Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-75

1975-1 C.B. 154

Sec. 501

IRS Headnote

Public interest law firm; fees from clients. A nonprofit public interest law firm that has an established policy of charging or accepting fees from its clients does not qualify for exemption under section 501(c)(3) of the Code.

Full Text

Rev. Rul. 75-75 [fn1]

Advice has been requested whether the nonprofit organization described below qualifies for exemption from Federal income tax under section 501(c)(3) of the Internal Revenue Code of 1954.

The organization was created and is operated as a public interest law firm. The organization is similar to the public interest law firm described in Rev. Rul. 75-74, page 152, this Bulletin, except for its procedure of charging and accepting certain client fees.

Some of the organization's clients are groups of individuals or organizations that have some financial resources from which they are willing to help pay for the services rendered. In these cases, the organization charges or accepts reasonable attorneys' fees from its clients.

The policy of the organization is to charge or accept a fee less than the normal fee that would be charged by a private law firm. Also, under the organization's policy, the fee charged or accepted in a particular case will not exceed the actual costs in that case. The organization anticipates that a substantial amount of its support will continue to be derived from grants and contributions rather than from client fees.

The organization pays its employees reasonable salaries that are not set in reference to any fees received from their practice.

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

Rev. Rul. 75-74 provides that the recognition of public interest law firms as charitable is based on their provision of legal representation for the resolution of issues of broad public importance where such representation is not ordinarily provided by traditional private law firms.

As explained in Rev. Rul. 75-74, public interest law firms are charities only so long as they provide representation in cases of important public interest that are not economically feasible for private firms. In the typical public interest case, no individual plaintiff has a sufficient economic interest to warrant the retention of a traditional law firm and, because the interested individuals are so varied and diffused, it is not practical to rely upon collective financing.

If a public interest law firm has an established policy of charging or accepting attorneys' fees from its clients, the representation provided cannot be distinguished from that available through traditional private law firms. In this circumstance, it cannot be said that the expectation of compensation for the legal services rendered would not be a motivating factor in undertaking the representation. Representation which is commercially feasible cannot be distinguished from representation which is not solely on the basis of the amount of the fee the clients might be willing to pay. The practice of law is competitive with some law firms charging less than others. Of the cases handled by traditional private law firms, some result in profit, but some do not. Also, traditional law firms can operate at a loss, just as any other business organization. Thus, only where public interest law firms do not charge or accept any attorneys' fees from clients can it clearly be established that they are providing representation not available from traditional private sources.

Because the above described organization charges or accepts attorneys' fees from its clients, it is not distinguishable from a private law firm and is not operating exclusively for charitable purposes. Accordingly, the organization does not qualify for exemption from Federal income tax under section 501(c)(3) of the Code.

Compare Rev. Rul. 75-76, below, for the effect of court awarded attorneys' fees on the charitable status of public interest law firms.

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