department of the treasury internal_revenue_service washington d c tax exempt ando government entities division release number release date date date 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 because 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 instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their 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 instructions in notice action if you agree with our deletions you do not need to take any further if you disagree with our proposed deletions follow the 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 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 about your sincerely lois g lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number employer_identification_number tax_exempt_and_government_entities_division date date legend state date community language‘ language2 company president 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 facts you are a state nonprofit non-stock corporation incorporated on date your amended articles of incorporation provide that you are organized exclusively for one or more of the purposes as specified in sec_501 of the internal_revenue_code and to allocate your assets to exempt purposes upon dissolution your specific purpose is to p rovide advice to prospective -homebuyers regarding mortgage financial provide financial education provide counseling to homeowners who have mortgage defaulted mortgage and or foreclosure sic you cater largely to the community and have counselors who are native speakers of language1 and lanquagez2 the information you submitted indicates that your primary activities are to provide financial education programs and housing counseling home buyer education foreclosure post- purchase education homeownership counseling sic your application states that you offer general financial and credit_counseling_services you originally represented that you would provide reverse mortgage counseling and refinancing counseling but you later stated that you have insufficient financial support and inadequate resources to maintain those programs you represent that you do not offer debt management plans your budget counseling and financial literacy services consist of helping customers to understand their credit history and set financial priorities you state that you help customers identify and correct erroneous information on their reports and assist them in understanding and exercising their rights under the fair credit reporting act you did not provide significant additional detail regarding your credit repair activities you also provide housing counseling services such as homebuyer education and pre-purchase counseling you state that homebuyer education informs customers of the advantages and disadvantages of homeownership helps customers develop a budget plan and obtain a loan assists customers in choosing homes and discusses negotiations inspection and closing you state that your pre-purchase counseling service consists of providing customers with basic knowledge about mortgages and the requirements of homeownership and post-purchase counseling to address issues that arise after a home purchase such as making mortgage payments escrow taxes insurance maintaining the home and predatory lending you state that your counselors determine how much customers can afford to spend on a home assist customers in dealing with real_estate agents help customers choose home inspectors appraisers attorneys escrow officers title insurance officers and property insurance agents and instruct customers on the closing process it is not clear how or whether your homebuyer education service is different from your pre-purchase and post-purchase counseling services your information also indicates that you provide foreclosure prevention counseling you state that you explore alternatives to housing foreclosure for customers who are behind on their payments or are in danger of falling behind you determine whether a customer's situation is curable or incurable and explain their options to them including forbearance modification refinance bankruptcy deed in lieu pre-sale short_sale and straight sale you prepare a loss mitigation package to send to the mortgage servicer help the customer access any financial resources that can be used to make housing payments and help them develop a long-term budget you then monitor the customer’s success in complying with the workout plan you submitted copies of the materials you plan to use in your educational programs in english language’ and lanquage2 you represent that the copies provided in english are translations of ail the materials you submitted in lanquage1 and language2 you included manuals with titles such as financial education program design and home purchase process counseling although you provided materials entitled education materials for participants these were in lanquage1 or lanquage2 and there were no equivalent english versions submitted the educational materials you submitted are training manuals used for training housing counselors as opposed to educating homeowners the materials appear to be portions of training manuals produced by neighborworks and distributed to individuals seeking certification as financial and housing counselors and seeking to set up financial and housing counseling businesses all of these documents have a neighborworks copyright on each page you provided a copy of your web site the web site contains basic information pertaining to home ownership and financial literacy but no educational materials you provided english translations of this material services you indicated that your web site is not yet available on the internet it directs potential customers to contact you for counseling you state that you intend to fund your programs through grants and service fees specifically you plan to receive grant funding from neighborworks you also indicated that you applied for funding from several banks you did not specify whether the funding from these banks would be in the form of grants loans or both department of housing and urban development hud in the future you plan to apply for funding from the u s you submitted a fee schedule for your services which shows that you plan to charge a fee to