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Saturday, May 4, 2024
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GiftLaw Note:
ORG teaches married couples how to communicate more effectively and make wise financial decisions based on biblical principles. D is ORG's President and also the founder and President of for-profit company J. J provides software and training materials to financial planners.
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March 15, 2013 PLR 201310048 ORG Offering Financial Advice Denied Exemption
03/08/2013 (12/12/2012)
Dear * * *
We have considered your application for recognition of exemption from federal income tax under Internal Revenue Code section 501(a). Based on the information provided, we have concluded that you do not qualify for exemption under Code section 501(c)(3). The basis for our conclusion is set forth below.
ISSUE
Do you qualify for exemption under section 501(c)(3) of the Code? You do not for the reasons set forth below.
Alternate Issue:
If upon appeal, it is determined you do meet the requirements of section 501(c)(3), do you also meet the requirements of section 501(q)(1) of the Code? You do not for the reasons set forth below.
FACTS
You were incorporated in the State of B on C (date).
According to your Articles of Incorporation, your purpose is to teach married couples biblical principles relative to better communication in the marriage relationship. Special emphasis is placed on assisting them in making wise financial decisions. To accomplish this mission, you will conduct marriage seminars and conferences in which proper money management and financial stewardship are the main subjects. Your Articles of Incorporation also restrict your purposes and dedicate your assets upon dissolution in accordance with section 501(c)(3) requirements.
Your governing body consists of three members:
- D serves as your President. He is also the founder and president of J. J is a for profit company which creates and provides software and training materials to financial planners.
- F serves as your Secretary. He is the founder of H, a for-profit S Corp. H provides behavioral assessment training for the leadership of various churches, as well as for married couples and parents.
- D and F develop and produce your conferences.
- You identified G as your Treasurer.
The Form 990 filed for your first year of operations listed these same individuals as the members of your board of directors. In your second year, D and F were the only persons that you listed as officers and directors.
None of your officers are compensated for their governing roles. However, F received compensation as an employee of his company, H. H provided contract services that included development of your website, preparation of training literature and designing your general program approach. The terms of the contract were established and agreed upon orally. In fact, the only written contracts you have provided are two loan contracts between you and J.
You conduct conferences where biblical principles of marriage and finances are presented to couples. According to your promotional material, "Experts give you a biblical model of finance while providing information that financial institutions will never tell you." You originally stated that the conferences will take places in church and non-church settings. You later stated that conferences would take place exclusively in churches. The conferences are primarily taught by your officers, D and F.
The one day seminar follows an 80 page workbook which was created by D and F. The morning topics appear to cover common problems in marital relationships and discusses how couples should work together to resolve those issues. The afternoon topics include wealth strategies and money management.
When requested to provide a detailed narrative describing each of the topics set forth in the workbook, you stated that this "would simply require the writing of a book as opposed to putting on a seminar. Suffice it to say that the training and discussion follows along the lines of the pages of the workbook . . ." You went on to state that all materials given to the participant and used by the instructors have been previously provided to the IRS.
J provides "financial calculators" used in conjunction with the program. These online computer programs are designed to help the participants understand that the proper use of money is a biblical stewardship issue, not finance or wealth issues.
Your workbook provides biblical text to introduce a discussion of reasons for living a more conservative lifestyle, as well as, the importance of investing and financial management. You did not provide representative samples of these "financial calculators" or access to the online computer programs. The workbook identifies the financial calculators, pictures and graphs used in the money section as ones that are copyrighted and owned by J. Four other copyrights for materials used in the workbook/presentation are identified as belonging to H.
J's online program to determine if one is prepared for retirement is implemented at the conferences as a type of post-conference assignment. You reported that J charges x dollars per couple for this service. The charge is included in the conference registration fee. You allege that, "These items are supplied basically at cost."
The program allows the participant couple to input their ages, present income, savings amounts, expected returns, etc. to determine if the funds necessary for them to retire at age 65 (or any other age) will be available. Normally, J charges y dollars per couple for using the program. You stated that the reduced fee is meant simply to offset the costs associated with providing the service. No contracts or other documentation were provided to support theses statements.
H will also provide some computer based services to the conference participants. These services include a computerized behavior/personality assessment to each attendee. This service is implemented as a pre-conference assignment. The cost to each attendee will be x dollars per person. Normally, H charges y dollars per person (to other third parties) for this service. Attendees that cannot afford the fee for this service can use it free of charge. You reported that you had not maintained records to reflect accurately the number of persons who received service free of charge.
You expect your main sources of income to be donations from both private and public sources and gross receipts from the conferences. In the future, you may sell recordings of the seminar/conferences at a slight markup (over cost) to secure additional funding.
In your first year, no contributions were received. For year N, J contributed * * *% of your total contribution income.
