t c no united_states tax_court jason bontrager petitioner v commissioner of internal revenue respondent docket no 5998-16l filed date p pleaded guilty in to violation of sec_7201 the basis for his conviction was that he had aided and abetted his father in evading payment of his father’s federal_income_tax liability for in p filed a petition under chapter of the bankruptcy code at sentencing in the district_court ordered p to pay restitution of dollar_figure representing of the government’s total_tax loss attri- butable to his father’s unpaid tax_liability for relying on sec_6201 r assessed the dollar_figure of restitution that p had been ordered to pay and recorded this assess- ment as a liability for p’s tax_year when p did not pay the balance of the liability r began collection action by filing a notice_of_federal_tax_lien nftl after a cdp hearing the settlement officer upheld the filing of the nftl and p timely petitioned this court held sec_6201 authorizes the irs to assess restitution that a person has been ordered to pay upon conviction of violating sec_7201 when his wrongdoing consisted of aiding_and_abetting the evasion of payment of a third party’s tax_liability held further p’s restitution liability was not discharged in the bankruptcy proceeding held further the irs collection action is sustained holly c henson for petitioner derek s pratt and rachael j zepeda for respondent opinion lauber judge in this collection_due_process cdp case petitioner seeks review pursuant to sec_6320 and sec_6330 of the determination by the internal_revenue_service irs or respondent to uphold a notice_of_federal_tax_lien nftl filing the irs filed the nftl to facilitate collection of criminal restitution that it had assessed against petitioner under sec_6201 that section authorizes the irs to assess and collect the amount of restitution for 1unless otherwise indicated all statutory references are to the internal reve- nue code code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar failure to pay any_tax imposed under this title in the same manner as if such amount were such tax petitioner pleaded guilty in to one count of violating sec_7201 which criminalizes willful attempts to evade or defeat any_tax or the payment thereof the basis for his conviction was that he had aided and abetted his father in evading payment of his father’s federal_income_tax liability for which the irs had assessed in at sentencing petitioner was ordered to pay to the irs restitution of dollar_figure representing of the government’s tax loss relating to his father’s unpaid tax_liability for the principal question presented one of first impression in this court is whether sec_6201 authorizes the irs to assess restitution that a person has been ordered to pay upon conviction of violating sec_7201 when his wrongdoing consisted of aiding_and_abetting the evasion of payment of a third party’s tax_liability we resolve this question in respondent’s favor background the parties have submitted the case for decision without trial under rule relevant facts have been stipulated or are otherwise included in the record see rule a pursuant to rule of the federal rules of evidence we take judicial_notice of certain filings in petitioner’s criminal case see united_states v bontrager no 12-cr-00052-raj w d wash date petitioner resided in arizona when he filed his petition petitioner jason bontrager is the son of winston g bontrager winston in winston was convicted of conspiracy to commit wire fraud ordered to pay restitution of dollar_figure and sentenced to prison for several years about the time when he was released from prison the irs assessed against him dollar_figure of federal_income_tax for in petitioner lived in everett and snohomish washington then aged he had completed some coursework at seattle university and had worked at several real_estate title firms in date he established his own real_estate firm alexandria investment co inc aic of which he was the president and initially the sole shareholder from age seven until well into his adulthood petitioner had had little con- tact with his father shortly after winston was released from prison however he moved to nearby bellevue washington and offered to help petitioner with the real_estate business unwisely perhaps petitioner accepted his father’s offer 2absent stipulation to the contrary appeal of this case would lie to the u s court_of_appeals for the ninth circuit see sec_7482 where relevant to the discussion we note that court’s precedent see 54_tc_742 aff’d 445_f2d_985 10th cir winston thereafter played a significant role in the business exercising substantial control_over financing arrangements and negotiating terms for complex real_estate deals winston petitioner and others eventually became the subjects of a federal investigation into various crimes including tax crimes and mortgage fraud that investigation revealed among other things that winston had evaded payment of his outstanding federal tax and restitution liabilities by using petitioner’s real es- tate business as a front to conceal winston’s income and assets on date the u s department of justice filed a criminal infor- mation against petitioner in the u s district_court for the western district of washington the information alleged one count of violating sec_7201 and u s c sec_2 sec_7201 criminalizes any willful attempt to evade or defeat any_tax imposed by this title viz title_26 u s code or the payment thereof title u s c sec_2 provides that w hoever commits an offense against the united_states or aids abets counsels commands induces or procures its commis- sion is punishable as a principal the information alleged that petitioner from through had criminally aided and abetted winston in evading payment of winston’s federal_income_tax liability petitioner was alleged to have done this by using aic and a related real_estate company to help winston conceal assets income bank accounts and business interests the information alleged that petitioner had for example issued corporate checks to winston’s female acquaintance had used corporate funds to purchase a rolls royce for winston’s use had allowed win- ston to charge personal expenditures to a corporate credit card had titled various assets in the names of winston’s nominees and had used offshore accounts to conceal winston’s income and assets that same day petitioner pleaded guilty as charged almost two years later on date the district_court issued its judgment in petitioner’s criminal case the judgment entered on his plea stated that he was adjudicated guilty of violating sec_7201 it stated that his offense ended on date and it described the nature of his offense as aiding_and_abetting the evasion of payment of income_tax petitioner was sentenced to one year in prison and three years of supervised release at the sentencing hearing the district_court described petitioner as an upstanding member of his community but noted his very significant role in his father’s tax-evasion scheme the parties agreed that the government’s overall tax loss stemming from winston’s unpaid tax_liability was dollar_figure ie in- come tax of dollar_figure additions to tax totaling dollar_figure and statutory interest of dollar_figure while acknowledging that he could be held liable for the full amount of the tax loss petitioner asked the sentencing court to apportion the restitution obliga- tion and to assign ten percent of the total loss to him as his separate liability in light of petitioner’s lesser role in the overall scheme the district_court granted this request apportioned of the tax loss or dollar_figure to peti- tioner and ordered him to pay to the irs restitution in that amount several months before his sentencing on date petitioner filed a petition under chapter of the bankruptcy code during the bankruptcy proceed- ing the irs filed a general unsecured proof_of_claim for dollar_figure of which it ultimately received dollar_figure from the bankruptcy_estate on date several weeks after petitioner’s sentencing the u s bankruptcy court for the western district of washington closed the bankruptcy case by issuing an order of discharge that order noted that certain types of debts are not discharged in a chapter case including d ebts for most fines penalties forfeitures or criminal restitution obligations on date the irs assessed against petitioner under sec_6201 the amount of restitution the district_court had ordered him to pay dollar_figure the irs also assessed pursuant to sec_6601 underpayment interest of dollar_figure calculated from the due_date of winston’s tax_return the irs applied a credit of dollar_figure for the payment it had received from petitioner’s bank- ruptcy estate on date after petitioner did not pay the balance of the liability on notice_and_demand the irs filed an nftl upon notification petitioner timely requested a cdp hearing in his hearing request he contended that the restitution was not assessable because it was ordered for failure to pay a tax that title_26 im- posed upon his father rather than upon him petitioner’s hearing request was assigned to a settlement officer so from the irs appeals_office the so