certain customers for your services including credit analysis housing education and foreclosure preventions sic you provided several contradictory criteria by which you decide whether a customer is entitled to a fee waiver you stated that you provide customers with counseling without charging fees when customer presents a hardship and reasonable reason that prove client’s financial difficulties you later said that your services are f ree of charge for person who can not afford the below poverty sic w-2 or paystub that can prove the below ‘poverty’ is considered as customers’ households earning below state poverty is required median income you also stated conditions for approval of free of charge dti above in addition your fee schedule states that hardships due to illness unexpected financial crisis you will provide financial counseling’ free of charge to all customers regardless of their income or other factors you stated that you intend to offer homeownership education to individuals per month of which approximately would qualify for a fee waiver you also stated that you will assist individuals per month through your foreclosure prevention counseling services with of them qualifying for a fee waiver per month dollar_figure per month for homeownership education and dollar_figure in contributions in your first year of operation dollar_figure on your statement of revenues and expenses you classified all your income as contributions in your you planned to receive dollar_figure in your third year however when asked how much money you second year and dollar_figure expected to collect in fees from your customers you estimated that such fees would total dollar_figure prevention you also predicted that in your first five years of operation you would collect between and percent of your revenue from funding sources such as neighborworks hud and financial institutions while between and percent of your revenues would be derived from fees charged to customers however your predicted revenue of dollar_figure fees from customers by itself would add up to significantly more than your projected total revenues indicated on your statement of revenues and expenses for your first three years of operation moreover if these fees account for only percent of your projected revenue you expect approximately an additional dollar_figure financial institutions that is not reflected on your statement of revenues and expenses you have not explained this discrepancy in annual revenue from neighborworks hud and for foreclosure in monthly you are governed by a board_of directors which is currently comprised of president and four other individuals you have stated that none of these individuals are compensated by your organization you listed the time devoted by each individual as but it is unclear whether this refers to hours per week hours per month or another measurement you did not specify whether your board members are community leaders or government officials acting in their capacities as such president is also the president of company an organization that provides credit_counseling_services and debt management plans company operates out of the same address as your headquarters and leases office space to your organization the lease is signed by president as president of your organization and by president as president of company all of the employees whose resumes you have submitted are former employees of company the acronyms by which the two organizations are referred to are identical as the names of the two organizations are similar there is conflicting information in your application as to which organization conducts which activity you stated that customers seeking credit_counseling_services will be directed to company while customers seeking housing counseling services will be directed to your organization you provided resumes for your three employees they each have approximately months’ experience in financial counseling you represented that they all gained this experience during their time as financial counselors for company your counselors have undergone training with neighborworks an organization that provides instruction and certification for housing counselors your counselors have certification in areas such as homeownership counseling and foreclosure basics when asked about the difference between you and company you stated that company aims at educating debtors and advancing their social welfare along with improving consumer's financial obligations that might be greatly influenced by the usage of credit cards loans and other debts and your mission is to assist people to develop their proper spending plan and increase housing affordability and management by eliminating barriers and discrimination caused by lack of language proficiency cultural deviation and financial literacy in contrast you are a housing counseling agency specializing the sic you also said that company is a credit counseling agency providing credit counseling and debt management plan housing counseling services including consumer financial counseling housing counseling and foreclosure prevention counseling you stated that you will direct a client to one organization or the other based on the client’s needs you stated that d irection to visit each agency will be shown top sic of the office door by a sign indicating you for housing matters and company for credit debt matters when a client is in the building we asked you to provide photographs showing any signage but the photographs you provided do not indicate the presence of such a sign when asked whether you and company were related in any manner you stated that employees from company joined you to help community develop financial housing literacy they are all certified by ‘center for financial certifications’ as personal finance counselors having knowledge of personal finance and housing matters as well as having many experiences on budget financial counseling through dealing with community these counselors also participated in a wide variety of professional workshops and completing well- rounded courses and exams to make qualification about financial nousing consulting sic you also stated that company ’s activities providing financial education to community leads to