In order to get the events set up and create the conference materials, you accepted a loan in the amount of p dollars from J shortly after you were incorporated. In addition, a second note for q dollars was executed a year later. The additional loan was intended to cover additional conference and materials expenses. Both notes are subject to a * * *% interest rate per annum. There is no set timetable for the loans to be repaid. However, it is hoped that you will obtain sufficient funding from donations, contributions and gifts from third parties. If so, repayment of these loans could be accomplished in a fairly short period of time.
All of the conferences will be sponsored through local churches. Each host church is asked to pay v dollars to subsidize the conference. If the church pays v dollars, then each couple pays s dollars to attend. If a church cannot afford its portion of the conference fee, the amount is reduced to an amount the church can afford. When the church pays its full share, v dollars, each couple pays s dollars to attend. If the church does not pay the full amount, the 'per couple' fee is increased accordingly. No promotional materials or contracts relating to the use of church facilities were provided with your application or in response to subsequent correspondence.
The sponsor church may also choose to pay an additional amount. In that case, the fee paid by attending couples is reduced accordingly. Thus, the fee can range from zero to t dollars. At no time will the 'per couple' fee be more than t dollars.
A partial breakdown of the conference registration fee indicates that $* * * of the t dollar fee covers the profile and financial calculations programs provided by H and J. The workbooks and lunch for the participating couples represent another $* * *. An explanation of the expenses related to the remaining balance of the attendance fee was not provided.
You stated that you have also made an accommodation for those who would like to attend but cannot afford the 'per couple' conference fee. In these cases, you will 'scholarship' the couple so they can attend. You stated that "often times couples are admitted 'free' if the cost is a burden on them." However, you do not have a fee waiver policy. Instead, you state your fees are not "confined to any particular price point . . . but attempt to achieve a price that will break even in terms of costs and expenses versus revenue."
In addition, no details were provided as to how the scholarship program is publicized and administrated. You did not disclose how eligible persons become aware that scholarships are available or the selection criteria used. And, you did not maintain a record of the persons who have been recipients of your scholarships in the past.
You anticipate your largest expenditures will be for salaries and program expenses.
You submitted copies of your Form 990s for M year and N year. In M year, you received less than $* * * in program income (conference fees) and spent nearly $* * * in various expenses, including almost $* * * paid to subcontractors, about $* * * for development/art and over $* * * for seminar presentations. You stated that a majority of the contract labor was paid to H. However, you also stated that no 1099's were issued because there was no additional contract labor in that year.
According to the Form 990 filed for N year, you spent nearly $* * * on contracted labor provided by H. No contracts related to any of the expenditures have been provided.
You indicated that the excessive expenses in M year were due to your attempt to accelerate your programs. These expenses included development of your training material, general program approach and the website. Instead of spreading the development expenditures out over several years, a loan from J was obtained so that funds could be available for the development to take place on a shorter schedule. The only document you have furnished related to "training material and general program approach" is the workbook provided to seminar participants. As pointed out earlier, most of the materials in the workbook are adapted from patent and trademark materials owned by H and J.
Your website, K was a single page. All 3 of the links on that page redirect the viewer to H web pages. The L link leads to a form where the registrant can enroll to attend the conference for z dollars. The other 2 links lead to books and other materials co-authored by your founders, D and F. The checkout page identifies H as the payee.
LAW
Section 501(c)(3) 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 part of their net earnings inures to the benefit of any private shareholder or individual.
Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations ("regulations") provides that, in order to be exempt as an organization described in section 501(c)(3) of the Code, 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.
Section 1.501(c)(3)-1(c)(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 section 501(c)(3) 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.
Section 1.501(c)(3)-1(c)(2) of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Section 1.501(a)-1(c) of the regulations defines the words "private shareholder or individual" in section 501 of the Code to refer to persons having a personal and private interest in the activities of the organization.
Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides that an organization must serve a public rather than a private interest and, specifically, 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.
Section 501(q)(1) of the Code applies to organizations with respect to which the provision of credit counseling services is a substantial purpose. An organization of this type shall not be exempt from tax under subsection (a) unless such organization is described in paragraph (3) or (4) of subsection (c) and meets the other requirements of this section.
Section 501(q)(1)(C) of the Code indicates that these organizations must establish and implement a fee policy which, requires that any fees charged to a consumer for services are reasonable. [501(q)(1)(C)(i)], allows for the waiver of fees if the consumer is unable to pay [501(q)(1)(C)(ii)], 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 [501(q)(1)(C)(iii)].
Section 501(q)(1)(D) of the Code applies the following restrictions:
"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 20 percent of the voting power of which is vested in persons who are employed by the organization or who will benefit financially, directly or indirectly, from the organization's activities (other than through the receipt of reasonable directors' fees or the repayment of consumer debt to creditors other than the credit counseling organization or its affiliates), and
(iii) not more than 49 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)."