scheduled a telephone hearing for date at the hearing petitioner challenged the validity of the assessment and sought withdrawal of the lien he contended that the assessment was invalid in whole or in part because the irs had no legal authority to assess the restitu- tion the restitution obligation had been discharged in bankruptcy the irs had no legal authority to assess underpayment interest and the assessment was improperly recorded as a liability on his tax module he did not request a collection alternative the so rejected all four arguments on date the irs issued petitioner a notice_of_determination sustaining the nftl filing and he timely petitioned this court for redetermination on date the parties submitted this case for decision without trial under rule on date the parties filed a stipulation of settled issues in which respondent conceded that under this court’s decision in klein v commissioner t c __ date petitioner is not liable for underpayment interest under sec_6601 on the dollar_figure restitution-based assessment in light of that concession the issues remaining in live dispute are whether the so erred in deter- mining that the irs had authority under sec_6201 to assess the resti- tution and the restitution obligation had not been discharged in bankruptcy i standard of review discussion petitioner challenges the restitution-based assessment of dollar_figure we treat this amount as being the underlying tax_liability in this case see klein t c at __ slip op pincite the code expressly precludes review of the amount of 3the parties had originally presented as a third question for review whether the restitution obligation should be assessed on petitioner’s or tax mod- ule given respondent’s concession that petitioner is not liable for underpayment interest that question no longer has any practical importance for this case and we therefore decline to address it restitution ordered by the sentencing court see sec_6201 the amount of such restitution may not be challenged by the person against whom assessed on the basis of the existence or amount of the underlying tax_liability in any proceed- ing authorized by this title when the taxpayer’s underlying liability is not properly at issue the court reviews the so’s determination for abuse_of_discretion 114_tc_176 in this case our evaluation of the questions pre- sented turns largely on issues of law the standard of review we apply thus makes little difference as a rule we must reject the so’s determinations to the extent they were based on erroneous views of the law see 124_tc_69 whether characterized as a review for abuse_of_discretion or as a consideration ‘de novo’ of a question of law we must reject erroneous views of the law 121_tc_111 if respondent’s determination was based on erroneous views of the law and peti- tioner’s unpaid liabilities were discharged in bankruptcy then we must reject re- spondent’s views and find that there was an abuse_of_discretion ii validity of assessment the irs can make a restitution-based assessment only to the extent author- ized by sec_6201 that section provides that the secretary shall as- sess and collect the amount of restitution under an order pursuant to section of title united_states_code for failure to pay any_tax imposed under this title viz title_26 in the same manner as if such amount were such tax the parties agree that the restitution obligation at issue arose under an order pursuant to section of title they disagree however as to whether this restitution was ordered for failure to pay any_tax imposed under this title the restitution petitioner was ordered to pay equals of the govern- ment’s loss attributable to winston’s unpaid tax_liability for in petitioner’s view this restitution falls outside the scope of sec_6201 because it was ordered for failure to pay a tax that title_26 imposed not upon him but upon his father petitioner thus reads tax imposed under this title as used in sec_6201 to mean tax imposed upon him under this title the answer to the question presented depends on whether this gloss is correct 4title u s c sec provides that t he court in imposing a sentence on a defendant who has been found guilty of an offense may order restitution in accordance with section the latter section permits the court to order restitution in any criminal case to the extent agreed to by the parties in a plea agreement u s c sec a tax crimes under title_26 are covered by u s c sec a see 970_f2d_529 9th cir s ection a applies to offenses under any title of the united_states_code petitioner agreed to pay restitution as a part of his guilty plea which left the amount of the restitution to be apportioned by the sentencing court pursuant to its authority under u s c sec h we begin our inquiry as we must by considering the plain and ordinary meaning of the text congress enacted klein t c at __ slip op pincite citing 555_us_113 and 844_f3d_832 9th cir sec_6201 authorizes assess- ment and collection of restitution under an order pursuant to section of title the latter section provides as relevant here that t he court in imposing a sentence on a defendant who has been found guilty of an offense may or- der restitution in accordance with u s c section we thus start with the district court’s sentencing order that order stated that petitioner was adjudicated guilty of violating sec_7201 sec_7201 criminalizes any willful attempt in any manner to evade or defeat any_tax imposed by this title or the payment thereof the elements of a sec_7201 of- fense are willfulness the existence of a tax_deficiency and an affirm- ative act constituting an evasion or attempted evasion of the tax 488_f3d_1070 9th cir citing 380_us_343 the second element is equivalent to a failure_to_pay_tax see 832_f2d_1110 9th cir noting that the first two elements of a sec_7201 offense are the same as the elements of an offense under sec_7203 which criminalizes any willful failure_to_pay_tax 607_fedappx_645 9th cir it is undisputed that sec_7203 is a lesser included offense of sec_7201 the sentencing order described the nature of petitioner’s offense as aiding_and_abetting the evasion of payment of income_tax within the meaning of u s c sec_2 this section does not make aiding_and_abetting a distinct crime rather it provides that a person who aids abets counsels commands induces or procures the commission of an offense against the united_states is punishable as a principal see 957_f2d_703 9th cir sec- tion does not establish ‘an offense’ of which a defendant may be convicted it merely determines which offenders may be punished as principals restitution orders in this setting are thus based on the underlying crime not on the aiding_and_abetting sec_6201 authorizes the commissioner to assess and collect the amount of restitution under a sentencing order for failure to pay any_tax imposed under this title petitioner was convicted of violating sec_7201 he was thus found guilty of attempting to evade or defeat a tax imposed by this title or the payment thereof because failure to pay a tax imposed by title_26 was an element of the offense with which petitioner was charged and because he was convicted of that offense sec_6201 by its terms authorized respondent to assess and collect the amount of restitution that petitioner was ordered to pay petitioner notes correctly that the tax the payment of which he was con- victed of evading was not originally imposed upon him by title_26 but neither sec_7201 nor sec_6201 requires that this be the case sec_7201 criminalizes any willful attempt to evade payment of any_tax imposed by this title sec_6201 authorizes the assessment of restitution for failure to pay any_tax imposed under this title petitioner was ordered to pay restitution for aiding_and_abetting winston’s failure to pay federal_income_tax that tax was clearly a tax imposed under this title the phrase any_tax imposed under this title in sec_6201 contains no limiting language read naturally the word ‘any’ has an expansive meaning 520_us_1 in gonzales the supreme court was called upon to interpret the meaning of the phrase any other term of impris- onment as used in u s c sec_924 c because congress had in- cluded no language limiting the scope of any the court held that any term of imprisonment must be construed as referring to all ‘terms of imprison- ment ’ including those imposed by state courts see gonzales u s pincite reasoning similarly here we conclude that the term any_tax imposed under this title includes all taxes imposed under title_26 the tax that petitioner was convicted of willfully attempting to evade the payment of--winston’s income_tax_liability for 1994--was a tax imposed under this title because failure to pay a tax imposed under this title was an element of the crime of which petitioner was convicted sec_6201 authorized respondent to assess and collect that restitution the statute’s text does not support the limiting gloss that petitioner seeks to place upon it the statute’s purpose likewise counsels rejection of petitioner’s proposed construction historically principal responsibility for restitution has lain with the financial litigation unit flu at the u s attorney’s office