establish you in that community needs a reputational housing counseling organization since community suffer s from lack of financial literacy solution of housing matters caused by language barriers sic your services are more specified and more focusing on housing counseling including pre post purchasing housing counseling and foreclosure prevention counseling when asked whether you will allow other entities to promote their products or services to your customers you responded that you will permit entities to advertise their program indirectly which means they may provide audience with useful education materials in the program or directly which mean sic they may provide audience with free coupon which can purchase their products in a discount price or stationary products souvenirs on which they put their company logo if they officially support our program through donation we do not allow individual profession to advertise them sic however if individual profession who is willing to support our program board member will decide whether s he can participate in program as a lecturer based on his her expertise you were asked whether any of your board members officers directors or employees are or have been an officer director or employee of a credit_counseling_organization a credit repair organization or an organization issuing credit cards president is the only board member who works for a credit counseling or gjanization you provided an identical response when asked whether any of your board members officers directors or employees have or had any ownership interests in for-profit businesses that perform credit counseling credit repair or other services that may be used by your organization and when asked whether any of your organization’s board members officers directors or employees have expertise or experience in the area of consumer credit counseling or credit repair in response you stated only that law sec_501 of the code exempts from federal_income_tax corporations organized and operated exclusively for charitable educational and other purposes provided that no part of its net_earnings inures to the benefit of any private_shareholder_or_individual sec_501 of the code presents special requirements for organizations which provide credit_counseling_services as a substantial purpose it defines credit_counseling_services as providing educational information to the general_public regarding budgeting personal finance financial literacy saving and spending practices and the sound use of consumer credit and assisting individuals and families with financial problems through counseling an organization with respect to which the provision of credit_counseling_services is a substantial purpose shall not be exempt from tax under subsection a unless such organization is described in paragraph or of subsection c and such organization is organized and operated in accordance with the following requirements a the organization-- i provides credit_counseling_services tailored to the specific needs and circumstances of consumers ii makes no loans to debtors other than loans with no fees or interest and does not negotiate the making of loans on behalf of debtors iii provides services for the purpose of improving a consumer's credit record credit history or credit rating only to the extent that such services are incidental to providing credit_counseling_services and iv does not charge any separately_stated fee for services for the purpose of improving any consumer's credit record credit history or credit rating b the organization does not refuse to provide credit_counseling_services to a consumer due to the inability of the consumer to pay the ineligibility of the consumer for debt management plan enrollment or the unwillingness of the consumer to enroll in a debt management plan c the organization establishes and implements a fee policy which-- i requires that any fees charged to a consumer for services are reasonable ii allows for the waiver of fees if the consumer is unable to pay and iii except to the extent allowed by state law prohibits charging any fee based in whole or in part on a percentage of the consumer's debt the consumer's payments to be made pursuant to a debt management plan or the projected or actual savings to the consumer resulting from enrolling in a debt management plan d at all times the organization has a board_of directors or other governing body-- i which is controlled by persons who represent the broad interests of the public such as public officials acting in their capacities as such persons having special knowledge or expertise in credit or financial education and community leaders ii not more than percent of the voting power of which is vested in persons who are employed by the organization or who will benefit financially directly or indirectly from the organization's activities other than through the receipt of reasonable directors' fees or the repayment of consumer debt to creditors other than the credit_counseling_organization or its affiliates and iil not more than percent of the voting power of which is vested in persons who are employed by the organization or who will benefit financially directly or indirectly from the organization's activities other than through the receipt of reasonable directors' fees credit_counseling_services debt_management_plan_services --for purposes of this subsection-- a credit_counseling_services --the term credit_counseling_services means-- i the providing of educational information to the general_public on budgeting personal finance financial literacy saving and spending practices and the sound use of consumer credit ii the assisting of individuals and families with financial problems by providing them with counseling or iii a combination of the activities described in clauses i and ii 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 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirements of this subsection it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in sec_501 of the code in its generally accepted legal sense and includes relief of the poor and distressed or of the underprivileged as well as the advancement of education sec_1_501_c_3_-1 of the regulations provides that the term educational refers 