Section 501(q)(4)(A) of the Code defines, for purposes of section 501(q), the term "credit counseling services" to mean (i) the providing of educational information to the general public on budgeting, personal finance, financial literacy, saving and spending practices, and the sound use of consumer credit; (ii) the assisting of individuals and families with financial problems by providing them with counseling; or (iii) a combination of the activities described above.
In Revenue Ruling 69-441, 1969-2 C.B. 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 section 501(c)(3) of the Code. Its Board of Directors consisted of a broad-base from the community. In order to accomplish their exempt purpose, the organization provided information to the public on budgeting, buying practices, and the sound use of consumer credit. It aided low-income individuals and families who have financial problems by providing them with individual counseling, and if necessary, by establishing budget plans. The organization did not charge fees for counseling services (or proration services). 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 the poor and distressed. Moreover, by providing the public with information on budgeting, buying practices, and the sound use of consumer credit, the organization was instructing the public on subjects useful to the individual and beneficial to the community. Thus, the organization was exempt from federal income tax under section 501(c)(3) of the Code.
The petitioner in est of Hawaii, 71 T.C. 1067 (1979), conducted training, seminars and lectures in the area of interpersonal awareness. Such activities were conducted under licensing arrangements with various for-profit corporations. The licensing agreements were conditioned on the petitioner maintaining tax exempt status. The petitioner argued that it had no commercial purpose of its own and that its payments to the for-profits were just ordinary and necessary business expenses. The Court did not agree with the petitioner citing that the operational test (see Section 1.501(c)(3)-1(c)(1)(1) of the Income Tax Regulations) focuses on the purpose rather than nature of an organization's activities. The Court concluded that the petitioner is not exempt under IRC 501(c)(3) because the petitioner serves a substantial private and commercial purpose rather than an exempt purpose.
In Church by Mail, Inc. v. Commissioner, (1985) the Court affirmed a Tax Court decision. Church by Mail sent out sermons in numerous mailings. This required a great deal of printing services. A for-profit company, controlled by the same ministers, provided the printing and the mailing. This company also employed family members. The services were provided under two contracts. The contracts were signed by the two ministers for both the organization and the for-profit company. The organization's business comprised two-thirds of the overall business done by the for-profit company. The court determined that there was ample evidence in the record to support the finding that the organization was operated for the substantial non-exempt purpose of providing a market for the services of the for-profit company. The employees of the company spend two-thirds of their time working on the services provided to the church. The majority of the Church's income is paid to the for-profit company to cover repayments on loan principal, interest, and commissions. The critical inquiry is not whether particular contractual payments to a related for-profit organization are reasonable or excessive, but instead whether the entire enterprise is carried on in such a manner that the for-profit organization benefits substantially from the operation of the Church. Further, the potential for abuse created by the ministers' control of the Church requires open and candid disclosure of facts bearing upon the exemption application. Moreover, the ministers' dual control of both the Church and the for-profit company enables them to profit from the affiliation of the two entities through increased compensation.
In Easter House v. U.S., 12 Ct. CI. 476 (1987), aff'd. 846 F.2d 78 (Fed. Cir 1988), the court found that adoption services were the primary activity of the organization. In deciding that the organization conducted adoption services for a business purpose rather for a charitable purpose, the court considered the manner in which the organization operated. The record established a number of factors that characterize a commercial activity and which were evident in the operations of the organization as well. The court determined that the organization competed with other commercial organizations providing similar services; fees were the only source of revenue; it accumulated very substantial profits, because it set its fees in order to generate a profit; the accumulated capital was substantially greater than the amounts spent on charitable and educational activity; and the organization did not solicit and did not plan to solicit contributions. The court also found a corporate-type structure in the classes of memberships (including a single life member having inherent power that the holder could transfer like stock), and dependence on paid employees. The organization was not found to be exempt under section 501(c)(3) of the Code.
In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the court found that a corporation organized to provide counseling services was not exempt under section 501(c)(3) because its activities constituted the conduct of a trade or business that is ordinarily carried on as a commercial venture organized for profit. The corporation's primary purpose was not charitable, educational or scientific, but rather commercial in nature. Further, the court found that the organization's financing did not resemble that of a typical 501(c)(3) organization as it had not solicited, nor had it received voluntary contributions from the public. Its only source of income was from the fees for services that it collected. Those fees were set high enough to recover all projected costs and produce a profit. Moreover, it did not appear that the corporation ever planned to charge a fee less than "cost." Additionally, the corporation did not limit its clientele to organizations that were exempt under section 501(c)(3).
In Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court held that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt purposes. The Court found that the trade association had an "underlying commercial motive" that distinguished its educational program from that carried out by a university
APPLICATION OF LAW
As noted in section 501(c)(3) of the Code and section 1.501(c)(3)-1(a)(1) of the regulations two tests must be met to qualify for exempt status. Because your Articles of Incorporation contain the proper language, you meet the operational test. However, you also bear the burden of proving you meet the operational test. You have not met that burden for the reasons set forth below.
You do not meet the requirements of section 1.501(c)(3)-1(c)(1) of the regulations because more than an insubstantial part of your operations are not in furtherance of an exempt purpose. The facts show substantial control by D and F and that you are an extension of their for profit businesses, H and J. Through you products and services of H and J are marketed, promoted and sold. Accordingly, more than an insubstantial part of your operations benefit D and F.
You do not meet the requirements of section 1.501(c)(3)-1(d)(ii) because you are organized and operated for the benefit of D and F.
You are not similar to Revenue Ruling 69-441 because your board of directors does not consist of a broad-base from the community, and because you charge fees for the services you provide.
Like est of Hawaii, you are not exempt because you serve substantial private and commercial purposes. While there is no formal licensing agreement between you and the companies controlled by D and F, it is clear that virtually all your activities are conducted by your officers who provide similar instructions and products in their for-profit businesses. Your website, literature and materials promote H and J products, and a portion of the fees you collect is for H and J products.
The facts presented in Church by Mail, Inc. v. Commissioner, are remarkably similar to your operations.
- You are controlled by officers whose companies, H and J, provide services to you
- You are substantially funded by a loan from J and will repay J, on demand, the loan principal and interest.
- D and F control both you and their for-profit companies H and J. This control enables them to profit from the affiliation of the entities through increased revenues.
Church by Mail, Inc. was ultimately denied exemption because like you, the entire enterprise was carried on in a manner that serves to benefit the for-profits that control its operations.
Like Easter House v. U.S., and B.S.W. Group, Inc. v. Commissioner, the commercial manner in which you operate precludes you from exemption under section 501(c)(3). Your marriage and financial counseling services are conducted in the same manner as commercial organizations. In fact, D and F, own 2 such companies. Both H and J provide similar products and services on a for-profit basis. In fact, H and J hold patents and trademarks on the material used in your seminars. Like a commercial organization, you charge fees for your services. Though you state services are provided free to some persons who could not afford to pay the participation fee, you provided no evidence to support this claim or the number or percentage of individuals who received free services. You do not have a fee waiver policy. Instead, your fees are calculated to allow you to "break even in terms of costs and expenses versus revenue." Like a commercial organization, you market your services to prospective clients and offer suggestions designed to increase attendance and sales.
As noted in Better Business Bureau of Washington D.C., the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt purposes. The facts show that a substantial purpose of your operations is commercial and furthers the private interests of D and F.
Section 501(q) of the Code:
Because you are providing educational information to the general public on budgeting, personal finance, financial literacy, saving and spending practices, and the sound use of consumer credit; you are engaging in credit counseling services as defined in section 501(q)(4)(A) of the Code. An organization that engages in credit counseling activities as a substantial purpose must, in addition to complying with the requirements of section 501(c)(3), comply with the provisions of section 501(q). You do not meet the requirements of section 501(c)(3) and you do not meet the requirements of section 501(q).
You failed to establish that you have a fee policy that meets the requirements of section 501(q)(1)(C). Although you have indicated that you will provide 'scholarships' or provide services 'free', this has not been expressed in any set fee policy. You have not elaborated on how and when you would allow for any fee waiver to be used. Further, you have not shown that any of the previous persons who attended your program were granted any reduction in fees or any fee waiver option.
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, as noted in section 501(q)(1)(D) of the Code. A majority of the voting power of your board is vested in persons, specifically D and F, who will benefit financially, directly and 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) through subcontractor payments, fees to their for-profit entities for services or compensation. Accordingly, you do not have a board that is controlled by persons who represent the broad interests of the public as required by section 501(q)(1)(D)(i). You also fail to meet the requirements of sections 501(q)(1)(D)(ii) and (iii), which generally specify the percent of voting power that is allowed to be vested in financially interested persons.
CONCLUSION
Based on the facts provided, we hold that you do not meet the operational test for exemption under section 501(c)(3) of the Code because you operate in a commercial manner and because your operations serve the private interest of your officers, D and F. Had you established that you met the requirements of section 501(c)(3) of the Code, the facts show you also fail to satisfy the requirements of section 501(q) which is an alternate basis for denial of exemption. Accordingly, we conclude you do not qualify for exemption as an organization described in section 501(c)(3) of the Code. Contributions to you are not deductible under section 170 of the Code.
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 30 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 892, Exempt Organization Appeal Procedures for Unagreed Issues.
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 already done so. You can find more information about representation in Publication 947, 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 30 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 section 7428(b)(2) 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 30 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:
* * *
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,
Holly Paz
Director EO Rulings and Agreements
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