TEXAS LAW REVIEW VOLUME 50 MARCH 1972 NUMBER 3 CHARITABLE DEDUCTIONS FOR PRO BONO PUBLICO PROFESSIONAL SERVICES: AN UPDATED CARROT AND STICK APPROACH PETER D. BAIRD* Although charitable contributions of money or property may To a significant degree, lawyers and other professionals work for lucre. Until the proper economic incentive can be found, America's pro bono legal problems will be handled largely, if at all, by a patchwork of traditional legal aid societies, government programs, a few public interest law firms, foundations, a variety of special interest organizations, and some private practitioners.1 This mélange has been unable to do the entire job, especially for the poor.2 One answer is obvious. The private law firms, with their numbers, • Member of the State Bar of Arizona. B.A., 1963, Carleton College; LL.B., 1966, Stanford. The author is grateful for the assistance of many at his law firm, particularly John P. Frank, Paul M. Roca, and Arthur P. Allsworth, and of his lawyer and wife, Sara Baird. 1 See 42 U.S.C. §§ 2701-2994 (1970); Samore, Legal Services for the Poor, 32 Albany L. REV. 509 (1967-68); Voorhees, Legal Aid: Past, Present and Future, 56 A.B.A.J. 765 (1970); Wilging, Financial Barriers and the Access of Indigents to the Courts, 57 GEO. L.J. 253 (1968); Comment, The New Public Interest Lawyers, 79 YALE L.J. 1069 (1970). 2 "The traditional pro bono publico role of the private attorney and the efforts of government and privately supported legal aid have proved insufficient to meet the needs of unrepresented individuals and interests who are locked in the poverty cycle and unable to secure legal services." Ashman & Woodard, Private Law Firms Serve the Poor, 56 A.B.A.J. 565 (1970). "Despite the broadening of the legal aid program, in many cities and less populous areas the poor have few, if any, legal services from organized legal aid available to them, and equal justice is a reality in much less than half of the major communities of the country." Voorhees, supra note 1, at 767. “[T]here aren't enough lawyers to serve poor people ." Wexler, Practicing Law for Poor People, 79 YALE L.J. 1049, 1055 (1970). “[T]his vast program appears only to have scratched the surface of the widespread need for such services. . . . It has been estimated that between 14 and 20 million legal problems of the poor each year merit the attention of a lawyer." Wilging, supra note I, at 268, 269. See Comment, Unavailability of Lawyer's Services for Low Income Persons, 4 VALPARAISO U.L. REV. 308 (1970). 442 TEXAS LAW REVIEW [Vol. 50:441 experience, expertise, and political influence, must assume a more active role. Observing that "[t]he practicing bar has remained largely aloof," Justice Brennan asks us to face the "problem of devising more and better ways for lawyers to serve the public interest even while they remain fully engaged in private practice." Indeed, canon 8 of the new Code of Professional Responsibility states that “[t]he fair administration of justice requires the availability of competent lawyers" and that "[t]hose persons unable to pay for legal services should be provided needed services."5 Words alone, like those high sounding but too often hollow phrases in canon 8, will not reshape our profession. There must be an economic incentive. Before desperation pushes us to an expanded, federally funded program with its high cost, controls," politics,8 bureaucracy, and threat to the independence of the bar, we should experiment with something less drastic. Consider a charitable deduction for lawyers and other professionals who render services to or through a tax exempt organization, 3 There is a persistent cry for greater participation by the private bar. See Cahn & Cahn, Power to the People or the Profession?-The Public Interest in Public Interest Law, 79 YALE L.J. 1005, 1025 (1970) ("[P]rivate law firms must become involved on an institutional basis in public interest work...."); Kirgis, Law Firms Could Better Serve the Poor, 55 A.B.A.J. 232 (1969) (“[I]ncreased systematic participation by private law firms is not only desirable, but inevitable ."); See also Ashman & Woodard, supra note 2; McGonagle, New Lawyers and New Law Firms, 56 A.B.A.J. 1139, 1140 (1970). 4 Brennan, The Responsibilities of the Legal Profession, 54 A.B.A.J. 121, 122, 125 (1968). 5 ABA, CODE OF PROFESSIONAL RESPONSIBILITY, Canon 8, Ethical Consideration 8-3, at 33 (1969). 