A tipster (send in your tips here) has sent me a petition to the Internal Revenue Service which asks for for an investigation and revocation of the tax-exempt nonprofit status for the credit counseling group. I took a look at the claims made and they do appear to be supported by the website of First Stone Credit Counseling so I will publish it.
I will print the document submitted to the IRS below and the images inserted are done by me to help you see the points raised. I have also linked some of the footnoted pages to PDF copies I made from the site.
for the Investigation and Revocation of 501(c)(3)
Tax-Exempt Status of First Stone Credit Counseling
This petition is filed with the United States Internal Revenue Service (“IRS”) for the investigation and revocation of 501(c)(3) tax-exempt status of First Stone Credit Counseling (“First Stone”) operating under employer identification number (“EIN”) 75-2698055.
First Stone is a 501(c)(3) tax-exempt organization operating at 4372 Spring Valley Road, Farmers Branch, TX 75244. First Stone claims, both in name and advertising materials, that it is a “credit counseling” organization. First Stone is in actuality and practice a credit repair organization.
Internal Revenue Code Section 501(q)
The Internal Revenue Code (“IRC”) was amended with the addition of the Pension Protection Act of 2006 (“PPA”) which become effective January 1, 2008 for existing tax-exempt organizations. This Act establishes additional standards that a credit counseling organization must satisfy to qualify for exemption under section 501(c)(3) or 501(c)(4).1
Specifically, the PPA added a new section to the IRC which is designated as 501(q). The new law applies to an organization if a substantial purpose of the organization is either to educate the general public on budgeting, personal finance, financial literacy, saving and spending practices, or to conduct financial counseling — and it wants to be tax-exempt under section 501(c)(3) or 501(c)(4).2 Thus a credit counseling agency desiring tax-exempt status under Section 501(c)(3) also must adhere to the new requirements of section 501(q).
A short summary of section 501(q) provides the following restrictions on the operations of a credit counseling agency relevant to this request for investigation:
- “Credit Repair – Can only provide incidental services to improve consumer credit records and credit history, and cannot charge a separate fee for such services;
- Contributions: Cannot solicit contributions from consumers during initial counseling process, or while consumer is receiving services from organization;3
- Ability to Pay – Cannot refuse services based on ability to pay or ineligibility/unwillingness of consumer to enroll in a debt management plan (“DMP”);
- Fee Policy – Must charge reasonable fees and provide waivers if consumer is unable to pay;
- Board Composition – Majority of members must represent broad interests of the public; maximum of 49 percent can be employed by organization or benefit from it;”4
According to the IRS a credit counseling agency is required to comply with its specific tax-exemption requirements as well as section 501(q) regardless of its offering of debt management plans (“DMP”). The IRS stated:
“Am I required to comply with the new law even if I do not offer debt management plans (DMPs)?
First Stone is a Credit Repair Organization
First Stone widely advertises its services and specifically offers “credit file restoration, correction with settlement(s), education and credit file clean-up”.6 While this list may seem expansive, First Stone itself distills its list of services down to what it is that the company actually does as its core business:
“…credit file restoration, correction with settlement(s), education and credit file clean-up … That means the removal or neutralization of negative items within your credit report.”7
First Stone has also had its core purpose as a credit repair organization publicly declared in litigation describing the organization as:
“First Stone Credit Counseling (a non-profit corporation) is in the business of assisting consumers with credit clean-up services, including correcting erroneous credit reporting data.”8
Even First Stone proclaims its “credit restoration” services as the “ultimate goal” of the organization. It stated:
“Here at First Stone® we truly understand that every credit situation is different. Therefore, we’ve designed a customized program that combines our unique services to create a credit restoration package for each client. Our program begins with a thorough, professional evaluation of your current credit history. During this one-on-one consultation, we will discuss your problems in detail and agree upon the best course of action for your situation. Our ultimate goal for every client is permanent restoration with removal or corrections of ALL negative items within your credit file.”9
First Stone’s advertising is replete with its own self-proclaimed references as a credit repair clinic. In fact, according to First Stone itself, it is the only “truly legal” “credit file restorer” in the entire United States. First Stone proclaims:
“The ONLY truly legal as well as competent credit file restorers in America… Read on and learn how to check us and any others out before you make a serious mistake!”10
First Stone’s Credit Repair Services are Not Incidental to its Core Mission and Purpose
There is no paucity of citation for First Stone’s declaration of its true purpose to provide credit repair services. Given the agency’s lack of any discernible public education in the form of seminars, free literature or a reference library coupled with its fees for “credit file restoration”11, to “improve your credit “RISK” scores” 12 and “credit file clean-up”13 it is evident that First Stone is simply a credit repair organization. The agency describes its long history of providing credit repair services stating:
“First Stone® has been cleaning up and correcting negative credit file information as well as restoring consumers’ good credit history for more than twenty (20) years.”14
“With our unique program of PERMANENT credit file restoration, First Stone® Credit Counseling™ offers “credit file restoration/correction with settlement(s) and education as well as credit file clean-up”. This means that removal or neutralization of negative items within your credit report will cause your credit “RISK” scores to rise to A or better (eventually around 800 in the FICO system.)”15
“Our team of experienced and knowledgeable credit professionals has three (3) main goals: 1.) to greatly improve your credit “RISK” scores 2.) to educate consumers regarding credit system dangers 3.) correcting and restoring a consumer’s damaged credit file/s.”16
“Then after reviewing your professional version credit file/reports with FICO risk scores evaluation we can very accurately tell you what you may need to do and you can hire First Stone Credit Counseling (FSCC) to get you out of credit and/or cash flow trouble.
