a voluntary election election to contribute those rebates to a charitable_organization or organizations b direct solicitation procedures i election in application when an individual joins the program as the result of direct solicitation by a participating charity the election will normally be contained on the application_for the card the application will inform the cardholder that the rebates may either be donated to the soliciting charity or to another charity or charities participating in the program or retained by the cardholder the election will state that if the cardholder chooses to donate rebates the rebates may be deductible for federal tax purposes if the cardholder itemizes deductions the election will also inform cardholders that if they choose to retain rebates the rebates are not deductible both options will be presented together in the same typeface and font the applicant cardholder will be required to indicate affirmatively - for example by checking an empty box - which of the two options the cardholder intends to select if the cardholder elects to retain rebates personally rebates will be credited back to the cardholder's account by company in such a case any statement showing the amount of rebates earned by the cardholder will state that they are not deductible if the cardholder elects to donate the rebates to a charity rebates will be transferred from participating merchants to company and subsequently transferred to the charity as described above cardholders who elect to donate will be notified typically in a year- end statement of the amount of rebates transferred to the charity and will be informed that those amounts are deductible subject_to the requirements and limitations of the internal_revenue_code if no affirmative election is made rebates will still be accumulated and transferred to the soliciting charity and the cardholder will be informed of the transferred amounts in this case however any statement showing rebate amounts transferred to the charity will inform the cardholder that the rebate amounts like the basis point donations are not deductible plr-145990-01 ii election in welcome letter because of the number of issuing banks that may be involved and because of possible legal restrictions concerning disclosures on credit card applications company cannot represent that the election will always be included directly on the application if it is not then the election will be included in a subsequent welcome letter from company to the individual cardholder company will be able to track applications that have or have not included the election and will provide the welcome letters accordingly an election included in a welcome letter will be substantially the same as an election included in an application it will inform cardholders of their option either to donate or retain rebates and the corresponding tax consequences both options will be presented together in the same typeface and font the applicant cardholder will be asked to indicate affirmatively which option the cardholder intends to select - for example by checking an empty box on the welcome letter or on a reply card - and to return the election to company the default procedure unless and until a cardholder responds will be that rebates are transferred to the soliciting charity however any rebates that accrue prior to the receipt and processing of a cardholder's election will not be deductible and any statement that is furnished to the cardholder will indicate clearly which amounts are deductible and which are not ii election on website company maintains a website on the internet prospective cardholders will be able to apply for an account using the website and will be able to make the election on the website the manner of presenting the election the options offered and the procedures company will follow will be substantially the same as in the case of an election included on a paper application or in a welcome letter for example the option either to donate or retain rebates will be presented together in the same typeface and font and the applicant cardholder will be asked to indicate affirmatively which option the cardholder intends to select iii effect of election and change_of election an election or the default procedure in the absence of an affirmative election will remain in effect for all purchases and rebates until company receives affirmative notification of a subsequent election or change_of election for example a cardholder who elects to donate rebates to a charity cannot change that election on a purchase- by-purchase basis or with respect to purchases that have already been made however a cardholder will be able to make or change an election for future purchases at any time through a procedure that is not unduly burdensome reflects an affirmative choice by the cardholder and is disclosed at the time of and in the same manner as the original election methods of making or changing an election may include for example mail e-mail use of the website or an automated telephone pin number method if a method is provided for electing to donate rebates to charity a cardholder will be able to elect to retain rebates personally using the same method an election or plr-145990-01 change_of election will apply to rebates accruing after the election is received and processed by company for example a cardholder may change the designation of the charity to which rebates are donated or the cardholder may elect to retain the rebates personally instead in the latter case rebates received after company receives and processes the change_of election will be credited back to the cardholder’s account and will be identified as nondeductible in any statement furnished to the cardholder similarly a cardholder who originally elected to retain the rebates or made no affirmative election may subsequently make an affirmative election to waive the right to receive the rebates and donate them to a charity or charities in this case only rebates received after company receives and processes the notification will be identified as deductible c overlay method procedures under the overlay method participating banks will be given the option either to have all their existing and new cardholders entered into the program as an added benefit to their other card privileges or create the opportunity for each existing and new cardholder to join the program on an opt-in basis if the bank elects to join the program on an added benefit basis there will be no opportunity to advise existing cardholders in advance about the program the cardholder will receive notification of the added benefit in a welcome letter which will advise the cardholder of the election in the same manner as described above for welcome letters that are sent in connection with a direct solicitation for prospective cardholders the election will be disclosed either in the application where possible or in a welcome letter in the same manner as in the case of a direct solicitation if the participating bank elects to provide the program as an opt-in benefit the cardholder will not be enrolled into the program until an election is made the overlay method differs from the direct solicitation method in that in the absence of an election by a cardholder to donate rebates to a specific charity the default will be that rebates will be contributed to a pool of charities participating in the program in the local community a cardholder making an election will be able to choose between directing the rebates to a particular charity to the pool or to the cardholder personally in all other respects the overlay method will function in the same manner as the direct solicitation method in particular cardholders will be advised that basis point donations are never deductible and only rebates that are transferred to charities after the cardholder makes an affirmative election are deductible taxpayer’s election taxpayer intends to enroll in the program and using one of the procedures described above elect to donate rebates generated through purchases from participating plr-145990-01 merchants to a participating charitable_organization that is eligible to receive tax deductible contributions under sec_170 ruling_request - charitable_contribution under sec_170 law and analysis taxpayer first asks us to rule that under the following circumstances he has made a donation that is a