6 The federal government has increasingly become the sustaining economic force behind public service poverty law in America today. "In 1964, 51 per cent of the financial support of legal aid came from community funds, 17 per cent from bar associations or lawyers and the balance from miscellaneous sources." Voorhees, supra note 1, at 767. By 1969, 82% or $45 million of the total $55 million budget came from the federal government. Id. And this money is not adequate; to handle the present case load properly, it is estimated that "the OEO legal services budget would have to be doubled." McGonagle, supra note 3, at 1140. Moreover, when funding judicare, which involved paying private lawyers with government money, the cost of these services was high: "[T]he cost per case under judicare is running almost three times that of the neighborhood law offices." Schlossberg & Weinberg, The Role of Judicare in the American Legal System, 54 A.B.A.J. 1000, 1003 (1968); Robb, Alternate Legal Assistance Plans, 14 CATHOLIC Law. 127, 135 (1968). 7 Federal funds inevitably entail federal strings. For example, judicare required "a large amount of federal control." Schlossberg & Weinberg, supra note 6, at 1004. See also The New Public Interest Lawyers, 79 YALE L.J. 1069, 1106 (1970) ("A central difficulty arising from the need to seek financing from sources other than clients is that the source of funds may place explicit or implicit conditions on their use which make the lawyer less effective in his advocacy."). 8 With federal funding comes political debate about the legal services that are being underwritten. See generally McGonagle, supra note 3; Hannon, Legal Services and the Local Bars; How Strong Is the Bond?, 6 CAL. WESTERN L. REV. 46 (1969). 9 A legitimate concern has been voiced that some lawyers could become dependent upon government under the judicare program. See Robb, supra note 6, at 136. See also Hannon, supra note 8. Preserving the independence of the bar is essential to our system of freedom. See generally Black, The Lawyer and Individual Freedom, 21 Tenn. L. Rev. 461 (1950). 1972] PRO BONO TAX DEDUCTIONS 443 such as a legal aid society.10 The personal contribution of professional services can certainly be as significant and meaningful as the impersonal donation of cash or property. Apart from administrative considerations, there is no compelling reason to differentiate between absentee charity based on the transfer of money or property and the donation of professional time and talent. One purpose for the charitable deduction is to encourage the private sector to perform tasks that otherwise would fall on government." By creating an incentive for private practitioners to become personally involved in the pro bono work of our time, to represent the poor who come to legal aid societies for help, or to build the corporate structures of organizations dedicated to protecting the environment, we may avoid the necessity of greatly expanded federal participation. It is impossible to measure the strength of the incentive. However, since the charitable deduction for a partnership inures to the benefit of individual partners, 12 the senior partners in high tax brackets may be more interested in allowing or even directing the firm's associates to engage in pro bono legal work for qualified organizations. Congress has never clearly said that section 170(c), which allows a deduction for "a contribution or gift to or for the use of's certain organizations, is restricted to the transfer of property or money. Since 1920, however, the Treasury Department has ruled consistently that "[t]he value of services rendered to charitable institutions may not be allowed as a deduction."14 Thus, there is a regulation stating that “[n]o deduction is allowable for contribution of services."15 Making professional services deductible undoubtedly would entail an amendment to section 170(c). Even though section 170(c) is not on its face restricted to money or property, a formal amendment, rather 10 Legal aid societies are eligible for tax exempt status. Rev. Rul. 69-161, 1969-1 CUM. BULL. 149. See also Dulles v. Johnson, 273 F.2d 362, 367-68 (2d Cir. 1959) (“[P]roviding free legal service through participation in legal aid, and providing low cost legal service through participation in a legal referral system. are in our opinion, educational and charitable."). Tax-Exempt Status for Legal Aid-Lawyer Reference, 25 LEGAL AID BRIEFCASE 21 (1966). 11 HOUSE COMM. ON WAYS AND MEANS, H.R. REP. No. 1860, 75th Cong., 3d Sess. 19-20 (1938): The exemption from taxation of money or property devoted to charitable and other purposes is based upon the theory that the Government is compensated for the loss of revenue by its relief from financial burden which would otherwise have to be met by appropriations from public funds, and by the benefits resulting from the promotion of the general welfare. 