klein t c at __ slip op pincite the flu reported restitution payments to the sentencing court and eventually transmitted the funds to the irs ibid but before the irs typically had no account receivable against which restitution payments it re- ceived could be credited because it usually had not yet completed or even begun a civil examination of the defendant taxpayer and assessed the tax sec_6201 cured this problem by allowing the irs to assess and collect the resti- tution amount immediately as if such amount were such tax see klein t c at __ slip op pincite if the irs cannot assess restitution of the sort involved here the problem congress aimed to solve in would be perpetuated for a subset of restitution payments indeed the problem would be particularly acute in this context the irs cannot commence an examination of petitioner to determine winston’s civil tax_liability thus it could never make an assessment against petitioner for that tax unless permitted to do so by sec_6201 and this problem could arise in the case of restitution ordered not just for violations of sec_7201 but for violations of other code provisions see eg sec_7202 willful failure to collect or pay over tax and willful failure_to_file supply information or pay tax we decline to find a gap in the statutory scheme in the absence of any textu- al evidence suggesting that such gap exists we thus conclude that sec_6201 authorized the irs to assess the restitution at issue that section directs the commissioner to assess and collect restitution ordered for failure to pay any_tax imposed under this title sec_6201 winston’s federal_income_tax was a tax imposed under this title and petitioner was convicted of violating sec_7201 which involved willful failure to pay that tax the plain language of the statute supported by the policy goal congress sought to achieve justifies the assessment of restitution in these circumstances iii bankruptcy discharge petitioner asserts that his restitution obligation was discharged in his bankruptcy proceeding under the bankruptcy code restitution obligations imposed under title are generally excepted from a chapter discharge see u s c secs a b 154_br_276 bankr d n d r estitution owing to the irs as part of the debtor’s criminal sentence is not dischargeable indeed the discharge order that petitioner received stated that d ebts for most fines penalties forfeitures or criminal restitution obligations are not discharged however certain actions taken by a creditor during a bankruptcy proceed- ing may result in the creditor’s waiving the nondischargeability of his claim see eg in re garrett wl at b a p 9th cir date hold- ing that creditor waived claim of nondischargeability by failing to raise certain 5petitioner contends that he cannot be held responsible for his father’s tax_liability for which arose before he and winston began doing business to- gether this is an impermissible attempt to relitigate the criminal case petitioner pleaded guilty to a violation of sec_7201 and he was punishable as a principal for that crime he was ordered to pay restitution for evading payment of a tax imposed under title_26 and he cannot now challenge the restitution he was ordered to pay see sec_6201 claims during the bankruptcy case petitioner asserts that a waiver occurred here specifically he contends that the irs waived the nondischargeability of the resti- tution obligation by filing a claim as a general unsecured creditor in petitioner’s chapter case contrary to petitioner’s view nothing in the bankruptcy code prevents a creditor of a nondischargeable debt from filing a claim generally all properly filed creditor claims are allowed in a bankruptcy case unless expressly disallowed by the bankruptcy court under a specific provision see u s c sec_502 b d e none of these provisions disallows claims for nondischarge- able debts and no provision of the bankruptcy code prevented the irs from filing a claim or attached any adverse consequences to its doing so further the irs properly filed its claim as a general unsecured creditor because the irs had not assessed the restitution obligation at the time of peti- tioner’s bankruptcy let alone filed an nftl it was required to file its claim as a general unsecured creditor see 237_br_918 bankr n d tex holding that the irs could file only a general unsecured claim when it had not filed an nftl before the commencement of the chapter case peti- tioner has cited no legal authority for the proposition that the irs’ filing of this claim effected a waiver of any kind in sum we conclude that petitioner’s restitution obligation was not dis- charged in his prior bankruptcy and that sec_6201 authorized the com- missioner to assess and collect that amount as if it were a tax taking account of respondent’s concession that the restitution-based assessment does not attract underpayment interest under sec_6601 we will sustain the collection action as set forth in the notice_of_determination to reflect the foregoing an appropriate decision will be entered


internal_revenue_service number release date index number ------------------------------ ------------------------- ---------------------------- re -------------------------------------- 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 plr-122448-16 date legend decedent spouse date date dear ----------- ---------------------------------------------------- ------------------------------------------- ----------------------- ------------------- this letter responds to your personal representative’s letter of date and subsequent correspondence requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election plr-122448-16 spouse as executrix of decedent’s estate represents that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of the decedent’s death and that decedent made no taxable_gifts during his lifetime as executix spouse requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return plr-122448-16 sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i 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 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means 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_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner 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 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 plr-122448-16 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date as executrix spouse represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-122448-16 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 yours associate chief_counsel passthroughs special industries by karlene m lesho karlene m lesho senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number -------------------- ---------------------------- ------------------------------------ department of the treasury washington dc person to contact ------------------------ id no ------------ telephone number -------------------- refer reply to cc fip b02 plr-146740-08 date legend taxpayer ----------------------- -------------------------------------------------------------------- employer ------------------------------------------------------------------- --------------------------------------------- company a state year year year year dear ------------ ----------------------------- ---------- ------- ------- ------- ------- this is in reply to a letter dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations for taxpayer to file a written representation under sec_1_7872-15 of the income_tax regulations if this written representation under sec_1_7872-15 is considered timely filed and the other requirements under sec_1_7872-15 are plr-146740-08 satisfied then an otherwise noncontingent payment on a split-dollar loan that is nonrecourse to the borrower is not a contingent payment under sec_1_7872-15 facts employer is a state non-profit corporation established in year employer is a tax-exempt_organization under sec_501 of the internal_revenue_code_of_1986 as amended code in year employer met with a consulting team from company a to consult on matters relating to the retention and recognition of key employer employees the consulting team recommended and implemented employer’s split-dollar_life_insurance plan sdp company a intended for the sdp to be subject_to the regulations under sec_1_7872-15 the split-dollar regulations and designed the plan to utilize nonrecourse premium loans to the employee participants secured_by the policy the loans the loans were to each have a stated_interest rate equal to the applicable_federal_rate afr so as not to be below-market split-dollar loans under the split-dollar regulations in year taxpayer entered into a split-dollar_life_insurance arrangement the arrangement with employer as a participant in the sdp at the time taxpayer entered into the arrangement taxpayer had no prior experience with or knowledge of split- dollar life_insurance arrangements or sdps taxpayer was the borrower on the loan and the employer lent money to taxpayer to pay the premiums on the policy at the time the arrangement was entered into calculations prepared by company a projected that the proceeds of the insurance_policy securing