Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-76

1975-1 C.B. 154

Sec. 501

IRS Headnote

Public interest law firm; fees awarded by court or administrative agency. An exempt public interest law firm's policy of accepting only fees awarded or approved by a court or an administrative agency and paid by an opposing party will not adversely affect its exemption under section 501(c)(3) of the Code.

Full Text

Rev. Rul. 75-76 [fn1]

Advice has been requested whether the recovery of fees described below by an exempt public interest law firm will adversely affect its recognition of exemption under section 501(c)(3) of the Internal Revenue Code of 1954.

The public interest law firm has been previously recognized as exempt from Federal income tax under section 501(c)(3) of the Code. Except for its practice of accepting court or agency awarded fees, the organization is similar to that described in Rev. Rul. 75-74, page 152, this Bulletin, and is operated in conformity with Rev. Proc. 71-39, 1971-2 C.B. 575 and Rev. Proc. 75-13, page 662, this Bulletin.

The public interest law firm's retainer agreement form authorizes it to retain any attorneys' fees that may be awarded or approved by a court or an administrative agency against an opposing party. If fees are awarded or approved by a court or agency, the fees are paid to the firm and are used to defray its normal operating expenses. To date, the firm has received two such fees and they have been used to defray only a small percentage of its operating expenses. In neither case did the expectation or probability of a fee affect the firm's decision to accept the case.

Under the firm's policy, it will only accept attorneys' fees awarded by a court or an administrative agency in a public interest case or approved by a court or an administrative agency in a settlement agreement in a public interest case. In either event, the fees will be paid by the opposing party in the litigation and not by the firm's client.

It is the firm's policy that it will not select its cases or clients on the basis of any potential fee recovery. The firm anticipates that most of its support will continue to be provided by 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.

As discussed in Rev. Rul. 75-74, the recognition of a public interest law firm as charitable is based on its providing legal representation for the resolution of issues of broad public importance where such representation is not ordinarily provided by traditional private law firms.

Rev. Rul. 75-75, page 154, this Bulletin, holds that a public interest law firm that has a policy of charging or accepting attorneys' fees from its clients is not distinguishable from a private law firm and is not operating exclusively for charitable purposes.

As a general rule, United States courts do not award attorneys' fees to the prevailing party. Fees are awarded only under a specific statutory authorization or in special circumstances in which the court concludes that equity compels the award of fees. Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970). In either case, the award of attorneys' fees serves to effectuate some legislative or judicial policy in deterring or encouraging certain actions, for which the Court determines that the opposing party should pay all or part of the cost. See Newman v. Piggie Park Enterprises, Inc., 309 U.S. 400 (1968). Thus, the award or acceptance of attorneys' fees by public interest law firms in these situations is consistent with and tends to support the statutory and public policy objectives in awarding such fees.

Unlike fees paid by clients described in  Rev. Rul. 75-75, the after-the-fact award of attorneys' fees does not necessarily indicate that the case involved a sufficient economic interest to warrant the utilization of private counsel. Ordinarily, there is little correlation between the award of a fee and the economic feasibility of the litigation to the client. Accordingly, the receipt of fees awarded against an opposing party is not necessarily inconsistent with the basis of charitable exemption of public interest law firms.

However, the likelihood or certainty of an award of fees is a factor affecting the appropriateness of the particular litigation for a public interest law firm. Certainty of an award of fees, or even a strong probability, would suggest that the issue may be economically feasible for the client and thus may not be proper for the public interest law firm to undertake. In order for its exempt status to be unaffected by the receipt of awarded fees, it must be clear that neither the expectation nor the possibility, however remote, of an award of fees is a substantial motivating factor in the selection of cases. As legal precedent is developed indicating the strong possibility of the recovery of fees, certain issues may become economically feasible for private litigants and thus inappropriate for public interest law firm participation.

The above exempt public interest law firm's recovery of fees, policy on fees, and selection of cases are in conformity with the basis for its exemption as a charity. Accordingly, the firm's recovery of fees awarded or approved by a court or an administrative agency and paid by an opposing party will not adversely affect its recognition of exemption under section 501(c)(3) of the Code.

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