charitable_contribution deductible under sec_170 of the code by using a procedure described above taxpayer elects to donate rebates generated by his purchases made by brand card to charity after making the election taxpayer purchases merchandise from a participating merchant using a brand card and company receives a rebate from the participating merchant which it subsequently pays over to charity a charitable_contribution must be made voluntarily and with donative_intent u s v american bar endowment 477_us_105 in american bar endowment a membership_organization maintained a group_insurance program for its members as a condition of participating in the insurance program members were required to assign refunds from their premiums to the organization every year a portion of the insurance premiums_paid by members was refunded to the organization the organization used these refunds to fund charitable grants members participating in the group_insurance program claimed charitable_contribution deductions under sec_170 for their pro-rata shares of the refund amounts that funded charitable activities the supreme court concluded that there was no voluntary payment of money or property the court held that since the members could not demonstrate that they had intentionally contributed money in excess of the value of the insurance they received they were not allowed a charitable_contribution_deduction although one member demonstrated that he was eligible for an insurance program that offered lower premiums he did not establish donative_intent because he failed to show that he was aware of that alternative during the years at issue u s pincite the court suggested that it would have reached a different result if the organization were to give each member a choice between retaining the member's pro-rata share of dividends or assigning them to the organization id pincite revrul_70_419 1970_2_cb_5 holds that a taxpayer may deduct the amount of a state tax_refund to which it is entitled but for which it does not file an application provided the state is affirmatively notified of the gift by the taxpayer where no affirmative action is taken by the taxpayer and the statute_of_limitations within which to file the application_for refund is allowed to expire no charitable deduction under sec_170 is allowed in the present case taxpayer will have the choice referred to in american bar endowment he will have the opportunity to donate the rebates held by company on his behalf to a charity or to direct company to pay them to him company has instituted procedures to ensure that before a participating cardholder can claim a charitable plr-145990-01 contribution deduction for rebates the cardholder has indicated in an unambiguous and affirmative manner that the cardholder is aware of the right to receive the rebates personally and has instead made a voluntary election to contribute those rebates to charity see american bar endowment u s pincite revrul_70_419 once he elects to donate rebates to charity taxpayer will not be able to change that election on a purchase-by-purchase basis or with respect to purchases that have already been made however taxpayer will be able to change his election at any time for future purchases this element of choice distinguishes the company program from the group_insurance program at issue in american bar endowment where those who wished to participate in the group_insurance program could not decline to have their premium refunds transferred to a charitable_organization the opportunity to decide whether rebates will be made to a charity or received personally and the affirmative decision to donate the rebates render the payments voluntary by contrast the program’s bank basis point donations are not deductible by taxpayer - even though taxpayer can designate the recipient charity - because taxpayer never has the option to receive those amounts personally if taxpayer complies with the substantiation requirements under sec_170 and all of the other requirements of sec_170 he will be allowed a charitable_contribution_deduction for the donation of his rebate ruling_request - year of deduction revrul_78_38 1978_1_cb_67 holds that a charitable_contribution effected by means of a bank credit card is deductible in the year the charge is made however in the present case although the charitable_contribution arises as a result of taxpayer’s purchase of an item using a credit card the charitable_contribution is not actually made by use of the card revrul_55_192 1955_1_cb_294 concludes that the portion of a social club’s membership dues earmarked by a taxpayer for distribution to a qualified charity and paid to the club’s treasurer may give rise to a deductible charitable_contribution because the social club’s treasurer also serves as an authorized agent of the donee charitable_organization the ruling allows the deduction in the year the dues are paid to the treasurer the ruling states that if the treasurer had not been designated by the charitable_organization as its agent the contributions would have been deductible only in the year in which they were actually transferred to the charitable_organization in revrul_85_184 1985_2_cb_84 a utility company enters into an agreement with a local chapter of a charitable_organization to collect contributions for a program providing emergency energy assistance to elderly and handicapped persons the charity designates the utility company as its authorized agent to collect contributions on the charity’s behalf utility company customers are given the opportunity to make contributions to the emergency energy assistance program by making payments to the utility company in an amount earmarked by the customer for donation in excess of plr-145990-01 their monthly bills the revenue_ruling holds that customers making such extra payments are entitled to a deduction for a charitable_contribution under sec_170 as the utility company is acting as the agent for the charity revrul_85_184 holds that the deduction is allowed in the taxable_year the extra payment is made to the utility company a charitable_contribution paid to an agent of a charitable_organization is deductible when paid to the agent sec_1_170a-1 of the income_tax regulations see also revrul_55_192 and revrul_85_184 in the present case however company does not serve as the agent for a charity with respect to merchant rebates during the time the rebates are held by company they are available in the event of any charge-back return or dispute resolution connected with the purchase thus taxpayer retains a degree of control and benefit with respect to the funds a charity does not have an absolute right to any rebates until company actually transfers the amounts to the charity in substance company is acting on behalf of taxpayer not the recipient charity until the rebates are transferred to the charity delivery to a third party for subsequent delivery to a charitable_organization does not satisfy the requirement of delivery 45_tc_106 steele's mills v commissioner 4_bta_960 there is no delivery of a charitable_contribution when company receives an amount on behalf of taxpayer delivery occurs when company transfers the amount to the recipient charity therefore taxpayer will be entitled to claim a charitable_contribution_deduction for the tax_year in which company transfers rebates it holds on taxpayer's behalf to the recipient charity ruling_request - application of sec_170 sec_170 provides that no deduction is allowed under sec_170 for a contribution of dollar_figure or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of sec_170 if company makes a lump-sum transfer of dollar_figure or more to a charity taxpayer must have the substantiation required by sec_170 because as stated above the donation occurs when company transfers the amount to the recipient charity a payment of dollar_figure or more is subject_to sec_170 even if it is the aggregate of separate rebates company will supply all participating charities with the information necessary for the charities to provide the required substantiation ruling_request - rebates not included in income a rebate received from the party to whom the buyer directly or indirectly paid the purchase_price for an item is a reduction in the purchase_price of the item it is not an accession to wealth and is not includible in the buyer’s gross_income revrul_76_96 1976_1_cb_23 revrul_84_41 1984_1_cb_130 plr-145990-01 in this case when taxpayer purchases a product from a participating merchant company receives from the merchant a rebate on behalf of taxpayer taxpayer may elect to receive rebates personally or donate them to a charity regardless of taxpayer’s election this rebate constitutes a reduction in the purchase_price of the product that pursuant to revrul_76_96 and revrul_84_41 is not includible in taxpayer’s gross_income a copy of this letter must be attached to any income_tax return to which it is relevant we enclose a copy of the letter for this purpose also enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 of the internal_revenue_code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter for example no opinion is expressed about the tax consequences of the program to company or to participating merchants banks or charities this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely paul m ritenour chief branch office of associate chief_counsel income_tax accounting