the loan were expected to be sufficient to pay all interest and principal due on the loan company a was instrumental in implementing the sdp and the loans under the plan company a was responsible for drafting the documents advising taxpayer regarding the set-up of the arrangement and directing taxpayer regarding the many documents that required taxpayer’s signature taxpayer represents however that company a did not advise taxpayer regarding the resulting tax consequences if the payments on the loan were treated as contingent payments under the split-dollar regulations after the sdp was implemented employer contracted with company a to serve as the sdp’s third party administrator tpa as tpa company a was responsible for administering the sdp and providing employer and taxpayer with ongoing guidance related to the sdp taxpayer represents that because taxpayer lacked knowledge and experience with split-dollar_life_insurance arrangements taxpayer relied on company a’s information representations and conclusions regarding the arrangement plr-146740-08 taxpayer further represents that company a was aware of taxpayer’s reliance on its expertise regarding the arrangement prior to filing taxpayer’s year tax_return the return corresponding to the taxable_year in which employer made the first split-dollar loan to taxpayer under the arrangement taxpayer was not advised by company a that unless the parties to the arrangement filed a written representation pursuant to sec_1_7872-15 and ii of the regulations payments on the loan would be treated as contingent payments for purposes of the split-dollar regulations unbeknownst to taxpayer company a also failed to advise employer that employer and taxpayer were both required to file a written representation so that the loan payments would not be treated as contingent payments under sec_1_7872-15 since year taxpayer has filed tax returns as if the election had been made and the written representation had been filed pursuant to sec_1_7872-15 and ii in year employer informed taxpayer that employer’s new tpa discovered that a written representation should have been filed with both employer’s and taxpayer’s tax returns for the taxable_year in which the first loan was made employer further informed taxpayer that at the time the written representation was required to be filed employer was unaware of the requirement because prior tpas had failed to advise them to make such a filing employer explained the necessity of filing a written representation to ensure that payments on the loan were not treated as contingent payments and asked taxpayer to file an extension of time for filing the written representation as employer had done for itself taxpayer makes the following representations the granting of relief under sec_301_9100-3 would not result in taxpayer having a lower tax_liability in the aggregate for all years to which the election applies than taxpayer would have had if the election had been timely made taking into account the time_value_of_money taxpayer did not knowingly choose not to file the election taxpayer did not use hindsight in requesting relief finally taxpayer represents that it is not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 in support of this requested ruling taxpayer has submitted the affidavits of taxpayer employer’s controller employer’s vice president of human resources and the owner of employer’s current tpa regarding the events that led to taxpayer’s failure to make the regulatory election pursuant to sec_1_7872-15 and ii law and analysis sec_1_7872-15 of the regulations provides that except as provided in sec_1_7872-15 if a payment on a split-dollar loan is nonrecourse to the borrower the payment is a contingent payment for purposes of sec_1_7872-15 plr-146740-08 sec_1_7872-15 provides that an otherwise noncontingent payment on a split-dollar loan that is nonrecourse to the borrower is not a contingent payment under sec_1_7872-15 if the parties to the split-dollar_life_insurance arrangement represent in writing that a reasonable person would expect that all payments under the loan will be made sec_1_7872-15 describes the time and manner requirements for providing the written representation required by sec_1_7872-15 sec_1 d ii provides in part that the written representation be signed by both the borrower and lender not later than the last day including extensions for filing the federal_income_tax return of the borrower or lender whichever is earlier for the taxable_year in which the lender makes the first split-dollar loan under the split-dollar_life_insurance arrangement sec_301_9100-1 defines election to include an application_for relief in respect of tax a request to adopt change or retain an accounting_method or accounting_period the term does not include an application_for an extension of time for filing a return under sec_6081 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulation or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 sets forth parameters for determining whether under particular facts and circumstances the commissioner will grant an extension of time for regulatory elections that do not meet the requirements for an automatic_extension under sec_301_9100-2 sec_301_9100-3 provides that when a taxpayer does not meet the requirements for an automatic_extension under sec_301_9100-2 the taxpayer must provide evidence satisfactorily establishing that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the government sec_301_9100-3 provides that subject_to sec_301_9100-3 a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer satisfies at least one of the following five criteria i the request for relief was made before the service discovered the failure to make the regulatory election ii the failure to make the election was due to intervening events beyond the taxpayer’s control iii after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv the taxpayer reasonably relied on the written advice of the service or v the taxpayer reasonably relied upon a qualified_tax professional including a tax professional employed by the taxpayer and that tax professional failed to make or failed to advise the taxpayer to make the election plr-146740-08 sec_301_9100-3 provides that a taxpayer has not reasonably relied on a qualified_tax professional if the taxpayer knew or should have known that the professional was either i not competent to render advice on the regulatory election or ii not aware of all relevant facts sec_301_9100-3 provides that a taxpayer will not be deemed to have acted reasonably and in good_faith if taxpayer does one of the following i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and the subsequent tax consequences but chose not to make the election or iii uses hindsight in requesting relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based on the information submitted and taxpayer’s representations we conclude that taxpayer has satisfied the requirements for granting a reasonable extension of time to file the written representation as required under sec_1 d i and ii taxpayer is therefore granted a period of time not to exceed days from the date of this letter to prepare and have both parties sign the written representation provided that the written representation is timely signed by both parties as required by this letter and filed with the taxpayer’s tax_return for year the written representation will be deemed effective for all years in which the arrangement has been in effect in accordance with sec_1_7872-15 a copy of the written representation should be attached to taxpayer’s tax_return for any subsequent taxable_year in which employer makes a split-dollar loan to taxpayer to which the representation applies except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences relating to the facts herein under any other provision of the code this ruling is limited to the timeliness of the filing requirement of the written representation under sec_1_7872-15 and ii no opinion is expressed with regard to whether taxpayer satisfied the other requirements under sec_1_7872-15 and ii the loan treatment requirements under sec_1_7872-15 or whether payments under the loan are otherwise noncontingent payments for purposes of sec_1_7872-15 no opinion is expressed with regard to whether the tax_liability of taxpayer is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time plr-146740-08 value of money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect this ruling is directed only to the taxpayer requesting it sec_6110 of the 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 is being sent to your authorized representative sincerely david b silber david b silber chief branch office of associate chief_counsel financial institutions and products


