Tuesday, October 3, 2023
A Washington Post story over the weekend made me think about tax exempt law firms and how curiously they are treated by tax exemption jurisprudence. The curiosity, to my mind, is explained below the fold. For now, the story involved Arizona State University's legal clinic and its representation of Kari Lake, who would caucus with Matt Gaetz and Marjorie Taylor Green if she were ever elected to Congress. You get what I'm saying.
In August, some university donors and alumni were flummoxed to see the Arizona State clinic listed as “Counsel for Defendant Kari Lake” on a motion to dismiss a defamation lawsuit filed against her by a Republican election official. In the suit, Stephen Richer, recorder for Maricopa County, alleges that Lake falsely accused Richer of intentionally sabotaging the gubernatorial election to help her opponent, resulting in violent threats against Richer and his family. In its motion for dismissal, the university clinic argues that Richer’s suit is an attempt to squelch Lake’s free-speech rights.
The clinic, which is formally known as the ASU Sandra Day O’Connor College of Law First Amendment Clinic, often takes controversial cases. But this isn’t just any case, and Lake isn’t just any client. By defending her, the clinic has thrust the university into a national debate about the line between heated political rhetoric and defamatory speech that may endanger individuals and undermine public confidence in elections. It’s also a curious partnership for a politician who has railed against the university, which she has described as a “very liberal campus” caught in the clutches of “wokeism.”
The Lake case is a great opportunity for law students to work on a potentially precedent-setting legal matter, said Gregg Leslie, a longtime media lawyer and executive director of the clinic. The clinic’s motion argues that the lawsuit is invalid because of Arizona’s anti-SLAPP law — short for Strategic Lawsuits Against Public Participation. Such laws allow courts to dismiss claims designed to stifle speech. Arizona recently broadened its law, expanding the parameters of who can bring an anti-SLAPP case, and Leslie says the clinic wants to test it.
I don't much like Kari Lake, none. Hardly any of her RINO [in her estimation] colleagues like her either. But the clinic is doing what it ought to do. It takes cases based on the clinic's perception that the case involves issues of broad public importance and without regard to the client's ability to pay for the services. That's the way its supposed to work even though, as the article points out, Kari Lake can afford her own attorneys. A lot of donors disagree but that's fair too. It is appropriate for donors to decide for any reason whatsoever to object to an exempt firm's representation and withhold their money. That's the way its supposed to work. But the exempt law firm itself should select cases and provide representation for plaintiffs who are take positions on issues of broad public importance. I am ignoring the educational basis for tax exemption here, only to focus on tax exempt law firms that are not explicitly trying to teach students:
Legal clinics, which offer law students practical experience, are ubiquitous in law schools. So is criticism of their work, even from their own universities. Robert Kuehn, who co-chairs an American Association of Law Schools committee on political interference in law clinics, said the institutions “are supposed to exercise independent, professional judgment and render candid advice.” It would be “completely inappropriate,” he said, for a university administrator to overrule or second-guess a clinic taking on a client, no matter how polarizing.
Below the fold, I provide a brief summary of the law relating to tax exempt law firms.
darryll k. jones
As with exempt health care, I am not sure the law has ever been comfortable with the notion that a service essential to life -- in the case of law firms, I'm talking about conflict resolution or vindicating fundamental rights -- but which is also a service subject to unlimited demands (i.e. profit) ought to support tax exemption. So in an early ruling, the service prohibited fee earning law firms, even those that charge discounted rates, from ever achieving tax exempt status:
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.
In that same bulletin, though, the Service ruled that a nonprofit law firm litigating cases involving "broad public importance where such representation is not ordinarily provided by traditional law firms" can be tax exempt if it retains court or administratively awarded attorney fees. Maybe that means there can be no such thing as a exempt personal injury firm. And then finally, in Revenue Procedure 92-59, the Service that tax exempt law firms may serve paying clients (though not just like exempt hospitals):
Client-paid fees may not exceed the actual cost incurred in each case, viz., the salaries, overhead, and other costs fairly allocable to the litigation in question. Costs may be charged against a retainer, with any balance remaining after the conclusion of the litigation refunded to the litigant. Once having undertaken a representation, a public interest law firm may not withdraw from the case because the litigant is unable to pay the contemplated fee.