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Casey's CouchSurfing Blog

A couple of weeks ago I wrote about how CouchSurfing had been denied 501c3 status by the IRS; the status that the State of New Hampshire required us to get in order to keep operating as a non-profit. Despite our best efforts we weren’t able to achieve it and had to find an alternative, which is ultimately how we ended up transitioning into a B Corp.

As you know I’ve received a lot of emails from our members; lots positive, lots of questions and some with definite concerns about our future. A common one is “Why didn’t you just try harder to get 501c3? I think it’s something you could have achieved.”

Some members have asked to know more about why we were rejected, so I’ve posted the full denial letter and Narrative Description (PDFs) of CS’s activities below to help make sense of it all. I asked our non-profit attorney, Cherie Evans, to provide her interpretation as well.

Letter from, Cherie Evans, CouchSurfing’s non-profit attorney who filed the final 501c3 application:

“The primary reason for the denial of CouchSurfing’s application for tax-exempt status was that the IRS disagreed with CouchSurfing as to whether its activities were charitable and educational. This was the subject of many of the questions and discussions with the IRS leading up to the denial. In addition to the Revenue Rulings regarding homestay mentioned by the IRS in the denial letter, CouchSurfing found support for its qualification under Internal Revenue Code Section 501(c)(3) based on Private Letter Rulings by the IRS and based on similar organizations that had been granted Section 501(c)(3) status. Private Letter Rulings and previous determinations by the IRS do not have precedential value, and the IRS is not required to follow them; however, they are a good indication of the IRS’s thinking on the matter. Importantly, there is only so much precedent on activities that qualify under Section 501(c)(3), and there are many Section 501(c)(3) organizations that have fact patterns different from these IRS rulings. Because there was not a Revenue Ruling or other precedent that dealt with an organization identical to CouchSurfing, i.e., an organization that used a website to facilitate homestay, there was an element of discretion in the IRS’s decision. Instead of looking at CouchSurfing’s approach as innovative and cost saving, the IRS looked negatively on the fact that there was not an intermediary personally arranging the homestays. The IRS also seemed to fear that other websites that were social networks might see this as an opening to tax exemption.

To bolster its denial of tax exemption, the IRS threw every possible negative factor into the denial letter. Some of these issues had never been raised. Throughout the process, CouchSurfing bent over backwards to make any changes requested by the IRS and to produce any requested documents. CouchSurfing produced hundreds of pages of documents, including receipts and financial records. Even though the IRS tried to find many reasons for denial, the IRS did not note any inappropriate use of funds by directors or officers.

One new issue the IRS raised in the denial letter to demonstrate that CouchSurfing was not organized for charitable purposes was that CouchSurfing’s Articles of Agreement allowed for the repayment of capital contributions on dissolution. CouchSurfing’s Articles were prepared by BizFilings, an online incorporation service, which mistakenly added this phrase. During the three years that CouchSurfing pursued tax exemption and after multiple conferences with and multiple questions from IRS agents, this phrase in the Articles was never raised as a basis for denial. If it had been, CouchSurfing would have amended its Articles. In addition, since CouchSurfing was planning to transfer its assets to the California nonprofit corporation and dissolve (because it was operating out of California rather than New Hampshire), it did not seem necessary to revise the New Hampshire corporation’s Articles. There were no capital contributions to CouchSurfing so this phrase was meaningless. In contrast to the IRS, the New Hampshire Attorney General’s Office considers CouchSurfing to be organized for charitable purposes based on its Articles and views the asset dedication language as requiring Attorney General oversight and restricting CouchSurfing’s assets to charitable purposes.

Although CouchSurfing articulated in detail why its activities were charitable and educational, the IRS disagreed. CouchSurfing had the option to appeal the IRS denial. However, this is an expensive and time consuming process, and the result is not certain.”