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 which held the funds in a_trust account and disbursed the funds on a partial payment basis to the creditors the organization did not charge fees for counseling services or proration services the organization relied upon voluntary 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 the poor and distressed section dollar_figure of revproc_2011_9 r b provides that exempt status may be recognized in advance of the organization's operations if its proposed operations are described in sufficient detail to permit a conclusion that it will clearly meet the particular requirements for exemption pursuant to the section of the code under which exemption is claimed sec_4 states that the organization must fully describe all of the activities in which it expects to engage including the standards criteria procedures or other means adopted or planned for carrying out the activities the anticipated sources of receipts and the nature of contemplated expenditures in 326_us_279 the supreme court held that the presence of a single non-exempt purposes if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes in 71_tc_1067 a nonprofit organization paid a for-profit corporation for the licenses to conduct est programs the est programs involved training seminars and lectures in the areas of intrapersonal awareness and communication the court held that an organization’s denial of exemption was proper because the organization had a substantial commercial purpose that served private rather than public interests although the nonprofit claimed that it had no connection direct or indirect with the for-profit the court found that the for-profit exerted considerable control_over the nonprofit’s activities the nonprofit's only function was to present to the public for a fee ideas that were owned by the for-profit with materials and trainers supplied by the for-profit regardless of whether the payments made by the nonprofit to the for-profit were excessive the for-profit benefited substantially from the operation of the nonprofit the nonprofit was the instrument to subsidize the for-profit corporations and not vice versa and had not life independent of the for-profits in consumer credit counseling service of alabama inc v united_states u s tax cas d d c the court held that an organization that provided free information on budgeting buying practices and the sound use of consumer credit qualified for exemption from income_tax because its activities were charitable and educational the consumer credit counseling service which had been recognized as exempt under sec_501 in a group ruling is an umbrella organization made up of numerous credit counseling service agencies in this case these agencies provided information to the general_public through the use of speakers films and publications on the subjects of budgeting buying practices and the sound use of consumer credit they also provided counseling on budgeting and the appropriate use of consumer credit to debt-distressed individuals and families the professional counselors used only percent of their time for debt management programs they did not limit these services to low-income individuals and families but they provided their services free of charge the court found that the law did not require that an organization must perform its exempt functions solely for the benefit of low-income individuals to qualify under sec_501 nonetheless these agencies did not charge a fee for the programs that constituted their principal activities a nominal fee was charged for the debt management services but was waived when payment would work a financial hardship the agencies received the bulk of their support from government and private_foundation grants contributions and assistance from labor agencies and the united way an incidental amount of their revenue was from fees thus the court conciuded 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 cas d d c in which the facts were virtually identical and the law was identical to those in consumer credit counseling centers of alabama inc v united_states discussed immediately above in 70_tc_352 the court found that a corporation formed to provide consulting services was not exempt under sec_501 because its activities constituted the conduct_of_a_trade_or_business that is ordinarily carried on by commercial ventures organized for profit nor scientific but rather commercial its primary purpose was not charitable educational in addition the court found that the organization’s financing did not resemble that of the typical 501_c_3_organization it had not solicited nor had it received voluntary contributions from the public 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 its only source_of_income was from fees from services and those fees were set high in 82_tc_196 an organization operated bingo at a bar a for-profit enterprise for purposes of raising money for scholarships the board_of directors included the bar's owners and accountant and two other persons the court reasoned that because the bar owners controlled the organization and appointed its directors the organization's fundraising activities could be used to the advantage of the bar owners and thus provide them with a maximum private benefit the organization claimed that it was independent because there was a separate_accounting and that no payments were going to the bar the court maintained that the organization's and the bar's activities were so interrelated as to be functionally inseparable a separate_accounting did not change that fact thus the organization did not operate exclusively for exempt purposes but rather benefited private interests - the bar owners exemption was properly denied in easter house v united_states cl_ct affd 846_f2d_78 fed cir cert_denied 488_us_907 109_sct_257 102_led_246 the court found an organization that operated an adoption agency was not described in sec_501 of the code because a substantial purpose of the agency was a nonexempt commercial purpose the court concluded that its primary activity was placing children for adoption in a manner indistinguishable from that of a commercial adoption agency the court found that the health-related services provided to unwed mothers