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 if 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 uil legend b date c state d individual e individual f individual g business h business j individual k state fund l business m number n dollar amount p dollar amount q dollar amount r dollar amount s dollar amount t year dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below letter cg catalog number 47630w issues do you qualify for exemption under sec_501 of the code no for the reasons described below do you meet the requirements under sec_501 of the code no for the reasons described below facts you were incorporated on b as a non-profit under c law your articles of incorporation articles state in article iii that and is organized corporation financial the with other services assist the purpose for which credit families individuals counseling services to and housing and home mortgage counseling advice on payment of debts assistance in negotiating with lenders and assistance with setting up debt repayment plans and agreements and mortgage workout or to providing problems by restructuring including limited plans not but is your bylaws state in article ii that your specific purposes are the following are the purposes for which this organization has been organized to assist individuals and families with financial problems by providing credit_counseling_services and other services including but not limited to housing and home mortgage counseling advice on payment of debts assistance in negotiating with lenders and assistance with setting up debt repayment plans and mortgage workout or restructuring plans and agreements your form_1023 application indicates that you offer financial education to your clients tailored to meet their specific needs which is offered through both housing and credit_counseling_services in addition you work with lenders and homeowners in crisis to secure more affordable terms enabling families to remain in their homes based upon a detailed cost price analysis your fees are lower than the current market rates and are not based in whole or in part on a percent of the client's debt individuals that need counseling services will not be turned away due to an inability to pay and contributions will not be solicited during the counseling process you have five directors of which two are positioned officers those two officer directors d and e are married and another director f is d’s mother d and e are also listed as letter cg catalog number 47630w will provide your initial members in your bylaws and per your bylaws existing members can only vote in new ones d and e will be compensated for their services d your president and to treasurer including counseling negotiating mortgage modifications financially distressed families and individuals for over eight years e your vice president and secretary also has over eight years of similar experience and will perform accounting payroll marketing and it services as well as managing and supervising employees you have not had any board meetings to date the day-to-day operations are carried out by d and e education been services assisting and he clients has d and e own and operate g a for-profit company that was formed in g has been in the business of providing housing counseling foreclosure mitigation and money management for eight years servicing over clients on a monthly basis the m homeowners referenced in your brochure were actually assisted by g not by you you intend on closing down the operations of g no later than the end of you expect to service the same number of clients and offer the same services as g once you take over g’s operations and client base g is no longer accepting new clients all new clients are being accepted through you you also share a facility with g paying of the monthly rent you stated that your members employees have been helping homeowners for almost eight years it is the same people only a different organization name for the purpose of establishing tax exempt status to better position the organizations ability to provide the services the members deliver you perform regular follow-ups with your clients and the lender servicer through e-mail fax and telephone through g you have provided up to six clients a year services free of charge due to the inability to pay you track your success rate of mortgage loan negotiations and do not close a file until after your client has agreed to the new terms of the loan and are in receipt of the modified agreement all clients have the option to contact you up to days after file completion your submitted budgets include revenue from gifts grants and contributions as well as related activity income approximately of your revenue is expected to be derived of your expected from fees for services provided to expenses are discretionary bonuses may be offered to employees currently for each successful outcome an employee receives n dollars as a bonus finally you submitted a conflict of interest policy however the policy shows no evidence of being adopted towards compensation of clients approximately officers directors devoted the primary service you provide is loss mitigation with respect to residential foreclosure you do offer basic credit counseling however if a client needs credit counseling outside your expertise you refer them to local counseling agencies you plan to offer debt management plans dmp and down payment assistance dpa in the future based letter cg catalog number 47630w upon grant funding as credit counseling debt management department funding for programs will be pursued after receiving your sec_501 approval you are considering small_group sessions as well as one-on-one training on the basics of budgeting as establishing a well staff your intake process for credit counseling begins with an initial interview by a member to determine eligibility for assistance information collected during the interview includes general client information financial information and a hardship explanation a discussion includes whether or not the client can benefit from your services or services available through outside agencies as well as a detailed review of monthly expenses and income including a written budget analysis is then provided to clients if an individual does not sign up for your services you do not provide any materials you have not conducted any workshops classes or seminars on financial planning budgeting credit debt relief or other educational programs offered to the general_public you generally spend one hour with individuals during the initial inquiry and minutes during subsequent calls you estimate spending at least dollar_figure on direct mail and at least dollar_figure on internet advertising per month you submitted samples of your advertising materials better budgeting habits is your initial counseling session for mortgage mitigation a one-on-one interview usually conducted over the phone if the individual is deemed qualified you request an enrollment contract be signed and returned within three days the initial presentation includes a discussion of the hardship that caused the mortgage delinquency as well as available options such as loan modifications partial claims special forbearance plans repayment plans principal reductions deed in lieu of foreclosure or a short_sale you consider various criteria when determining which services your clients qualify for including total numbers of payments delinquent monthly budget surplus deficit current interest rate type of loan previous workout options that were offered homeowners insurance and property_tax information employment status and liens against the property the initial inquiry usually take sec_45 minutes to hour and subsequent follow- ups take minutes per phone call for file processing and document preparation you recommend that your clients participate in ongoing educational programs that may be available in their area however you do not provide the educational programs instead you will assist a client in researching programs for debt consolidation credit counseling and or hud in their area your review process for a solution is generally days on average you speak to clients once a week to discuss any changes in their finances or changes to their monthly budget in addition you are in contact with lenders regarding the modification you are considering providing a financial success tool kit to new clients to reinforce the basic elements of budgeting each client receives written educational materials that letter cg catalog number 47630w include the foreclosure laws for their state as well as an action plan that includes a crisis budget you purchase leads on an as-needed basis from a subcontracted individual however you do not have a formal contract to purchase the leads you also receive mortgage default referrals through your website and from previous clients attorneys realtors and mortgage brokers you also provide referrals to attorneys and realtors for clients needing legal advice or seeking to make a short_sale of the property you do not pay or receive referral fees other than paying a dollar_figure per lead fee to the subcontractor you will seek funding from the national foreclosure mitigation counseling program administered by neighborworks you applied to hud for funding however you have retracted your application due to the fact that you do not want to limit yourself to your county only instead planning to provide services nationwide a you charge fees for your services you charge an enrollment fee of p dollars and a monthly fee of q dollars