Friday, August 6, 2004

Ellen Aprill (Loyola-L.A.) sparked an interesting thread on the TaxProf Discussion Group about the hidden tax issue in the New York Times article on the Southern California entrepreneur hoping to franchise his “Legal Grind” idea of combining legal advice with lattes:

The Legal Grind coffee house in L.A. also provides legal advice – $25 for 15 minutes of advice. The article says the owner wants to franchise the service and “is considering changing Legal Grind into a nonprofit corporation” in order to “give it access to tax-free charitable donations and government grants.” The article also says the services are aimed at middle class clients.

Franchise law experts are quoted in the article, but no tax lawyers. But the proposal would appear to run afoul of the IRS standards for law firms to qualify as charitable, as set forth in Rev. Proc. 92-59. (I have more than once found myself explaining to skeptical listeners wanting to offer nonprofit legal services that providing health care to the middle class is considered charitable as a community benefit, but the same is not true for legal services.) But are there other ways to structure the Legal Grind to qualify for tax-exempt status — such as an educational organization like some credit counseling services do?

Darryll Jones (Pittsburgh) followed up with a suggested path for tax-exempt status:

I can think of a way to articulate a charitable purpose with regard to the operation. I wouldn’t call it a “law firm” in the Rev. Rul. 92-59 sense since it appears from your description that the attorneys are really just giving referral type advice. But what if they called it the “Dispute Resolution Center” and billed it as a means to assist people in resolving community disputes (i.e., “lessening neighborhood tensions) peacefully by encouraging peaceful conflict resolution on subjects ranging from consumer disputes, police disputes, disputes with neighbors and landlords, etc (i.e., a more privately funded Neighborhood Legal Services focusing more on ADR than litigation). If that were the case, the charitable purpose requirement would seem easily satisfied.

Now if the advice leads to longer term representation by the insiders or a select group of attorneys, there may be some private benefit problems that indicate the attorneys are not really in it to make the world a better place (but instead to line their own pockets). Likewise, if the $25 fee is such that the attorneys accumulate lots of cash there could be a commerciality problem. And then finally, if the firms are all located in only Starbucks, there is a different sort of private benefit problem.

For attorneys who are really into helping with neighborhood tensions or really into assisting people understand or gain access to the legal system, I think the problems could be worked out and a charitable purpose articulated.