IRS Issues New Guidelines Applicable to Public Interest Law Firms

On October 9, 1970 the Internal Revenue Service announced that it was beginning a sixty-day review of the tax-exempt status of § 501(c)(3) organizations which supported or directly undertook the litigation of environmental, consumer or related "public" issues. The IRS's announcement attempted to define traditional public servicelitigation, e.g. charitable neighborhood legal services, in such a way as to exclude them from the review.

On November 12, 1970 the IRS completed its review of the tax status of the organizations concerned. The new regulations, printed in part below, show that the review was favorable to the organizations whose status was challenged. In the 33-day review period, the IRS received comments supporting the tax-exempt status of the organizations from a variety of sources. Russel E. Train, Chairman of the Council on Environmental Quality, William Ruckelshaus, Director of the new Environmental Protection Agency (at the time not yet confirmed), numerous Senators and Representatives and others opposed the possible withdrawal and future withholding of the exemption from organizations whose purpose is the protection of the environment and other public interests through litigation.

[1 ELR 10014]

Portions of the IRS announcement follow:

Where an organization of the newer type presents a program designed to serve the public interest through litigation and adopts the guidelines reflected below, the service will rule that it meets the test of being exclusively charitable and thus exempt under Section 501(c)(3) of the Internal Revenue Code. Organizations of this type having favorable rulings are asked to adopt these guidelines and advise the Service of the fact within 90 days.

These guidelines, however, are not inflexible rules and an organization will be given the opportunity to demonstrate that under the facts and circumstances of its particular program, adherence to the guide lines is not required in certain respects in order to ensure that the operations are "exclusively charitable."

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1. The engagement of the organization in litigation can reasonably be said to be in representation of a broad public interest rather than a private interest. The litigation is designed to present a position on behalf of the public at large on matters of public interest. … The activity would not normally extend to direct representation of litigants in actions between private persons where their financial interests at stake would warrant representation from private legal sources. In such cases, however, the organization may serve in the nature of a friend of the court.

2. The organization does not accept fees for its services except in accordance with procedures approved by IRS.

3. The organization does not attempt to achieve its objectives through a program of disruption of the judicial system, illegal activity, or violation of applicable canons of ethics.

4. The organization files with its annual information return a description of cases litigated and the rationale for the determination that they would benefit the public generally.

5. 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 Section 501(c)(3) of the Internal Revenue Code.

6. The ornganization 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.

7. 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.

8. The organization must otherwise comply with the provisions of Section 501(c)(3).