department of the treasury internal_revenue_service washington d c contact person id number telephone number pe sin sep date ledgend ma be cn d ee ope gq z dear sir or madam this is in response to your request for rulings on whether management of a and b's assets by d would constitute an act of self dealing under sec_4941 of the internal_revenue_code a and b are exempt from federal_income_tax under sec_501 c of the code and have been classified as private_foundations within the meaning of sec_509 this letter modifies our letter of date c was organized as a x and has two wholly owned subsidiaries conversion from mutual to stock form of organization e was organized as a y c's outstanding_stock d is the trust department of c in connection with the e owns all of c formed b in and funded it with a contribution c has made subsequent contributions b is governed by a board_of directors which consists of directors officers and employees of c b's board establishes the policies with respect to grants and donations consistent with the purposes for which b was established pursuant to the bylaws only current or former officers and directors of e or its affiliates or subsidiaries but not limited to c may comprise the board_of b b also employees three individuals who are also employees of a a was formed in connection with the mutual to stock conversion of c _ a was funded at that time with shares of common_stock of e _ a continues to hold shares of common_stock that was contributed to it upon its formation none of the other investments or financial products of a are related to c or its subsidiary organizations a's cash management account is held by a nonaffiliated third party in connection with the conversion e funded a with shares of e's common_stock a's board establishes policies with respect to grants or donations consistent with the purposes for which o22 it was established the directors are responsible for directing the activities including the management of the common_stock held by a pursuant to the bylaws only current and former officers and directors of e or its affiliates or subsidiaries including but not limited to c may comprise the board_of directors a currently has three employees who are also employees of b c established d as a department within c to provide trust and investment services to individuals trusts fiduciary accounts and institutional investors d proposed to provide custody and management services for the assets of a and b including i safekeeping the securities ii selling securities including the common_stock when appropriate to obtain working_capital and funds with which to make donations and iii investing any income received through the distributions of dividends by e dividends or interest earning on investments of a and or b or through the sale of securities as of date d manages z accounts of the z accounts four of the accounts are related to c and its subsidiary_organization the accounts include f - invested in u s treasuries g - required by government regulation a - consists solely of cash and securities and is a custody account and b - a custodial_account d does not make investments on behalf of a you represent that the fees charged in connection with the services will be in accordance with the published rates charged by d with respect to its other clients and will be reasonable for the services rendered such fees will be in accordance with industry practice and will be permissible under the applicable local laws governing fiduciary activities a standard courtesy_discount of percent is offered to all not-for-profit_organizations and is being extended to a and b a and b propose to use d in lieu of the trust department of a third party because i using a related_party will add administrative convenience thus saving them time and money allowing them to focus their efforts on reviewing grant applications and making donations and ii this will ensure compliance with the e common_stock restriction requiring all shares of e common_stock be voted in the same ratio on each and every proposal considered by e stockholders b stated that its finance_committee of the board_of directors dictates its investments based on its investment policy investments are selected in consultation with the c's finance department d foliows the instructions provided to it by the finance_committee and executes the investments d invests the assets using mutual funds or individual securities in high-quality fixed income investments and or equities none of b's investments or financial products are related to c or its subsidiary organizations b case management account is held by a nonaffiliated third party none of a or b's investments will represent more than percent of any single investment vehicle sec_501 of the code provides in part for exemption from federal_income_tax for a corporation organized and operated exclusively for charitable scientific or educational_purposes provided no part of the corporation's net_earnings inure to the benefit of any private_shareholder_or_individual sec_509 of the code provides that unless specifically excepted a domestic or foreign organization described in sec_501 is a private_foundation and subject_to the excise_taxes of chapter sec_4941 a of the code imposes a tax on each act of self-dealing between a disqualified_person and a private_foundation gaoy american savings bank foundation inc sec_4941 of the code provides in part that the term self-dealing means any direct or indirect - - a furnishing of goods services or facilities between a private_foundation and a disqualified_person b payment of compensation or payment or reimbursement of expenses by a private_foundation to a disqualified_person and c transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4941 of the code provides that the payment of compensation by a private_foundation to a disqualified_person for personal services which are reasonable and necessary to carry out the exempt_purpose of the foundation shall not be an act of self-dealing if the compensation is not excessive sec_53_4941_d_-1 of the foundation and similar excise_taxes regulations provides that tor purposes of sec_4941 the term self-dealing means any direct or indirect transaction described in sec_53 d for purposes of this section it is immaterial whether the transaction results in a benefit or detriment to the private_foundation sec_53 d -2 c of the regulations provides that the performance by a bank or trust company which is a disqualified_person of trust functions and certain general banking services for a private_foundation is not an act of self-dealing where the banking services are reasonable and necessary to carrying out the exempt purposes of the private_foundation if the compensation paid to the bank or trust company taking into account the fair interest rate for_the_use_of the funds by the bank or trust company for such services is not excessive the general banking services allowed by this subparagraph are checking accounts as long as the bank does not charge interest on any withdrawals savings accounts as long as the foundation may withdraw its funds on no more than 30-days notice without subjecting itself to a loss of interest on its money for the time during which the money was on deposit and safekeeping activities sec_53 d -2 f of the regulations provides in part that the fact that a disqualified_person