4.76.9  Public Interest Law Firms  (04-01-2003)

  1. The following procedures are applicable to all organizations which directly engage in litigation as a substantial part of their activities, for what they determine is in the public good in some chosen area of public interest. Such as, the preservation of the environment and protection of consumer interests.  (04-01-2003)
Public vs Private Interests

  1. In addition to verifying compliance with the usual requirements of an IRC § 501(c)(3) organization, examiners of public interest law firms need to fully analyze the organization’s litigation activities to determine whether such activities serve a public rather than private interest. See News Release IR-1078, issued November 12, 1970. The guidelines provided are intended to aid the examiner and adherence is not required in certain respects in order to ensure that the operations are totally charitable. The facts and circumstances of an organization should be applied. Area offices should not be reluctant to request technical advice if some doubt exists as to the propriety of the organization’s litigation activities.  (04-01-2003)
Public Interest Criteria

  1. To qualify for exemption, public interest law firms must adhere to the following:

    1. The organization’s litigation must be designed to present a position on behalf of the public at large on matters of public interest.

    2. The organization can not attempt to achieve its objectives by illegal activity or through a program of disruption of the judicial system.

    3. The organization can not violate any canons of legal ethics.  (04-01-2003)
Disclosures on the Annual Return

  1. Rev. Proc. 92-59, 1992-2 C.B. 411 requires the organization to file an attachment to its annual information return describing cases litigated and how the litigation serves a public interest. Review the attachment and other organization records to verify that all litigation was reported and that the public interest was served. Examples of documents to review include:

    1. Internal memoranda, minutes of board meetings, and other internal documents that discuss the firms activities;

    2. Copies of briefs filed with the courts;

    3. Newspaper or magazine articles concerning the litigation;

    4. Copies of newsletters; and

    5. Transcripts of radio and television broadcasts of attorneys working with the organization.


    § section 7525 provides that with respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney. Therefore, care should taken when requesting information from a taxpayer or its representative. See IRM 4.75.11.  (04-01-2003)
Public Control and Compensation Arrangements

  1. In Rev. Proc. 71-39 a two part qualification test is established. First, the organization must present a program designed to serve the public interest through litigation. Second, it must be operated in accordance with specified guidelines. These guidelines are summarized as follows:

    1. The policies and programs of the organization are the responsibility of a board or committee representative of the public interest, which is not controlled by employees or persons who litigate on behalf of the organization nor by any organization that is not itself an organization described in IRC § 501(c)(3).

    2. The organization is not operated, through sharing of office space or otherwise, in a manner so as to create identification or confusion with a particular private law firm. A tour of the facilities should disclose any sharing of space.

    3. There is no arrangement to provide, directly or indirectly, a deduction for the cost of litigation which is for the private benefit of the donor.

    4. A public interest law firm may accept reimbursement from clients or from opposing parties for direct out-of-pocket expenses incurred in the litigation. Out-of-pocket costs include filing fees, travel expenses, and expert witness fees.

  2. The organization’s receipts meet the requirements of Rev. Proc. 92-59, 1992-2 C.B. 11 with respect to fees received. The requirements are as follows:

    1. The organization may accept attorneys’ fees if such fees are paid by the opposing parties and are awarded by a court or administrative agency or approved by such a body in a settlement agreement.

    2. The organization may accept attorneys’ fees if such fees are paid directly by its clients provided the fees do not exceed the actual cost incurred in the case, for example, the salaries, overhead, and other costs fairly allocable to the litigation in question. Costs may be charged against a retainer, with any remaining balance refunded to the litigant. Once agreeing to undertake a representation, an organization may not withdraw from the case because the litigant is unable to pay the contemplated fee.

    3. The organization may not consider the likelihood or probability of a fee, court awarded or client paid, in the selection of cases.

    4. The organization may not accept cases in which a court awarded or client-paid fee is possible and the organization believes the litigants have a sufficient commercial or financial interest in the outcome of the litigation to justify retention of a private law firm. The organization may, in cases of sufficient broad public interest, represent the public interest as amicus curiae or intervenor in such cases.

    5. The total amount of all attorneys’ fees, both court awarded and from clients, must not exceed 50 percent of the total cost of the organization’s legal function operations. The percentage is calculated over a five year period which included the taxable year in which the fees are received and the four preceding taxable years or lessor period of existence. The costs of the legal function include attorneys’ salaries, nonprofessional salaries, overhead and other direct costs.


      An organization may submit a ruling request where an exception to the 50 percent limitation appears warranted.

    6. The organization will not seek or accept attorneys’ fees that would result in a conflict with state statutes or professional canons of ethics.

    7. Attorney fees must be paid to the organization not to individual staff attorneys. Staff attorneys and employees must be compensated by a straight salary that does not exceed reasonable amounts and is not established in connection with case fees received for cases handled.

    8. The organization’s annual information return must include a report of all attorneys’ fees sought and recovered in each case.  (04-01-2003)
Miscellaneous Concerns

  1. Review litigation in which litigants made payments to the firm. Analyze and review corporate minutes, correspondence and contracts to determine if there are any direct or indirect arrangements to allow a charitable contribution deduction for the cost of litigation that is for the private benefit of the donor. If such an arrangement is found, the examiner should consider making a discrepancy adjustment to the donor's income tax return or making a referral to SBSE or LMSB on Form 5666, TEGE Information Report.

  2. Review financial records for evidence of fee splitting with private law firms. See Rev. Rul. 76-5, 1976-1 C.B. 146.

  3. Legal work or litigation performed for a fee that is not performed for a public interest does not further IRC § 501(c)(3) purposes even if done for another exempt organization. This type of fee income is subject to unrelated business income tax.

More Internal Revenue Manual