and their children were merely incidental to the organization's operation of an adoption service which in and of itself did not serve an exempt_purpose the organization's sole source of support was the fees it charged adoptive parents rather than contributions from the public the court also found that the organization competed with for-profit adoption agencies engaged in substantial advertising and accumulated substantial profits accordingly the court found that the business_purpose and not the advancement of educational and charitable activities purpose of plaintiff's adoption service is its primary goal and held that the organization was not operated exclusively for purposes described in sec_501 in 950_f2d_365 7th cir the court_of_appeals for the seventh circuit upheld a tax_court decision that an organization operating restaurants and health food stores in a manner consistent with the doctrines of the seventh day adventist church was not described in sec_501 of the code because the organization was operated for a substantial nonexempt commercial purpose the court found that the organization's activities were presumptively commercial because the organization was in competition with other restaurants engaged in marketing and generally operated in a manner similar to commercial businesses in kj’s fund raisers inc v commissioner 74_tcm_669 the court held that a nonprofit organization which sold lottery tickets on the premises of a for-profit business had a substantial non-exempt purpose to enhance the profits of the for-profit business the owners of the for-profit business to purportedly raise funds for distribution to charitable causes formed the nonprofit organization the nonprofit’s lottery tickets were sold during the regular business hours by the owners and employees of the for-profit business the owners of the for-profit initially controlled the board and later indicated that it would vest control in unrelated parties the nonprofit opined that the organization would fold without the original founders of the organization as officers which was promoting the for-profit the court reasoned that the identity of the for-profit owners and the officer of the nonprofit placed the owners of the for-profit in a position to control the nonprofit additionally the court found that the publicity received by the for-profit was a in finding that the nonprofit had a substantial nonexempt purpose significant benefit in 283_fsupp2d_58 d d c the court relied on the commerciality doctrine in applying the operational_test because of the commercial manner in which this organization conducted its activities the court found that it was operated for a non- exempt commercial purpose rather than for a tax-exempt purpose among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations 70_fedclaims_782 was an action for declaratory_judgment that the petitioner brought to challenge the denial of his application_for exempt status the court in finding that the actual purposes displayed in the administrative record supported the service’s denial stated it is well-accepted that in initial qualification cases such as this gaps in the administrative record are resolved against the applicant the court noted that if the petitioner had evidence that contradicted these findings it should have submitted it as part of the administrative process 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 the court held that the organization's purposes were not educational because its activities are primarily structured to market determine eligibility for and enroll individuals in dmps 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 a 'non-select manner away unless they meet the criteria of the participating creditors because they will be turned its 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 officer and employee and his compensation was based in part on the organization's dmp sales activity levels the organization was a family-controlled business that he personally would run for financial gain using his past professional experience marketing dmps and managing a dmp call center the court further held that the organization’s principal activity of providing dmp services which were only provided if approved by a caller’s creditors furthered the benefit of private interests finally the tax_court held that the facts in credit_counseling_services of alabama v united_states ustc para d d c stand in stark contrast because the sale of dmps is the primary reason for solution plus's existence and its charitable and educational_purposes are at best minimal analysis to satisfy the c operational_test an organization must establish that it is both organized and operated exclusively for one or more exempt purposes sec_1 c - a of the regulations an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 of the code sec_1_501_c_3_-1 of the regulations a single nonexempt purpose will destroy exemption regardless of the presence of any truly exempt purposes 326_us_279 under the operational_test the purpose towards which an organization's activities are directed and not the nature of the activities themselves is ultimately dispositive of the organization’s right to be classified as a sec_501 organization 70_tc_352 your activities are not directed exclusively toward one or more exempt purposes while you engage in one-on-one discussions with homeowners and public presentations that may in part further educational or charitable purposes your activities primarily further the substantial nonexempt purpose of selling financial services to homeowners and lenders for a fee thus you have failed to establish that you are operated exclusively for one or more exempt purposes you are not operated exclusively for educational_purposes your activities demonstrate that you do not operate exclusively for educational_purposes within the meaning of sec_501 of the code the vast majority of the materials you submitted in response to our request for copies of your educational materials are not intended to facilitate homeowner and financial education rather they are training materials produced by neighborworks for the purpose of instructing counselors on how to establish and manage such programs while you provided some materials purported