Credit Counseling Organizations Get No Respect

Probably since the dawn of the 21st Century, Nonprofit Credit Counseling Organizations have been heavily scrutinized and even more heavily regulated.  And those operated by anybody who might even remotely benefit from a poor working slob’s better credit score are especially ostracized.  The Service maintains a whole online library devoted exclusively to the misdeeds of those organizations and their faint or strong odor of private benefit.  And IRC 501(q) contains more detail than can be reasonably defended in a legislative drafting course.  It condemns certain private benefit-smelling organizations to the tax world’s version of Steve McQueen and Dustin Hoffman’s forever prison in the movie Papillion.  Now there was a classic.  If you have never seen it, you might check it out.  The critics didn’t like it much, probably because the misery visited on the main characters seemed infinite and so unjust. 

But I am not here to make the argument that miscreant credit counseling organizations are unjustly treated.  I just don’t like the casual disregard for normative jurisprudential standards in the treatment of those organizations. Take PLR 202416014  released last week.  A painfully tortured ruling leading obviously to a desired result to never allow certain credit counseling organizations to gain tax exemption.  The organization provided credit counseling services free of charge to anybody who walked in the door.  No kidding, free of charge to everybody.  But the ruling concludes that offering free services to anybody — not just poor people — is not charitable.  Yeah.  And that counseling people on how to fix and maintain good credit is not educational.  It’s an activity that merely serves the private interests of the clients, according to the ruling.  Well, yeah, that’s the whole purpose of offering free services to people.  To help people with some personal private need.  Thereby benefitting everyone, I might have added. 

The whiff of private benefit comes from the fact that once clients are qualified to lease or buy a home, the organization’s directors assist them to find housing, presumably collecting a commission or other fee.  The ruling concludes that the organization’s purpose is to get clients qualified to buy or lease homes and then benefit when the clients are successful.  That might be reason enough to deny the organization tax exempt status.  But why rip up the normal rules to get that result?

darryll k. jones