receives an incidental or tenuous benefit from the use by a foundation of its income or assets will not by itself make such use an act of self-dealing sec_53 d -3 c of the regulations provides that the payment of compensation and the payment or reimbursement of expenses including reasonable advances for expenses anticipated in the immediate future by a private_foundation to a disqualified_person for the performance of personal services which are reasonable and necessary to carry out the exempt purposes of the private_foundation shall not be an act f self-dealing if such compensation or repayment or reimbursement is not excessive for purposes of this subparagraph the term personal services include the services of a broker serving as agent for the private_foundation but not the services of a dealer who buys from the private_foundation as principal and reselis to the third party example of sec_53 d -3 c of the regulations provides c a manager of private_foundation x and hence a disqualified_person with respect to x owns an investment counseling business acting in his capacity as an investment counselor c manages x's investment american savings bank foundation inc portfolio for which he receives an amount which is determined not to be excessive the payment of compensation to c shall not constitute an act of self- dealing sec_4946 of the code defines the term disqualified_person to mean in relevant part a person who is a substantial_contributor to the foundation a foundation_manager an owner of more than percent of an entity which is a substantial_contributor of the foundation a member_of_the_family of an individual previously described or an entity in which persons previously described own more than percent sec_4946 of the code defines a foundation_manager as an officer director or trustee of a foundation or an individual having powers or responsibilities similar to those of officers directors or trustees of the foundation and with respect to any act or failure to act the employees of the foundation having authority or responsibility with respect to such act or failure to act sec_7701 of the code defines the term person as including an individual a_trust estate partnership revrul_74_287 1974_1_cb_327 provides that the employees of a bank designated as the trustees of a private_foundation who have been delegated the responsibility for the day-to-day administration and distribution of the trust funds are foundation managers within the meaning of sec_4946 of the code and are disqualified persons as defined in sec_4946 even though they are ultimately responsible to the bank directors and officers for their actions with respect to the trust generally an act of self-dealing may be present where the assets of a private_foundation are transferred to or used by or for a disqualified_person it is not pertinent whether the transaction is beneficial or detrimental to the private_foundation however a private_foundation may pay reasonable_compensation to a disqualified_person for personal services pursuant to sec_4941 of the code an exception is provided where a bank only performs trust functions and certain limited general banking services the services must be reasonable and necessary to carry out the exempt purposes of the private_foundations the compensation must not be unreasonable the service has consistently strictly interpreted the term general banking services to include only checking accounts saving accounts and safekeeping activities trust functions historically include investment functions another exception to the rules prohibiting self-deating is where the disqualified_person only receives an incidental or tenuous benefit from the use by the foundation of its assets the information submitted established that a and b were created by c b is governed by a board_of directors which consists of directors c d and e as well as the officers and directors who are their employees are c's outstanding_stock officers and employees of c b disqualified persons as to a and b _ their relationship is similar to the one described in revrul_74_287 supra thus payment of compensation by a and b would be considered self-dealing under sec_4941 a of the code unless the compensation meets an exception e funded a with shares of e's common_stock c funded e owns all of based upon the information submitted the management and investing of a and b's funds by c is similar to trust and certain general banking services investment activity is a permissible use of foundation assets entered into for the purpose of obtaining funds to be used to further american savings bank foundation inc exempt purposes such services are excluded from the definition of self-dealing by reason of the provision of sec_53_4941_d_-2 and sec_53 d c of the regulations d follows the instructions provided to it by the finance_committee and executes the investments d invests the assets using mutual funds or individual securities the services provided by d which is a department of c will also fall within the term trust functions as used in sec_53 d -2 c of the regulations and within example of sec_53 d - c of the regulations a and b represent that the amount of compensation paid to d is reasonable and will be similar to those charged to other clients they will be given a standard percent discount given to not-for-profit_organizations based on these representations we conclude that the services provided by d are reasonable and necessary to obtain funds to carry out the exempt purposes of a and b based on the foregoing we rule that the payment of fees by a and b to d for the services described above will not constitute an act of self-dealing under sec_4941 of the code this ruling is based on the understanding that there will be no material changes in the facts upon which it is based this ruling is directed only to a b c and d sec_6110 of the code states that it may not be used or cited as precedent this ruling does not purport to rule under any other section of the code a copy of this ruling is being sent to the ohio tax exempt and government entities te_ge customer service office please notify the customer service office if there is any change in your name address purposes or method of operation the mailing address is internal_revenue_service te_ge customer service p box cincinnati oh if you have any questions about filing_requirements excise employment or other federal taxes please contact the ohio te_ge customer service office pincite-5500 a toll free number because this letter could help resolve questions you should keep this copy in your permanent records sincerely yours bizevetd vy sek gerald v sack chief exempt_organizations rulings branch


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uil code contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final since you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions you should follow the instructions in notice if you agree with our deletions you do not need to take any further action letter cg catalog number 47632s in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements lf you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter about your federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions sincerely lois lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number 47632s department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person identification_number contact number fax number employer_identification_number vil sec_501 legend b date c state d individual e individual u dollar amount v dollar amount w dollar amount x dollar amount y dollar amount z dollar amount dear we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code code based on the information provided we have concluded that you do not qualify for exemption under sec_501 of the code the basis for our conclusion is set forth below issues do you qualify for recognition of exemption under sec_501 of the code no for the reasons specified below facts d your founder and executive director worked as a sole_proprietor offering consulting services until date b when you were formed these services are the same as those that you will provide including counseling distressed homeowners to avoid foreclosure and negotiating loan modifications with lenders d provided a client list dating back three years as well as a balance_sheet including payroll_taxes and an overdraft balance carried