And it’s an IRS 501(c)(3) or business write-off on your taxes (normally 50% to 95%…)17
“First Stone® Credit Counseling™ (FSCC™) is a United States Treasury APPROVED Consumer Advocate Credit Counseling organization, with an IRS 501(c)(3) certification, whose objective is to educate consumers, while restoring credit scores through cleaning up credit files. It’s our goal to restore your good name, thus allowing you to fully reach your financial and personal life goals.”18
First Stone Charges for Credit Repair Services
Internal Revenue Code section 501(q) provides strict standards for the treatment of credit repair activity by a tax-exempt credit counseling organization. In summary, a credit counseling agency can only provide incidental services to improve consumer credit records and credit history, and cannot charge a separate fee for such services. The statute provides in relevant part:
“SEC. 1220. ADDITIONAL STANDARDS FOR CREDIT COUNSELING ORGANIZATIONS.
(q) Special Rules for Credit Counseling Organizations-
(1) IN GENERAL- 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 (3) or (4) 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.”
While the credit repair services of First Stone are hardly “incidental” to its true mission and purpose, this section of the complaint is targeted only at the charges and fees that First Stone imposes on its consumer customers.
First Stone makes no effort to disguise its credit repair services as a fee based function. Nor does it make any effort to disguise its fees as being for anything other than credit repair services. In fact, the agency even goes so far as to directly relate the fee charged to a consumer as “based on the number of items and the degree of difficulty involved with cleaning each line item”.19
First Stone’s own statement about its fee based credit repair services reads:
“4. How much does it cost?
Actually, the more relevant question may be ‘What does it save?’ Our fees are based on the number of items and the degree of difficulty involved with cleaning each line item. Remember that everyone’s credit situation is different. After a complete evaluation of your individual credit file, we will be able to give you a total cost of your restoration project. All fees are disclosed without obligation prior to a contractual agreement. Please keep in mind that some items may require legal assistance which could require referral to an expert credit attorney.”20
The fees charged by First Stone for its credit repair service are self-declared as ranging “from a few hundred dollars to several thousand”.21 First Stone stated:
“Q: How much does it cost and how long will it take?
A: Well…The only “fair” way to do this and “not gouge” the consumer or “go broke” ourselves is to charge by how much work is there…therefore it can vary from a few hundred dollars to several thousand.
FYI – there are NO “free lunches”22 (emphasis in original)
Given that First Stone is a credit counseling agency and subject to the provisions of IRC section 501(q), the organization cannot solicit contributions from consumers during initial counseling process, or while consumer is receiving services from organization and it cannot refuse services based on ability to pay or ineligibility/unwillingness of consumer to enroll in a debt management plan.23
The relevant section of 501(q) mandates:
“(2) ADDITIONAL REQUIREMENTS FOR ORGANIZATIONS DESCRIBED IN SUBSECTION (c)(3)-
(A) IN GENERAL- In addition to the requirements under paragraph (1), an organization with respect to which the provision of credit counseling services is a substantial purpose and which is described in paragraph (3) of subsection (c) shall not be exempt from tax under subsection (a) unless such organization is organized and operated in accordance with the following requirements:
(i) The organization does not solicit contributions from consumers during the initial counseling process or while the consumer is receiving services from the organization.”