not to exceed r dollars regardless of the duration of time for the final product of service the fee is refundable if the client terminates the contract within three business days after that the client must show just cause for any refund request if a workable solution to avoid foreclosure is not obtained the client is entitled to full refund less the p dollars enrollment fee you submitted a copy of your fee waiver policy which states that your fees are automatically waived for individuals at of the federal poverty level fees may also be waived on a case-by-case basis for of the federal poverty level clients are provided those individuals between a copy of the policy prior to enrollment you submitted copies of your enrollment agreement and your fee schedule the fee is broken down into four monthly payments of q dollars a fifth month payment of s dollars as well as the p dollars enrollment fee your fee schedule includes the following statement - pending approval of tax exempt status all contribution amounts are tax deductible your counseling agreement states that a certificate of contribution for tax deduction will be provided to the client your clients are being advised that their fees are considered contributions for tax deductibility purposes contributions will not be required for clients eligible for state or federal programs such as k you will receive compensation_for these clients through the federal or state program you have found that of the time the client cannot afford a small contribution the homeowner does not meet the lender's criteria for enrollment as a qualified candidate you provide the hud national hotline number for the homeowners not considered qualified candidates assistance with fees or down payments required for loan workouts may be provided in the future if awarded a grant contract you will determine on a case-by-case basis which clients qualify for assistance in addition assistance with delinquent personal loans letter cg catalog number 47630w and or unsecured debt may also be provided to clients in most cases home equity loans can be negotiated through traditional modification methods you negotiate to have the delinquency added to the unpaid balance and lower the rate to a fixed term currently clients are referred to local debt settlement agencies but you plan to integrate this service once you obtain funding from grants and contract awards you submitted a copy of your lease agreement the lessor is h a for profit entity owned e signed the lease as lessor and d signed the lease as lessee recently you by e a new facility that is being leased from an unrelated third party you also moved to submitted a copy of an employment contract for j which includes services to be provided to you and to g the employment contract also provides for payment of a commission on sales in addition you submitted copies of your website pages and a brochure the brochure includes the following statements t you in delinquent mortgages successfully negotiated m work-out solutions for homeowners with you parent company - g your website includes your phone number which is identical to the number used by g also depicted on your website is l’s logo and a link to l’s website l’s website states that they are your partner you stated that you do not have a formal written_agreement with l they only serve as a source of referrals of homeowners referrals may arise in circumstances where the homeowner is considering a short_sale if the homeowner decides not to use your services the short_sale will proceed through l you do not pay or receive any fees through your contact with l you receive a fee from homeowners that you assist in getting approval for and processing the short_sale you plan to establish a credit counseling debt management department in the future funding for the program will be pursued after receiving your sec_501 approval you are considering small_group sessions as well as one-on-one training on the basics of budgeting you do not anticipate beginning these programs for a period of months after approval of tax-exempt status law sec_501 of the code provides that corporations may be exempted from tax if they are organized and operated exclusively for charitable or educational_purposes and no net_earnings inures to the benefit of any private_shareholder_or_individual part of their sec_501 of the code provides that organizations which provide credit counseling letter cg catalog number 47630w 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 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 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 for services for the does not charge any separately_stated fee purpose of improving any consumer's credit record credit history or credit rating 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 the organization establishes and implements a fee policy which-- i ii iii requires that any fees charged to reasonable a consumer for services are allows for the waiver of fees if the consumer is unable to pay and 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 at all times the organization has a board_of directors or other governing body-- letter cg catalog number 47630w i ii 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 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 indirectly from the organization's activities other than through the receipt of reasonable directors’ fees or the repayment of consumer debt to credit_counseling_organization or its affiliates and creditors other than the directly or 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 indirectly from the organization's activities other than through the receipt of reasonable directors’ fees directly or 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 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 a combination of the activities described above iii 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 to meet either the organizational_test or the operational_test it is not exempt an organization fails in such section if section organized organization c -1 b i of exclusively for one regulations the or more exempt purposes only provides that an organization its articles if is of 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 in activities that in themselves are not in its activities insubstantial part of furtherance of one or more exempt purposes letter cg catalog number 47630w sec_1_501_c_3_-1 of the regulations provides that an organization's assets must be dedicated to an exempt_purpose either by an express provision in its governing instrument or by operation of law be sec_1_501_c_3_-1 of the regulations provides that an organization will 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 an applicant organization must establish it serves a public rather than a private interest and specifically that it is not as designated organized individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests or operated for interests benefit private such the of 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 letter cg catalog number 47630w the organization did not charge fees for counseling services or proration creditors services the debtor received full credit against his debts for all amounts paid the organization did not make loans to debtors or negotiate loans on their behalf finally the organization relied upon contributions primarily from the creditors participating in the organization's budget plans for its support 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 poor and moreover by providing the public with information on budgeting buying distressed 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 the the service compared this holding with the holding of revrul_65_299 which holds that a nonprofit organization formed to advise counsel and assist individuals in solving their financial difficulties by budgeting their income and expenses and effecting an orderly program for the payment of their obligations qualifies for exemption from federal_income_tax under sec_501 of the code rather than under sec_501 a number of outside the context of credit counseling individual counseling has in 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_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 free marriage counseling revrul_68_71 c b career planning education through free vocational counseling and nominal charge overwhelmingly the counseling activities described in these rulings were provided free and the organizations were supported by contributions from the public publications sold at a proc 1986_2_cb_729 describes the methodology test the internal rev revenue service uses to determine when the advocacy of a particular viewpoint or position is educational under sec_501 of the code and c -1 d of the regulations the revenue_procedure states that the focus of sec_1 c - d is on the method the organization uses to communicate to others not the content of its communication the method of communication is not educational if it fails to provide a development from the relevant facts that would materially aid a listener or reader in a learning process one factor indicating the method is not educational