forward from the sole_proprietorship d indicated that as he had provided these services in the past he believed it appropriate to continue offering the services through a non profit prior to providing these services as a sole_proprietor d worked for another non-profit organization that provided similar services you were incorporated on b in the state of c as a nonprofit corporation your articles of incorporation state you are organized exclusively for spiritual charitable or educational_purposes including for such purposes by providing quality housing counseling for distress property owners who are attempting to stave off foreclosure you have no bylaws you help homeowners primarily in the north c area avoid foreclosure by enforcing government protocols to prevent foreclosure you educate homeowners about their options to avoid foreclosure negotiate loan modifications with the mortgage_lender and refer homeowners to legal counsel if necessary you assist individuals who are delinquent with their mortgage loans including sub prime conventional va and fha loans with mortgage amounts ranging from dollar_figure homeowners helps them determine their best course of action and initiates the negotiation of loan modification with the lender other employees will process the loan modification documents and perform administrative tasks local attorneys may be engaged to protect the homeowners’ rights you usually provide services to homeowners before the foreclosure occurs however you may also aid homeowners in rescinding foreclosures after foreclosures are stopped homeowners are required to attend housing counseling which consists of home maintenance education job resources family values and savings currently these activities are funded by consulting fees paid_by the homeowners you have expressed a desire to apply for government grants in the future d interviews the to dollar_figure you use the services of a for-profit referral service who debits your banking account for v dollars each month in return for this fee you are given access to the names and contact information of homeowners who are scheduled for foreclosure within one month you provided a letter you send to those potential clients informing them of your services and include contact information the letter is signed by d as chief counselor and loss mitigation specialist you are governed by three directors two of your directors d and e are brothers you expect to pay compensation of w dollars per year to d x dollars per year to e and y dollars per year to the third director by letter dated date you stated that directors are not currently being paid compensation however you have outlined hourly pay schedules d is set to be paid u dollars hourly for consulting services you provide twenty hours of one-on-one counseling sessions for a fee of z dollars according to your payment refund policy half of the fees must be paid within hours of the initial consultation and signing of a confidentiality agreement you will not proceed if the homeowner does not supply the necessary information within hours the homeowner is not entitled to a refund if he or she fails to provide this information within this allotted time you state that about five percent of your clients have not paid for your services after having received an agreement you have not advertised your payment refund policy to the public an initial inquiry last sec_45 minutes the number of subsequent follow-up inquiries varies from to per client depending on the mortgage company’s response time each follow-up meeting lasts thirty minutes on average you stated that your fees are based on a scale to scale basis which depend s on the homeowner's financial circumstances and how long the homeowner will be in your program not to exceed z dollars you state however that additional charges will apply i f the mortgage company becomes complex in resolving the homeowner’s request within thirty days also you did not indicate how you will determine who is eligible for a reduced fee or what the amount of the fee reduction will be law in order to be described in sec_501 of the code a corporation must be organized and operated exclusively for charitable or educational_purposes and no part of its net_earnings may inure to the benefit of any private_shareholder_or_individual sec_501 of the code provides that organizations which provide credit_counseling_services as a substantial purpose shall not be exempt from taxation under sec_501 unless they are described in sec_501 or sec_501 and they are organized and operated in accordance with the following requirements a the organization-- i provides credit_counseling_services tailored to the specific needs and circumstances of consumers ii makes no loans to debtors other than loans with no fees or interest and does not negotiate the making of loans on behalf of debtors iii provides services for the purpose of improving a consumer's credit record credit history or credit rating only to the extent that such services are incidental to providing credit_counseling_services and iv does not charge any separately_stated fee for services for the purpose of improving any consumer's credit record credit history or credit rating b the organization does not refuse to provide credit_counseling_services to a consumer due to the inability of the consumer to pay the ineligibility of the consumer for debt management plan enrollment or the unwillingness of the consumer to enroll in a debt management plan c the organization establishes and implements a fee policy which-- i requires that any fees charged to a consumer for services are reasonable ii allows for the waiver of fees if the consumer is unable to pay and iii except to the extent allowed by state law prohibits charging any fee based in whole or in part on a percentage of the consumer's debt the consumer's payments to be made pursuant to a debt management plan or the projected or actual savings to the consumer resulting from enrolling in a debt management plan d at all times the organization has a board_of directors or other governing body-- i which is controlled by persons who represent the broad interests of the public such as public officials acting in their capacities as such persons having special knowledge or expertise in credit or financial education and community leaders ii not more than -_ percent of the voting power of which is vested in persons who are employed by the organization or who will benefit financially directly or indirectly from the organization's activities other than through the receipt of reasonable directors’ fees or the repayment of consumer debt to creditors other than the credit_counseling_organization or its affiliates and iii not more than percent of the voting power of which is vested in persons who are employed by the organization or who will benefit financially directly or indirectly from the organization's activities other than through the receipt of reasonable directors’ fees f the organization receives no amount for providing referrals to others for debt_management_plan_services and pays no amount to others for obtaining referrals of consumers sec_501 of the code defines for purposes of sec_501 the term credit_counseling_services to mean i the providing of educational information to the general_public on budgeting personal finance financial literacy saving and spending practices and the sound use of consumer credit ii the assisting of individuals and families with financial problems by providing them with counseling or iii a combination of the activities described above sec_1_501_c_3_-1 of the income_tax regulations regulations provides that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section organizational_test or the operational_test it is not exempt if an organization fails to meet either the sec_1_501_c_3_-1 of the regulations provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization a limit the purposes of such organization to one or more exempt purposes and b do not expressly empower the organization to engage otherwise than as an insubstantial part of its activities in activities that in themselves are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 of the regulations provides that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt_purpose either by an express provision in its governing instrument or by operation of law sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_a_-1 