The first restriction cited above limits the ability of a credit counseling agency to solicit contributions during the initial counseling process or while the consumer is receiving services. Fist Stone does, in fact, will not even provide an initial counseling session to further the “process” until it has received its fees. First Stone requires:
“To electronically initiate your professional credit evaluation, select one of the following options and click “Start the Credit Evaluation process.”
For Single persons $150
For Married persons $200”24
The second relevant provision of 501(q) prohibits a credit counseling agency from refusing services based on the consumer’s ability to pay. First Stone doesn’t even make any inquiry into the ability of the consumer to pay. First Stone’s method of offering services is conditioned on an fee in advance of services. It stated:
“If you would like to have your credits reports evaluated by one of First Stone’s certified credit counselors, the fee is $150 for an individual and $200 for a married couple, which allows us to secure a professional mortgage-type merged infile for your credit report with FICO risk scores.”25
Further, First Stone requires that payment be received before they will even begin any work on behalf of a consumer. There is no provision for services to be rendered without payment. First Stone notes:
“Once payment is received, we will contact you via phone to get more detailed information with which to begin working on your credit restoration.26
The evaluation fee, $150.00, will be charged to the credit card you provide.”27
First Stone Operates as a Consumer Lender
First Stone’s generosity in support of its tax-exempt purpose does not simply stop at the requirement of payment before the provision of services. It is imperative to remember First Stone’s own statement about how this non-profit charity justifies its fees:
“FYI – there are NO “free lunches”28
If a financially distressed consumer is seeking assistance from First Stone and cannot afford the credit repair services, the agency will loan the consumer the money to pay the agency’s fees. First Stone stated:
“Does First Stone® accept installment payments?
Yes. We are pleased to offer in-house financing with zero interest for up to one year.”29
First Stone Represents its Credit Repair Work as Tax-Deductible
Consumers who may or may not be able to afford the credit repair services of First Stone are led to believe that the fees paid to the agency are not as burdensome as they seem. This falsity occurs because First Stone advises that payment for individual services are tax-deductible. First Stone indicates that its credit repair services are a charitable function and that contributions to the agency for individual credit repair are a “write-off”. The agency states:
“After reviewing your professional version credit file/reports with those FICO risk scores, we can very accurately tell you what you may need to do. First Stone Credit Counseling© (FSCC) can then get you out of credit and/or cash flow trouble and it’s an IRS 501(c)(3) or business write-off on your taxes (normally 50% to 95%).” 30
First Stone makes no effort to hide the fact that the fees paid by a consumer for the credit repair service are to “hire” the agency. The money paid by any consumer to First Stone
“If you should choose to hire FSCC (by the way, it’s the only tax deductible credit cleanup system available in America), then…”31
While the money paid by any consumer to First Stone does not further any educational or other charitable purpose, the agency falsely represents that the credit repair activities for which it is not permitted to charge any fees
“And it’s an IRS 501(c)(3) or business write-off on your taxes (normally 50% to 95%…)”32
Client Testimonials are all Credit Repair
Although the First Stone web page lists twelve client testimonials each and every one is related only to credit repair. The more salient morsels are:
“First Stone Credit Counseling has improved my credit rating!. -Sharon B.
We would like to take the time and thank you in writing for all the help you have given us in correcting and re-establishing our credit.
We made our appointment with you, and you explained everything so thoroughly, we then knew we were on our way to correct and restore our credit. -James and Anna M.
Enclosed you will find my final credit reports, as you can see, I now have perfect credit. You and your staff have done an excellent job of cleaning up my credit…- Michael S.” 33
Available Free Education is Advertising for Credit Repair Services
First Stone offers a wide array of free educational material on its websites and Facebook page. This “educational” material, however, is simply a poorly veiled attempt to advertise the services of First Stone.