to be educational literature for your customers the material was in lanquage1 and lanquagez2 without an english equivalent to allow us to fully review the materials your website content alone is not sufficient to demonstrate that you are engaged in educational activities you have not established that you have an educational program that will provide substantive counseling in housing and financial matters the materials you submitted in english that aim to educate homeowners are minimal therefore you have failed to establish that the services you plan to offer constitute educational activity under sec_1 c -1 d of the regulations you did not submit a curriculum textbook lesson plan or other materials that would suggest that you plan to provide education your application and subsequent submissions fail to adequately describe your intended educational activities as required by revproc_2010_9 although you were specifically asked for such details and were given the opportunity to present them in your application you failed to submit a full explanation of how you would assist distressed homeowners in addition some of the answers that you gave conflicted with each other you were asked directly to describe the expertise of your board members and employees with credit counseling and credit repair and whether any board members or employees have or had any ownership interests in for-profit businesses that perform credit counseling credit repair or other services that may be used by your organization you were also asked to disclose whether any of your board members or employees are or have been officers directors or employees of a credit counseling or credit repair organization in response to these questions you stated only that president is the only board member who works credit counseling oranization sic this statement is not an adequate response to the questions we asked you as it does not fully describe or explain president's affiliation with other organizations or expertise in credit counseling it makes no mention of the experience or expertise of your organization’s other board members or employees therefore we are entitled to draw inferences from the missing information response contradicts other parts of your application that claim that your employees are certified in credit counseling have experience in that area and were formerly employed by company your president’s credit counseling company it is thus unclear whether your employees are equipped to provide any meaningful educational_services see 70_fedclaims_782 in addition your you are not operated for exclusively for charitable purposes providing services exclusively for the benefit of the poor a recognized charitable_class furthers charitable purposes sec_1_501_c_3_-1 for instance counseling the poor about economics and personal finance can achieve an exempt_purpose see revrul_69_441 supra you have failed to establish that your operations will be charitable through relief of the poor and distressed you do not restrict your activities to the benefit of the poor although you represented that you provide your services to the needy at no cost you do not appear to have a consistent definition of who qualifies for a waiver of your fees moreover the housing and financial consulting you offer are sold to anyone who is willing to purchase your services you have a substantial nonexempt purpose sec_1_501_c_3_-1 of the regulations provides that an organization does not qualify for exemption if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose a nonexempt purpose may be evidenced by activities that are conducted in a commercial manner or for a commercial purpose indeed in discerning whether an organization has a substantial nonexempt commercial purpose courts focus on a number of factors related to the nature of the activities and how an organization conducts its business including pricing policies funding sources and the organization’s competitiveness with and similarity to other commercial ventures see eg 70_tc_352 easter house cl_ct 283_fsupp2d_58 d d c 950_f2d_365 7th cir factors to be considered in assessing whether an organization is operating in a commercial manner include competition with for-profit commercial entities extent and degree of below cost services provided pricing policies and the extent to which the organization receives charitable donations airlie foundation f_supp 2d pincite you have not indicated the extent to which your services are offered below cost and your pricing policies are inconsistent your revenue sources further demonstrate that you operate for a substantial nonexempt commercial purpose the exempt_organization described in consumer credit counseling service of alabama u s t c d d c received support from grants and contributions while you indicated that you will solicit government grants you have not received any government grants and there is no evidence that you have received contributions or gifts from disinterested members of the public see 70_tc_352 citing lack of solicitation of contributions and sole support from fees as factors disfavoring exemption you also plan to receive advertising revenue the manner in which you will promote your advertisers conflicts with your stated goal of assisting financially distressed homeowners and suggests that you are operated commercially for example you indicated that you would permit entities that donate to your organization to provide your customers with coupons that can be used toward discounts on such sponsors’ services this provides a return benefit to the contributors making their contributions fees for service rather than disinterested donations you also stated that such sponsors may provide audience with useful education materials in the program although you were asked to provide all your educational materials to us you provided no materials from such sponsors nor did you describe your sponsorship arrangements in any detail however based on the information you provided it appears that your customers serve as an audience for the advertisements of your sponsors additional evidence of your commerciality is found in your relationship with company an organization is not operated exclusively for exempt purposes unless it serves a public rather