of the regulations defines the words private_shareholder_or_individual in sec_501 of the code to refer to persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations provides an applicant organization must establish it serves a public rather than a private interest and specifically that it is not as designated organized or operated for interests benefit private such the of individuals the creator or controlled directly or indirectly by such private interests his family shareholders of the organization or persons sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in sec_501 in its generally accepted legal sense and includes the relief of the poor and distressed or of the underprivileged sec_1_501_c_3_-1 of the regulations provides that the term educational as used in sec_501 of the code relates to a the instruction or training of the individual for the purpose of improving or developing his capabilities or b the instruction of the public on subjects useful to the individual and beneficial to the community in revrul_69_441 1969_2_cb_115 the service found that a nonprofit organization formed to help reduce personal bankruptcy by informing the public on personal money management and aiding low-income individuals and families with financial problems was exempt under sec_501 of the code its board_of directors was comprised of representatives from religious organizations civic groups labor unions business groups and educational institutions the organization provided information to the public on budgeting buying practices and the sound use of consumer credit through the use of films speakers and publications it aided low-income individuals and families who have financial problems by providing them with individual counseling and if necessary by establishing budget plans under the budget plan the debtor voluntarily made fixed payments to the organization holding the funds in a_trust account and disbursing the funds on a partial payment basis to the creditors the organization did not charge fees for counseling services or proration services the debtor received full credit against his debts for all amounts paid the finally organization did not make loans to debtors or negotiate loans on their behalf the organization relied upon contributions primarily from the creditors participating in the organization's budget plans for its support creditors were not required though to make such contributions as a condition of participation the service found that by aiding low-income individuals and families who have financial problems and by providing without charge counseling and a means for the orderly discharge_of_indebtedness the organization was relieving the poor and distressed moreover by providing the public with information on budgeting buying practices and the sound use of consumer credit the organization was instructing the public on subjects useful to the individual and beneficial to the community thus the organization was exempt from federal_income_tax under sec_501 of the code 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 individual and group counseling of widows where fees charged for services were based on ability of the widow to pay revrul_76_205 1976_1_cb_154 free counseling and english instruction for immigrants revrul_73_569 1973_2_cb_178 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 personal marriage counseling and public seminars supported by area churches clients’ fees and contributions 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 or below-cost and the organizations were supported by contributions from the public its primary purpose was not charitable educational or scientific but rather in 70_tc_352 the court found that a corporation formed to provide consulting services did not satisfy the operational_test under sec_501 of the code because its activities constituted the conduct_of_a_trade_or_business that is ordinarily carried on by commercial ventures organized for profit commercial in addition the court found that the organization's financing did not resemble that of typical sec_501 organizations it had not solicited nor had it received voluntary contributions from the public its only source_of_income was from fees from services and those fees were set high enough to recoup all projected costs and to produce a profit moreover while to some extent the fees charged reflected ability to pay it did not appear that the corporation ever planned to charge a fee less than cost and finally the corporation did not limit its clientele to organizations that were sec_501 exempt_organizations in consumer credit counseling service of alabama inc v united_states u s t c d d c 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 was 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 professional counselors employed by the organizations spent about percent of their time in activities such as information dissemination and counseling assistance rather than those connected with the debt management programs as such the community and education counseling assistance programs were the agencies’ primary activities the primary sources of revenue for these organizations were provided by government and private_foundation grants contributions and assistance from labor agencies and united way an incidental amount of their revenue was from service fees thus the court concluded that each of the plaintiff consumer credit counseling agencies was an organization described in sec_501 as a charitable and educational_organization see also credit counseling centers of oklahoma inc v united_states u s t c d d c in which the facts were virtually identical and the law was identical to those in consumer credit counseling service of alabama inc v united_states discussed immediately above in easter house v united_states cl_ct affd 846_f2d_78 fed cir cert_denied 488_us_907 109_sct_257 102_led_246 the court found an organization that operated an adoption agency was not described in sec_501 of the code because a substantial purpose of the agency was a nonexempt commercial purpose the court concluded that its primary activity was placing children for adoption in a manner indistinguishable from that of a commercial adoption agency the court found that the health-related services provided to unwed mothers and their children were merely incidental to the organization's operation of an adoption service which in and of itself did not serve an exempt_purpose the organization's sole source of support was the fees it charged adoptive parents rather than contributions from the public the court also found that the organization competed with for-profit adoption agencies engaged in substantial advertising and accumulated substantial profits accordingly the court found that the business_purpose and not the advancement of educational and charitable activities purpose of plaintiffs adoption service is its primary goal and held that the organization was not operated exclusively for purposes described in sec_501 in 950_f2d_365 7th cir the court_of_appeals for the seventh circuit upheld a tax_court decision that an organization operating restaurants and health food stores in a manner consistent with the doctrines of the seventh day adventist church was not described in sec_501 of the code because the organization was operated for a substantial nonexempt commercial purpose the court found that the organization's activities were presumptively commercial because the organization was in competition with other restaurants engaged in marketing and generally operated in a manner similar to commercial businesses in 283_fsupp2d_58 d d c the court relied on the commerciality doctrine in applying the operational_test because of the commercial manner in which this organization conducted its activities the court found that it was operated for a nonexempt commercial purpose rather than for an exempt_purpose as the court stated among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations in solution plus inc v commissioner tcmemo_2008_21 the tax_court held that a credit_counseling_organization was not described in sec_501 because it was not organized and operated exclusively for educational or charitable purposes and impermissibly served private interests the organization was formed by an individual with experience selling debt management plans dmps the founder and his spouse were the