First Stone uses its video advertising to distinguish its services from its competitors34, bash the practices of competitors35 and tout its own qualifications36. One video for example, states:
“Email from Patrick of Florida wrote:
How can you get consumers out of credit trouble, when other (sic) can’t? If other words what do you do that is so different?”37
First Stone even offers in its “Archive” of “Financial Articles” a webinar that details why First Stone’s credit “cleanup” services are better than those offered by others. It reads:
“Webinar – How and Why can FSCC cleanup credit where those others can’t?”38
First Stone Solicits Engages in Debt Settlement and Credit Repair
First Stone directly implicates itself as engaging in both debt settlement and credit repair. The First Stone Facebook page touts the agency as the “ONLY” organization that is “in compliance” with the Federal Trade Commission’s (“FTC”) new debt relief amendments to the Telemarketing Sales Rule (“TSR”). The agency wrote:
“First Stone® Credit Counseling™ The new TSR Act has gone into effect. Debt relief/settlement companies and credit “repair” clinics… your days are numbered. To be in compliance with the new law, JOINT VENTURE with the ONLY truly legal and competent Consumer Advocate US Treasury Approved Credit Counselor who does Credit Education with Credit File Restoration as well as settlements (if necessary).”39
An additional posting on First Stone’s Facebook page clearly states that the agency “who does…Credit File Restoration as well as settlements…” A verbatim account of First Stone’s own words is:
“First Stone® Credit Counseling™ FSCC announces its AMNESTY PROGRAM for Debt Relief/Settlement companies and Credit “Repair” Clinics….. Joint Venture with the ONLY truly legal and competent Conumer (sic) Advocate US Treasury Approved Credit Counselor who does Credit Education with Credit File Restoration as well as settlements (if necessary)….. Be in compliance with the new TSR Act.”40
First Stone “Owns” a For-Profit Credit Repair Organization
First Stone offers its services through its non-profit corporation as well as a “for-profit” corporation that serves simply at First Stone’s alter-ego. The “for-profit” entity, “The People’s Credit Bureau” (“TPCB”) is a self-proclaimed credit repair organization that provides “credit restoration” and “credit file cleanup”. The TPCB web page states:
“At TPCB, we get to the heart of the matter. We are a vigilant, outspoken, respected, trusted and competent leader in consumer affairs, credit restoration and credit file cleanup.”41
First Stone, as shown above, provides its own credit repair services and also provides a “deal” for “membership” in TPCB, which is providing credit repair assistance above and beyond that of First Stone. The “special deal” provides:
“ IF you should require professional credit file and/or cash flow assistance or guardian services we have a Special Deal for you, the consumer. It’s a 2 to 3-year membership to our For-Profit affiliate The People’s Credit Bureau (TPCB),”42
The commingling of the non-profit “First Stone” and the for-profit TPCB is constant throughout the advertising of both organizations. In one instance, First Stone even represents that its “for-profit affiliate The People’s Credit Bureau (TPCB)”43 is approved by the “U.S. Treasury” to provide credit repair services. The web page states:
“Features & Benefits of a TPCB™ Membership . . .start with a professional three (3) credit bureau annual file status evaluation using real FICO risk scores and conducted by the only U.S. Treasury approved professional Consumer Advocate Credit Education organization in the U.S.”44
Petitioner can find no valid purpose for a tax-exempt organization to own a for-profit credit repair organization that charges fees in contravention of federal and state law.
First Stone’s Credit File Restoration and File Clean Up are Not Tax-Exempt Functions
The record of the IRS in the denial of tax-exempt status to credit repair and debt counseling organizations contains many references that mirror the activities of First Stone. Some of the relevant written adverse determination letters are as follows:
Release Date: 3/17/06
“Helping consumers to improve credit ratings and obtain loans are not exempt purposes.”
“It is clear that you consider credit repair services as your competitors, because you explain on your website why your methods are superior to other credit repair services.”
Release Date: 12/10/04
“No court or IRS ruling has indicated that the sale of debt management plans and debt settlement services is a charitable activity. Since the sale of these services to the general public appears to be one of your substantial purposes, we cannot conclude that you are operating for charitable purposes.”
“Counseling the poor about economics and personal finance can achieve an exempt purpose. See Rev. Rul. 69-441, supra. However, you admit that you do not limit your services to the poor or underprivileged through a financial test or income limit or by any other means. Therefore, you do not operate to further a charitable purpose in the sense of providing relief to the poor or distressed.”
Release Date: 6/7/04
“You do not restrict your activities to the benefit of the poor. The credit/debt repair services and financial consulting you offer are sold to anyone who has unsecured debt and is willing to purchase your services. Nor court or IRS ruling has indicated that the sale of credit/debt repair services and financial consulting is a charitable activity. Since the sale of debt repair services and financial consulting to the general public appears to be one of your substantial purposes, we cannot conclude that you are operating for charitable purposes.”
“Second, the counselors in Consumer Credit Counseling Service of Alabama spent their time providing information to the general public through speakers, films, and publications on the subjects of budgeting, buying practices, and the sound use of consumer credit. You have submitted no evidence that you provide any similar information to the general public.”
Release Date: 6/7/04
“Thus, it is apparent that you do not limit your debt repair services to a particular class of people or segment of the community.”
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