than a private interest see sec_1_501_c_3_-1 of the regulations a substantial part of your activities consists of the private purpose of generating customers and revenue for company company is a for-profit financial services business owned by president your officers and directors are employees and or owners of company company is headquartered at your address leases space to you pursuant to a lease signed by president as both your president and as president of company this suggests that you intend for a portion of company’s expenses to be paid_by grant funding donations and other opportunities that would only be available to you_as a tax-exempt_organization given the commonality of ownership and the functional similarity of the two organizations the potential exists for the organizations to share resources in the areas of advertising facility-related expenses supplies managerial legal services and other areas moreover you have not represented to us that the accounting_records for the two organizations will be kept separately although you claim that company is an independent entity your activities and those of company are functionally inseparable your name sounds and looks similar to company's additionally despite repeated opportunities to do so you have not demonstrated that your customers will perceive any distinction between you and company see p l l scholarship fund t c _196 citing insufficient separation between organization seeking exemption and for-profit entity as a factor weighing against recognition of exemption easter house 846_f2d_78 fed cir aff'g cl_ct lack of difference between organization seeking exemption and for-profit entities weighed against recognition of exemption you have clearly stated that you will refer your clients to company for credit_counseling_services you have made no indication that you will change this practice thus company is likely to gain additional see 71_tc_1067 nonprofit’s clients and additional revenue from your clients activities served the commercial purposes of the for-profit organization that formed it even where individuals unrelated to the for-profit organizations formally controlled the nonprofit kj’s fund raisers inc 74_tcm_669 same your financial data also suggests that you are not devoting substantially_all your resources and dollar_figure per year more revenue than you expected to receive in any one year per year in your first three years of operation in total revenue n another to exempt_activities some of these unaccounted-for funds may be serving private rather than public interests the statement of revenues and expenses you provided conflicted with other financial information you submitted to us you projected that you would receive between dollar_figure part of your application you stated that you would receive approximately dollar_figure fees from your customers in exchange for the services you provide this would add up to approximately dollar_figure according to your statement of revenue and expenses elsewhere in your application you stated that you expected fees received from customers to account for between and percent of your total revenue in your first five years of operation if such fees roughly dollar_figure per year accounted for percent of your total revenue based on this estimate you would expect to receive approximately dollar_figure per year in grants this money is not accounted for in your statement of revenues and expenses you provided no explanation for this discrepancy and it is unclear whether this unaccounted-for revenue will be used exclusively for exempt purposes since you have thus not established that your income will be used exclusively for exempt purposes we are entitled to draw the inference that you are not operated exclusively for such purposes 70_fedclaims_782 see also sec_1_501_c_3_-1 of the regulations per month in based on the foregoing like the organization in solution plus tcmemo_2008_21 we conclude that your primary purpose is to benefit private interests through the promotion and delivery of financial and other services to individuals for a fee the activities you identify as educational and charitable are merely incidental to your business of providing consulting services for a fee and referrals to company thus more than an insubstantial part of your activities are in furtherance of a nonexempt purpose in contravention of sec_1 c - c of the regulations therefore you are not operated for an exempt_purpose sec_501 of the code an organization that provides educational information on financial topics or financial counseling to homeowners who are at risk of foreclosure is providing credit_counseling_services within the meaning of sec_501 of the code an organization that engages in such activities as a substantial purpose must in addition to complying with the requirements of sec_501 comply with the provisions of sec_501 you do not meet the requirements of sec_501 and you do not meet the requirements of sec_501 an exempt credit_counseling_organization must establish and implement a fee policy which requires that any fees charged to a consumer for services are reasonable and allows for the waiver of fees if the consumer is unable to pay sec_501 you failed to establish that you have a consistent fee policy that complies with these requirements credit counseling organizations must be governed by a board controlled by persons representing the broad interests of the public rather than by persons who benefit from the organization’s activities sec_501 of the code there is no indication that any of your directors represent the broad interests of the public although you have indicated that one of your board members president has experience in credit counseling there is no indication that your other board members do this is in violation of sec_501 q d i moreover based on your fee schedule you charge a separate fee for credit analysis services aimed at improving a consumer's credit in violation of sec_501 encouraging distressed homeowners to purchase products and services sold by your advertisers could prevent them from emerging from debt and thus would be contrary to their particular needs thus violating sec_501 of the code which requires that credit counseling organizations provide