Add a comment 11 comments

Poly Glot

Casey, why didn't you develop any of the educational programs mentioned in the application over the course of the three years during which the application was reviewed? Did you believe the IRS wouldn't notice or wouldn't care? Did you believe the IRS would display the same patience and leniency as your volunteers and members with your unkept promises? Why were all tax returns filed late? Do you believe that made a good impression? Yesterday at 12:30am

David Vaughn · University of Oregon

Since it is hidden at the bottom, I just wanted to make clear that the important post here is not the self-justifying by the paid legal staff, nor Casey's claims of having actually tried to get IRS approval, but the link entitled. "Internal Revenue Service – Denial Letter [PDF download]". Even though this is NOT the IRS letter that Casey promised to post, careful reading still shows the CS directors were unwilling to establish a real nonprofit that follows disinterested principles, but instead wished to personally control and profit from CS. Impossible for the IRS to approve such a scheme. Casey, could you print the rest of the secret bylaws of the old nonprofit CS?

Margaret Wohler

The IRS letter is very condemning. Its author states clearly that CS is not a charity, that is has no programming and has never seriously considered programming, that verification is a service not a donation, that CS tried to slip in the bylaws' clause allowing for debt and capital investment to be paid off using donation money before charitable dissolution (Article 4), that CS has reported to the IRS since 2007 that verification income is donated....among other strange tax filings.

Claudia Hüppmeier

In spite of not being familiar with US legislation, as a German civil servant I can completely understand the arguments of IRS and must agree with the conclusion they drew. Not surpring at all.

David Vaughn · University of Oregon

Casey, you say you supplied the "full denial letter". However you have furnished a redacted version, even though you possess the full version and could have furnished it. This redaction was not done to protect third parties, but only to keep secret CS details, such as the names of the CS directors etc. However in line with the transparency of CS, there is no reason to not provide the real letter. Thank you for doing so soon.

Niall Kennedy · London, United Kingdom

@David Vaughn : the more concerning part is that Casey as well as two others were members of the Board of Directors as well as drawing a salary. Casey was warned at the time that he could not serve as chair of the BoD and draw a salary as that is illegal and a conflict of interest. However, as I understand it he made no attempt to change this situation. Could you comment, Casey?

David Vaughn · University of Oregon

Yes, it is well-established nonprofit practice that the Board of Directors is disinterested, not profiting personally and directly from its own decisions. Paying itself a salary and setting the amount of that salary, as well as approving "expenses", all contradict that basic principle. But when the IRS read that Casey Fenton was "Leader for Life" AND he was paying himself, one must admire the IRS's professionalism for pointing out all the other holes in the CS application. We understand fully why the IRS asserts that the organization is profiting. · Friday at 11:11am

David Vaughn · University of Oregon This is incredibly damning. Obviously such a blotched demand could not be taken seriously by the IRS. How can one trust an organization that can't even file their tax returns? And Casey Fenton with a lifetime appointment to the board of directors? That does indeed sound like it would qualify for charity status. · Friday at 3:20am

Add a Reply... Reply using... o Facebook o Yahoo o AOL o Hotmail Posting as Poly Glot (Not you?) * o Mark as Spam o Report as Abuse Niall Kennedy · London, United Kingdom Thanks for publishing this letter Casey. "There were no capital contributions to CouchSurfing so this phrase was meaningless." How would you describe members' donations (other than verification) to Couchsurfing, if not capital contributions? · September 15 at 9:04pm

David Vaughn · University of Oregon Ms Evans says "this phrase in the Articles was never raised as a basis for denial. If it had been, CouchSurfing would have amended its Articles." And yet, you had 30 days to do so and resubmit, but you decided not to. If this point had any importance, you could have fixed it. You chose not to, but now use it as an excuse. · Friday at 3:32am

Margaret Wohler and wicked NOT happy at having to sign on to FB to post a reply...my serious pants are pulled up to nipple line.... Reply · Like · Follow Post · Friday at 3:26am Add a Reply... Reply using... o Facebook o Yahoo o AOL o Hotmail Posting as Poly Glot (Not you?) * o Mark as Spam o Report as Abuse Niall Kennedy · London, United Kingdom one more quick request: can you make the archives of this blog accessible? · September 15 at 9:41pm

Margaret Wohler

and pdf of the actual rejection letter...not a copy/paste? I want to establish a slam-dunk chronology. I too appreciate your efforts at informing the general membership. thanks Casey! Reply · Like · Friday at 3:25am o + Mark as Spam + Report as Abuse Margaret Wohler dislike!! these dudes are such total manipulators · Friday at 3:33am

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