is as follows not aimed at developing an understanding on the part of the intended audience or readership because it does not consider their background or training in the subject matter the the organization's presentations is t he approach used in letter cg catalog number 47630w remaining factors relate specifically to advocacy organizations and the full and fair exposition part of the regulation in 326_us_279 66_sct_112 90_led_67 the supreme court held that the presence of a single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes 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 its primary purpose was not charitable educational or scientific but rather commercial not resemble that of the 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 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 addition the court found that the organization's financing did in consumer credit counseling service of alabama inc 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 united_states v service agencies counseling these agencies of numerous credit the consumer credit counseling service of alabama is an umbrella organization made up 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 letter cg catalog number 47630w contributions and assistance from rather than those connected with the debt management programs the primary sources of revenue for these organizations were provided by government and private_foundation grants 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 tax case 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 labor agencies and united way in solution plus inc v commissioner tcmemo_2008_21 the tax_court held that a credit_counseling_organization was not exempt under 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 the founder and his spouse were the only member's of the organization’s board_of directors the organization did not have any meaningful educational program or materials for providing to people who contacted the organization and its financial education seminars for students constituted an insignificant part of the organization’s overall activities to are primarily structured market determine eligibility the court held that the organization's purposes were not educational because its activities enroll individuals in dmps _ its purposes are 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 because they will be turned away unless they meet the criteria of the participating creditors a 'non-select manner and for and officer employee and the tax_court further held the organization would operate for the private interests of its founder because the founder and spouse were the only directors the founder was the only 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 private interests his compensation was based part on in 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 letter cg catalog number 47630w sale of dmps is the primary reason for solution plus's existence and its charitable and educational_purposes are at best minimal application of law sec_501 of the code sets forth two main tests for an organization to be both organized and operated recognized as exempt 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 an organization must be regulations based on your application in organizational_test to satisfy the organizational_test an organization must have a valid purpose clause and a valid dissolution clause sec_1_501_c_3_-1 and sec_1_501_c_3_-1 of the regulations a valid purpose clause limits the 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 specifically providing assistance to individuals and families with financial problems by providing credit counseling and other services including but not limited to housing and home mortgage counseling advice on payment of debts assistance in negotiating with lenders and assistance with setting up debt repayment plans and mortgage workout or restructuring plans and agreements is not an exempt_purpose therefore you do not have a valid purpose clause accordingly you are not organized for exempt purposes operational_test is operated to satisfy the operational_test c -1 c of the exclusively for one or more exempt purposes section regulations the actual purposes of an organization may be discerned by the activities it conducts you failed to establish that you are operated exclusively for one or more exempt purposes an organization must establish that 70_tc_352 it your activities are not educational you are distinguishable from the organizations in consumer credit counseling service of alabama supra and revrul_69_441 by the methodology you use to conduct your both your credit counseling and mortgage counseling activities mitigation programs entail to lasting approximately one hour you stated that interview initial an letter cg catalog number 47630w any educational materials or budgeting information however unlike determine eligibility that includes a discussion of your services and a review of the client's financial situation clients that do not sign up for any of your services do not receive the organizations in consumer credit counseling service of alabama supra and revrul_69_441 supra 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 employees do anything other than sit down with your clients to fill out the information that is needed to submit a statement of their financial condition to the lender two of your directors have previously owned and operated a g conducted the same activities and uses the same facility and phone number loss mitigation is your primary service after the initial interview your follow-ups are with the lender and the client regarding negotiating the modification finally you stated that you do not provide ongoing educational programs to your clients communicating with a homeowner to fill out a financial worksheet and an intake sheet is not an educational activity because the communication does not provide a development from the relevant facts that would materially aid a listener or reader in a learning process revproc_86_43 supra therefore you failed to establish that your interactions with clients 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 for-profit credit counseling and mortgage mitigation corporation g not operate a substantive on-going educational program you do you have not conducted any seminars or workshops to date nor do you require your mortgage mitigation clients to participate in an ongoing educational program you may utilize alternative educational methods in the future however you are considering small_group sessions as well as one-on-one training in the basics of budgeting you have not submitted any educational materials or other evidence of an educational program you do not dedicate any revenue to activities involving educational programs you do not allocate any expenses to training employees like the organization in solution plus supra you did not provide evidence that you help clients develop an understanding of the cause of their financial problems or a plan to address their financial problems you provided no evidence that you intend to establish long-term counseling relationships with your clients your activities are not charitable all of your time and resources are devoted to providing mortgage modification services to individuals who are not part 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 letter cg catalog number 47630w the mortgage mitigation services you provide to individuals do not further charitable purposes you represent that everyone is eligible for your services regardless of income therefore your services are not directed exclusively to low-income individuals accordingly you are unlike the organizations described in consumer credit counseling service _of alabama supra and revrul_69_441 supra which aided low-income individuals and families who have financial problems thereby relieving the poor and distressed thus you failed to establish that your activities are charitable within the meaning of sec_501 of the code you have a substantial nonexempt commercial purpose the courts have developed guidelines intended to help discern whether an organization has a substantial nonexempt commercial purpose see eg b s w group supra easter house supra airlie supra living faith supra generally the factors proffered by courts focus on the nature of the activities and how an organization conducts its business you charge fees for your services including an enrollment fee of p dollars and a monthly fee of q dollars not to exceed r dollars the fee is refundable if the client terminates the contract within three business days after that the client must show just cause for any refund request in the event fees are paid you are advising individuals these qualify as deductible contributions your operational focus is on generating fees from your consulting activities through the receipt of grants and donations rather than fees charged to clients you did submit a fee waiver policy for individuals pincite of the federal poverty level they may also be waived for those clients between of the federal poverty level on a case-by-case basis although you do have a fee waiver policy you have found