125 J. MERTENS, Law of Federal Income Taxation § 31.32 (rev. ed. 1969). 13 INT. REV. Code of 1954, § 170(c). 14 O.D. 712, 3 CUM. BULL. 188 (1920). See Rev. Rul. 57-462, 1957-2 CUM. BULL. 157 (in which free newspaper space donated to charity was held to be a service and thus nondeductible); Rev. Rul. 162, 1953-2 CUM. BULL. 127 (in which the donation of blood was held to be nondeductible as a service); See also Chommie, Federal Income Taxation: Transactions in Aid of Education, 58 DICK. L. REV. 189, 190 (1954); Smith, Income Tax Planning for Charitable Gifts, 1953 ILL. L.F. 601, 611 (1953). 15 Treas. Reg. § 1.170-2(a)(2) (1958). 444 TEXAS LAW REVIEW [Vol. 50:441 than a test case, would be required to accomplish the change. The longstanding revenue rulings,16 the regulations, the tax court position,18 the reenactment doctrine,19 persuasive case authority,20 and congressional statements21 would all combine to prevent any judicial declaration that section 170(c) includes the contribution of services. Obvious problems surround this proposal. To prevent an unacceptable erosion of our tax base, limitations should be imposed on the breadth of any. deduction for charitable services. To avoid widespread abuse, there must be realistic administrative means of verifying and measuring the services contributed. There are at least two fundamental ways of restricting the scope of the proposed deduction. First, the eligibility of recipient organizations could be limited. Secondly, criteria could be drawn for the services themselves. At an absolute minimum, the recipient would have to be a charitable organization in order to fit within the present framework of section 170(c)22 and to avoid the administrative problem of policing charitable contributions made to other than qualified organizations. As a further limitation, the recipient's eligibility could hinge upon its being "organized and operated exclusively"23 to work 16 See note 14 supra. 17 See Treas. Reg. § 1.170-2(a)(2) (1958). There was an earlier regulation, § 29.23(0)-1, of Regulations 111, which provided that if the gift is other than money the basis for calculation of the amount would be the fair market value of the property at the time of the contribution or gift. This was relied upon in a revenue ruling which predated Treas. Reg. 1.170-2(a)(2) (1958), and which held services to be nondeductible. Rev. Rul. 162, 1953-2 CUM. BULL. 127. 18 Confronted with the claim by a lawyer and his wife that "they are entitled to deduct as a charitable contribution the value of legal services performed for their church," the tax court avoided the substantive issue and simply ruled that "the deduction must be disallowed here for failure of proof." Joseph P. Monaghan, 16 CCH Tax Ct. Mem. 159, 161 (1957). is Helvering v. Winmill, 305 U.S. 79, 83 (1938) ("Treasury regulations and interpretations long continued without substantial change, applying to unamended or substantially reenacted statutes, are deemed to have received congressional approval and have the effect of law."). See generally 1 J. MERTENS, supra note 12, § 3.22. 20 See Orr v. United States, 343 F.2d 553 (5th Cir. 1965). In Orr a claim for depreciation expense on an automobile used for charitable purposes was denied in part because "[a] depreciation expense... is not a 'payment', not a transfer of money or property." Id. at 556 (emphasis added). The court noted that “payment' is an essential part of the definition of 'charitable contribution' in section 170(c)." Id. (emphasis added). 21 Although no clear or definitive guideline can be extracted from the legislative history of provisions for charitable deductions, there are repeated statements concerning wealth, money, property, amounts, and payments indicating that the deduction has been intended for tangible contributions of money and property. See generally HOUSE CONF. COMM., H.R. REP. No. 172, 65th Cong., 1st Sess. 32" (1917); HOUSE COMM. ON WAYS AND MEANS, H.R. REP. No. 1860, 75th Cong., 3d Sess. (1938). 22 This statute requires that the contribution be "to or for the use of... a corpora tion, trust, or community chest, fund, or foundation . . . ." See also Rev. Rul. 62-113, 1962-2 CUM. BULL. 10, 11 ("If contributions to the fund are earmarked by the donor for a particular individual, they are treated, in effect, as being gifts to the designated individual and are not deductible."). 23 Under INT. REV. CODE OF 1954, §§ 170(c)(2)(B), 501(c)(3), this phrase has acquired a fairly well-established meaning that could be used in the context of this proposal. |