credit_counseling_services tailored to the specific needs and circumstances of consumers credit_counseling_services you would not be eligible for exempt status because you would not be organized and operated in accordance with the requirements of sec_501 therefore even if your educational program did constitute therefore had you established that you otherwise met the requirements of sec_501 of the code your failure to satisfy the requirements of sec_501 would prevent you from being exempt from taxation under sec_501 conclusion based on the facts and information provided you are not operated exclusively for exempt purposes as required by sec_1_501_c_3_-1 and sec_1_501_c_3_-1 of the regulations you are operated for a substantial nonexempt purpose in contravention of sec_1 c - c of the regulations any public purposes for which you may operate are only incidental to this primary nonexempt purpose you do not serve a public rather than a private interest as required by sec_1_501_c_3_-1 of the regulations therefore you are not described in sec_501 in addition you do not meet the requirements of sec_501 accordingly you do not qualify for exemption as an organization described in sec_501 of the code and you must file federal_income_tax returns contributions to you are not deductible under sec_170 you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration under penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you if you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so and power_of_attorney ail forms and publications mentioned in this letter can be found at www irs gov forms and publications for more information about representation see publication practice_before_the_irs if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to protest as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service se t eo ra t constitution ave n w washington dc you may also fax your statement using the fax number shown in the heading of this letter 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 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


internal_revenue_service number release date index number ------------------------------------- ------------------------- --------------------- ------------------------ - legend x department of the treasury washington dc person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi - plr-158770-04 date date --------------------------------------------------------------------------------------------- ----------------------- shareholder --------------------------------------------------------------------------------------------- ------------------------- ------------------ --------------------- state d1 ------------------ --------------------- d2 d3 dear ------------- and subsequent correspondence requesting a ruling under ' b of the internal_revenue_code regarding a late s_corporation_election and an accompanying fiscal_year election under sec_444 facts d1 x’s shareholder shareholder intended for x to be an s_corporation beginning d2 according to the information submitted x was incorporated under state law on this letter responds to a letter from your authorized representative dated october x requests a ruling under sec_1362 that its s_corporation_election with an sec_1362 provides that a small_business_corporation may elect to be an plr-158770-04 when x began business operations with a fiscal_year ending d3 accordingly x and its shareholder filed their income_tax returns for x’s first taxable_year and all subsequent taxable years consistent with x being an s_corporation however x’s form_2553 election by a small_business_corporation with an accompanying sec_444 election was not timely filed accompanying sec_444 election for a fiscal_year ending d3 will be treated as timely made for x’s taxable_year beginning on d2 law and analysis s_corporation sec_1362 provides when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year following the year in which the s election is made taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply partnership s_corporation or personal_service_corporation may elect to have a taxable_year other than the required_taxable_year sec_444 election shall be made by filing a properly prepared form_8716 election to have a tax_year other than a required tax_year with the service_center indicated by the instructions to form_8716 except as provided in sec_1_444-3t and form_8716 must be filed the earlier of i the 15th day of the fifth month following the month that includes the first day of the taxable_year for which the election will be first effective or ii the due_date without regard to extensions of the income_tax return resulting from the sec_444 election conclusion sec_1362 provides that if an election under sec_1362 is made for any sec_1_444-3t of the temporary income_tax regulations provides a sec_444 provides that except as otherwise provided in sec_444 a except as expressly provided herein we express or imply no opinion concerning plr-158770-04 based on the facts submitted and representations made we conclude that x has established reasonable_cause for its failure to make a timely s_corporation_election and that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 effective d2 within days following the date of this letter the election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center moreover x if qualified may elect under sec_444 to have a fiscal_year ending d3 by indicating that intention on form_2553 and attaching a completed form_8716 for each year that a sec_444 election is in effect x must file a return on form_8752 required_payment or refund under sec_7519 as provided by sec_1_7519-2t and make any payments required by sec_1_7519-2t the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation or is eligible to make a sec_444 election for federal tax purposes being sent to x’s authorized representative provides that it may not be used or cited as precedent enclosures copy of this letter copy for sec_6110 purposes cc james a quinn senior counsel branch office of the associate chief_counsel passthroughs and special industries this ruling is directed only to the taxpayer who requested it sec_6110 pursuant to a power_of_attorney on file with this office a copy of this letter is sincerely s