only members of the organization’s board_of directors the organization did not have any meaningful educational program or materials to provide to people who contacted the organization and its financial education seminars for students constituted an insignificant part of the organization’s overall activities the court held that the organization's purposes were not educational because its activities are primarily structured to market determine eligibility for and enroll individuals in dmps its purposes were not to inform consumers about understanding the cause of and devising personal solutions to consumers’ financial problems or to consider the particular knowledge of individual callers about managing their personal finances the tax_court also held that the organization's purposes were not charitable because its potential customers are not members of a charitable_class that are benefited in a 'non-select manner meet the criteria of the participating creditors because they will be turned away unless they the tax_court further held the organization would operate for the private interests of its founder because the founder and his spouse were the only directors the founder was the only officer and employee and his compensation was based in part on the organization's dmp sales activity levels the organization was a family-controlled business that he personally would run for financial gain using his past professional experience marketing dmps and managing a dmp call center the court further held that the organization's principal activity of providing dmp services which were only provided if approved by a caller's creditors furthered the benefit of the private interests of creditors as well finally the tax_court held that the facts in credit_counseling_services of alabama v united_states u s t c d d c stand in stark contrast because the sale of dmps is the primary reason for solution plus's existence and its charitable and educational_purposes are at best minimal application of tax law as exempt sec_501 of the code sets forth two main tests for an organization to be recognized and operated sec_1_501_c_3_-1 of exclusively for purposes described in sec_501 the and supporting documentation we conclude that you fail both tests the information you provided in regulations based on your application organization organized must be both an organizational_test to satisfy the organizational_test an organization must have a valid purpose clause your articles provide that your specific purpose is exclusively c exempt_purpose a valid purpose clause limits an organization's purposes to one or more exempt purposes and does not expressly empower the organization to engage otherwise than as an insubstantial part of its activities in activities that in themselves are not in furtherance of one or more exempt purposes your articles do not limit your purposes to one or more exempt purposes therefore you do not have a valid purpose clause accordingly you are not organized for exempt purposes this is not an operational_test to satisfy the operational_test an organization must establish that it is operated exclusively for one or more exempt purposes sec_1_501_c_3_-1 of the regulations 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 of the code sec_1 c - c of the regulations under the operational_test the purpose towards which an organization’s activities are directed and not the nature of the activities themselves is ultimately dispositive of the organization’s right to be classified as a sec_501 organization b s w group supra your activities are not directed toward one or more exempt purposes while you engage in personalized discussions with homeowners that may in part further educational or charitable purposes your activities primarily further the substantial nonexempt purpose of selling financial services to homeowners for a fee thus you have failed to establish that you are operated exclusively for one or more exempt purposes you are not operated exclusively for educational_purposes your activities demonstrate that you do not operate exclusively for educational_purposes within the meaning of sec_501 of the code you stated that you educate homeowners about their options to avoid foreclosure and help them determine their best course of action your methodology distinguishes you from the exempt_organizations in consumer credit counseling service of alabama supra and revrul_69_441 supra these exempt financial counseling organizations primarily informed the public on budgeting buying practices and the sound use of consumer credit any debt management programs were incidental to these primary educational activities unlike these exempt financial counseling organizations you do not offer counseling sessions that are structured primarily to improve your clients’ understanding of their financial problems or their skills in solving them you provided no evidence that your educational process does anything more than prepare you to provide debt management services on behalf of the homeowners you state that as part of your foreclosure prevention program that you provide certain housing counseling this counseling however is given to homeowners who have engaged you to provide debt management services rather than the general_public furthermore you solicit clients from a database of homeowners who are within days of foreclosure this outreach is not directed to the general_public rather it is designed to solicit business for your consulting services you have not demonstrated that your programs will serve to educate the general_public in sound financial management practices thus you have not demonstrated that you engage in these discussions primarily to further an educational purpose indeed your operational focus is on generating fees from your consulting activities like the organization that failed to qualify for exemption in solution plus supra your efforts are focused on informing potential clients about the range of services available and signing them up for your services rather than on conducting a meaningful educational program you did not provide evidence that you help clients develop an understanding of the cause of their financial problems you provided no evidence that you intend to establish long-term counseling relationships with your clients you only have further contact when the client has further contact with the bank and needs more consulting assistance therefore you have failed to demonstrate that your interactions with clients and the community are designed to provide instruction or training useful to the individual and beneficial to the community within the meaning of sec_1_501_c_3_-1 of the regulations thus you are not operated exclusively for educational_purposes within the meaning of sec_501 of the code you are not operated exclusively for charitable purposes your activities demonstrate that you do not operate exclusively for charitable purposes most of your time and resources within the meaning of sec_501 of the code are devoted to providing financial services for a fee not necessarily members of a charitable_class helping homeowners at risk of foreclosure negotiate a modification to the terms of their mortgage does not provide relief to the poor and distressed within the meaning of sec_1_501_c_3_-1 of the regulations or serve any other purpose recognized as charitable to individuals who are you also provide foreclosure consulting services to individuals who are delinquent with their mortgage loans including sub prime conventional loans va loans and fha loans with mortgage amount ranging from dollar_figure therefore your to dollar_figure services are not directed exclusively to low-income individuals accordingly you are unlike the organization described in revrul_69_441 supra which aided low-income individuals and families who have financial problems thereby relieving the poor and distressed moreover you charge fees for the majority of your services though you assert that fees are based on a scale to scale basis and depend on the homeowner's financial circumstances you did not indicate how you will determine who is eligible for a reduced fee or the amount of the fee reduction this distinguishes you from the exempt_organizations in consumer credit counseling service of alabama supra and revrul_69_441 supra which relied upon contributions to provide their services for free or at most for only a