Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 75-74

1975-1 C.B. 152

Sec. 501

IRS Headnote

Public interest law firm. A public interest law firm that provides representation in cases it selects as having significant public interest and for which representation by traditional private law firms is not economically feasible is operated exclusively for charitable purposes and qualifies for exemption under section 501(c)(3) of the Code.

Full Text

Rev. Rul. 75-74 [fn1]

Advice has been requested whether the nonprofit organization described below, which otherwise qualifies for exemption from Federal income tax under section 501(c)(3) of the Internal Revenue Code of 1954, is operated exclusively for charitable purposes.

The organization is organized and operated as a public interest law firm in accordance with the guidelines set forth in Rev. Proc. 71-39, 1971-2 C.B. 575 and Rev. Proc. 75-13, page 662, this Bulletin. The organization represents clients in court and in proceedings before administrative agencies.

The organization has engaged in "public interest" litigation in areas such as environmental protection, urban renewal, prison reform, freedom of information, injunction suits challenging governmental and private action or inaction, and "test" cases of significance to the public.

Under its articles of incorporation and by-laws, the overall management of the organization is vested in a board of governors, the majority of whom are attorneys. The members of the board are prominent attorneys, law professors, and leaders of public interest organizations.

Several members of the board of governors comprise a litigation committee, whose function is to determine, for each proposed case, whether the case meets certain criteria for selection. The criteria of the Committee include: whether the case involves a matter of important public interest; whether the individuals or groups involved cannot afford competent private legal counsel; whether the case affords opportunities for participation by law students; and whether the organization's resources are adequate in view of the complexity of the case.

The organization does not accept cases in which private persons have a sufficient economic interest in the outcome of the litigation to justify the retention of private counsel. The organization's financial support is derived from grants and contributions.

Section 501(c)(3) of the Code provides for the exemption from Federal income tax of organizations organized and operated exclusively for charitable purposes.

Section 1.501(c)(3)-1(d)(2) of the Income Tax Regulations provides that the term "charitable" is used in section 501(c)(3) of the Code in its generally accepted legal sense.

In Rev. Proc. 71-39, 1971-2 C.B. 575, the Internal Revenue Service announced guidelines pursuant to which it would recognize public interest law firms as exempt from the Federal income tax as organizations described in section 501(c)(3) of the Code.

Organizations meeting the guidelines of  Rev. Proc. 71-39 are recognized as charities because they provide a service which is of benefit to the community as a whole. They provide legal representation on issues of significant public interest where such representation is not ordinarily provided by traditional private law firms. In this way, the courts and administrative agencies are afforded the opportunity to review issues of significant public interest and to identify and adjudicate that interest.

Charitability rests not upon the particular positions advocated by the firm, but upon the provision of a facility for the resolution of issues of broad public importance. See Hearings on Tax Exemptions for Charitable Organizations Affecting Poverty Programs, Senate Subcommittee on Employment, Manpower, and Poverty, 91st Cong., 2d Sess. 60, 61 (1970). For this reason, section 3.05 of Rev. Proc. 71-39 recognizes that it is for the public interest law firm itself, through a board or committee representative of the public interest, to select the cases in which representation is warranted.

Charitability is also dependent upon the fact that the service provided by public interest law firms is distinguishable from that which is commercially available. It is a general rule of charity law that the providing of an ordinary commercial service to the members of a community, even if done on a not-for-profit basis, is not regarded as charitable.

It is generally recognized that public interest representation is not ordinarily provided on a continuing basis by private law firms. Although a number of reasons have been given for the inability of private firms to provide sufficient representation of this type, it is primarily due to the fact that this type of representation is not economically feasible for private firms. In the typical public interest case, no individual plaintiff has a sufficient economic interest to warrant his bearing the cost of retaining private counsel. Even if the community as a whole has a significant cumulative economic interest, individual interests are generally so varied and diffused that it is not practical to rely upon collective financing of such cases.

This lack of economic feasibility in public interest cases is an essential characteristic distinguishing the work of public interest law firms from that of private firms and is a prerequisite of charitable recognition. For this reason section 3.01 of Rev. Proc. 71-39 provides that the activity of public interest law firms 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.

The above described organization, which otherwise qualifies for exemption and which is operated in conformity with the guidelines of Rev. Proc. 71-39, provides representation in cases of important public interest that are not economically feasible for private firms. Accordingly, it is operated exclusively for charitable purposes and qualifies for exemption under section 501(c)(3) of the Code.

Even though an organization considers itself within the scope of this Revenue Ruling, it must file an application on Form 1023, Application for Recognition of Exemption, in order to be recognized by the Service as exempt under section 501(c)(3) of the Code. The application should be filed with the District Director of Internal Revenue for the district in which is located the principal place of business or principal office of the organization. See sections 1.501(a)-1 and 1.508-1(a) of the regulations.

[fn1] Also released as TIR-1348, dated February 19, 1975.