that of the time that a client cannot afford a fee the homeowner does not meet the lender's criteria as a qualified candidate similar to the organization in solution plus supra your efforts are focused on informing potential clients about the mortgage mitigation service available and signing them up for your services in fact your client agreement states that the counselor is only providing assistance with negotiating a loan modification like the organizations described in solution plus supra better business bureau supra and easter house supra your activities have an underlying commercial motive that distinguishes your activities from those carried out by a sec_501 organization thus your activities are not educational within the meaning of sec_501 a substantial part of your activities consists of providing research services to e and other investors for a fee researching borrowers and property in residential mortgage backed securities portfolios is not an exempt_purpose as recognized by statute or by case law but rather a substantial nonexempt commercial purpose letter cg catalog number 47630w a you structure operate for further demonstrates that your finance substantial nonexempt commercial purpose you expect approximately of your revenue to be derived from fees for services in addition of your expected expenses are devoted to compensation of officers directors there is no evidence that you have received contributions or gifts from disinterested members of the public accordingly you are like the organization described in b s w group supra as its financing did not resemble that of the 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 for services and those fees were set high enough to recoup all projected costs and to produce a your operations are financed entirely by revenue earned from selling services to e and other investment firms and donations from e a related_entity receiving support primarily from consulting fees is indicative of a nonexempt purpose easter house supra profit like the organizations in easter house supra airlie supra and living faith supra you are in direct competition with commercial businesses because you conduct consulting activities generally for a profit in fact you are a successor to a for-profit organization g that conducts the same services as you for a fee you utilize the same phone number as g and two of your five directors are the owners of the predecessor in addition one of your employees is also an employee of g g is ceasing operations as you begin operations you conduct your consulting activities in the same manner as for example you use similar pricing financial structure and commercial enterprises relationships with other for-profit companies accordingly your activities evidence a substantial nonexempt commercial purpose the activities you identify as charitable are merely incidental to your business of providing consulting services for a fee your operational focus is on generating consulting fees from your consulting activities like the organizations described in better business bureau supra and easter house supra your activities have an underlying commercial motive that distinguishes your activities from those carried out by a charitable_organization thus more than an a nonexempt purpose in insubstantial part of your activities are in furtherance of 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 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_501 of the code sec_1_501_c_3_-1 of the regulations you do not have adequate safeguards to protect assets since three related members of your board_of directors control you your conflict of interest policy col was not executed by your governing body regardless under the terms of your purported col letter cg catalog number 47630w three of your directors are prevented from determining whether a conflict exists with regards to transactions or arrangements regarding your lease agreement with h and compensation of c and d thus you failed to demonstrate that insiders will not benefit from your operations now or in the future private benefit an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest sec_1_501_c_3_-1 of the regulations the mortgage mitigation services that you provide to homeowners do not serve a public interest nor are the beneficiaries of your services poor or distressed individuals your services benefit the private interests of individual homeowners by relieving them of the burden of negotiating a modification with their lender in addition you make referrals for short_sales to l a for-profit organization therefore you have not demonstrated that your operations serve a public rather than a private interest as required by sec_1 c -1 d ii 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 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 comply with certain provisions of sec_501 of the code 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 you charge your clients fees for your services however you failed to establish that you have a fee waiver policy for those clients that cannot afford to pay the fee while you did submit a fee waiver policy you also stated that you have found that individuals who cannot afford to pay a fee are not considered qualified candidates by lenders and therefore would not be eligible for your services you do not provide credit_counseling_services tailored to the specific needs and circumstances of consumers sec_501 you do not provide educational information to the public on budgeting personal finance financial literacy saving and spending practices and the sound use of credit nor do you assist individuals and families with financial problems by providing them with counseling sec_501 you have provided no educational seminars or workshops to the general_public and no letter cg catalog number 47630w materials educational negotiating with lenders and only the initial session on your meeting therefore you do not meet the requirements under sec_501 your clients you spend distributed to most of your time with clients finally you indicated that are officers and directors and both receive compensation from you as employees therefore more than of the members of your board_of directors are also compensated as employees sec_501 d and e 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 you are not organized or operated based on the facts and information provided you are exclusively for exempt purposes not organized exclusively for exempt purposes as required by sec_1_501_c_3_-1 of the regulations because your articles of incorporation do not restrict you to sec_501 purposes you are not operated exclusively for an exempt_purpose as required by sec_1_501_c_3_-1 and sec_1_501_c_3_-1 of the regulations because you are not educating your clients nor do you provide your services to poor or distressed individuals you are organized and operated for commercial purposes in contravention of sec_1 c -1 c of the regulations because you provide mortgage modification services for substantial fees any public purposes for which you may operate are only incidental to this primary nonexempt purpose you have not demonstrated that you do not allow your net_earnings to inure to private individuals as required by sec_1_501_c_3_-1 of the you do not serve a public rather than a private interest as required by regulations sec_1_501_c_3_-1 of the regulations therefore you are not described in 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 a protest if you believe this determination is incorrect you have the right to file 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 if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues letter cg catalog number 47630w types of information that should be included in your appeal can be found on page of publication these items include a statement that the organization wants to appeal the determination the organization's name address and employer_identification_number the date and symbols on the determination_letter a statement of facts supporting the organization’s position in any contested factual issue a statement outlining the law or other authority the organization is relying on and astatement as to whether a hearing is desired the statement of facts item must be declared true under penalties of perjury may be done by adding to the appeal the following signed declaration this under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete your appeal will be considered incomplete without this statement if an organization’s representative submits the appeal a substitute declaration must be included the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct stating that an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not you can find more information about representation in publication already done so 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 appeal 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 letter cg catalog number 47630w 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 the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may 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 rulings agreements enclosure publication letter cg catalog number 47630w