nominal fee indeed primarily providing services for a fee ordinarily does not further charitable purposes solution plus supra thus you have failed to establish that your activities exclusively further charitable purposes within the meaning of sec_501 of the code you have a substantial nonexempt purpose sec_1_501_c_3_-1 of the regulations provides that an organization does not qualify for exemption if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose a nonexempt purpose may be evidenced by activities that are conducted in a commercial manner or for a commercial purpose indeed in discerning whether an organization has a substantial nonexempt commercial purpose courts focus on a number of factors related to the nature of the activities and how an organization conducts its business including pricing policies funding sources and the organization’s competitiveness with and similarity to other commercial ventures see b s w group supra easter house supra airlie foundation supra living faith supra like the organization in solution plus supra a substantial part of your activities consists of the promotion and delivery of financial and other services to individuals for a fee your fee structure demonstrates that you are operated in a commercial manner and for a commercial purpose you charge z dollars to provide consulting services and require a payment of one half of the fee within hours of the initial consultation and signing of a confidentiality agreement these fees are not refundable if the homeowner does not supply the necessary information within hours the services provided for these fees are indistinguishable from those provided by for profit consultants further these activities are not distinguishable from those performed by the sole_proprietorship operated by d prior to your formation furthermore you have not established that you provide these services on different terms at prices significantly below market or in any other way that deviates from normal commercial practices when asked the number and percentage of clients who have received your services free of charge you responded that about have not paid our services after they have received an agreement this statement only indicates a percentage of clients who have failed to pay the fee it does not establish that any of your fees have been waived or reduced because of an inability to pay you have provided no evidence of your fee waiver policy the lack of public support for your activities further demonstrates that you operate for a substantial nonexempt commercial purpose the exempt_organization described in consumer credit counseling service of alabama supra received support from government and private_foundation grants contributions and assistance from labor agencies and the united way while you indicated that you will solicit government grants the financial data that provided shows that you have not and do not expect to receive any gifts grants or contributions at all there is also no evidence that you have received contributions or gifts from disinterested members of the public see b s w group supra citing lack of solicitation of contributions and sole support from fees as factors disfavoring exemption rather your operations are financed entirely by revenue earned from selling services to homeowners receiving support primarily from consulting fees is indicative of a nonexempt purpose easter house supra the activities you identify as educational are merely incidental to your business of providing foreclosure consulting services for a fee thus more than an insubstantial part of your activities are in furtherance of a nonexempt purpose in contravention of sec_1_501_c_3_-1 of the regulations therefore you are not operated for an exempt_purpose inurement an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest see sec_1_501_c_3_-1 of the regulations your board_of directors is composed of only three persons two of whom are related by blood furthermore all members of your board_of directors are compensated the composition of your board is in stark contrast to the exempt_organization in revrul_69_441 supra whose board_of directors was comprised of representatives from religious organizations civic groups labor unions business groups and educational institutions the fact that your board lacks public participation of any kind indicates that you are operated for the benefit of your directors rather than the public do not have bylaws to ensure that your governing body serves a public rather than private interest because your operations substantially benefit your directors you have not demonstrated that your operations serve a public rather than a private interest as required by sec_1 c -1 d ii of the regulations in addition you sec_501 of the code an organization that provides educational information on financial topics or financial counseling to homeowners who are at risk of foreclosure is providing credit_counseling_services within the meaning of sec_501 of the code an organization that engages in such activities as a substantial purpose must in addition to complying with the requirements of sec_501 comply with the provisions of sec_501 thus even if you had established that you engage in such activities as a substantial purpose to be exempt from taxation you must in addition to complying with the requirements of sec_501 comply with the provisions of sec_501 you do not meet the requirements of sec_501 and you do not meet the requirements of sec_501 an exempt credit_counseling_organization must establish and implement a fee policy which requires that any fees charged to a consumer for services are reasonable and allows for the waiver of fees if the consumer is unable to pay sec_501 of the code you failed to establish that you have such a fee policy credit counseling organizations must be governed by a board controlled by persons representing the broad interests of the public rather than by persons who benefit from the organization’s activities sec_501 of the code all of the voting power of your board_of directors is vested in persons who are employed by you and who will benefit financially directly or indirectly from your activities other than through the receipt of reasonable directors’ fees or the repayment of consumer debt to creditors other than the credit_counseling_organization or its affiliates accordingly you do not have a board_of directors that is controlled by persons who represent the broad interests of the public as required by sec_501 you also fail to meet the requirements of sec_501 and iii which generally specify the percent of voting power that is allowed to be vested in financially interested persons therefore had you established that you otherwise met the requirements of sec_501 your failure to satisfy the requirements of sec_501 would prevent you from being exempt from taxation under sec_501 conclusion based on the facts and information provided you are not organized or operated exclusively for exempt purposes as required by sec_1_501_c_3_-1 sec_1_501_c_3_-1 and sec_1_501_c_3_-1 of the regulations you are organized and operated for a substantial nonexempt purpose in contravention of sec_1 c - c of the regulations any public purposes for which you may operate are only incidental to this primary nonexempt purpose you do not serve a public rather than a private interest as required by sec_1 c -1 d ii of the regulations therefore you are not described in sec_501 in addition you do not meet the requirements of sec_501 accordingly you do not qualify for exemption as an organization described in sec_501 of the code and you must file federal_income_tax returns contributions to you are not deductible under sec_170 you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration under penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you if you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so for more information about representation see publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to protest as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address mail to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh deliver to internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may also fax your statement using the fax number shown in the heading of this letter if you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois g lerner director exempt_organizations enclosure publication