I want to thank you on behalf of the AICPA for the opportunity to present our position.

Senator PACKWOOD. You raise a very valid point and I can assure you it is one that never occurred to me. In the past, there was no discussion and that is not unique; it happens frequently. The issue just never occurred to us and I think it is one we should resolve. Mr. BLEYER. Thank you.

Senator PACKWOOD. I have no questions. Senator Matsunaga, do you have any questions?

Senator MATSUNAGA. Thank you, Mr. Chairman. Being the father of a lawyer and a CPA, I wonder what Mr. Bowles' view on Mr. Bleyer's comment is.

Mr. BOWLES. It is interesting. The beneficiary groups that we are in contact with, the actual employees, those labor organizations, getting tax advice is important to them I think. They talk about it. The problem needs to be researched and developed. I think it would be good.

Senator MATSUNAGA. The question really is where those legal services begin and end.

Senator PACKWOOD. I practiced law for 10 years, mostly labor law. Then, many people, if not most, went to CPA's who were better qualified to give tax advice than I was. It was not my field of law and yet I can see that under this plan, people would come and ask for tax advice of a lawyer who is simply not in a position to give it, and probably should not give it.

It is a really valid point.

Mr. BLEYER. Thank you.

Senator PACKWOOD. Gentlemen, thank you very much. I appreciate it.

[Prepared statements of the preceding panel follow:]

PREPARED STATEMENT OF David R. BRINK

Dear Mr. Chairman and Members of the Subcommittee: My name is David R. Brink. I am currently the President-Elect of the American Bar Association. I am also a lawyer practicing in Minneapolis, Minnesota. My purpose today is to state the American Bar Association's strong support for S. 1039, which, as you know, would make permanent Section 120 of the Internal Revenue Code.

As the Committee knows, Section 120 establishes the concept of a "qualified legal services plan." It provides that employees may exclude from their taxable incomes contributions made by an employer to such a plan or the value of any legal services received by the employee under the plan.

The real significance of Section 120 is that it makes it possible for employers to provide legal services as a benefit to employees the same way as they provide health care benefits. The Section is therefore a means by which middle income Americans can afford the legal assistance they need to gain full access to our justice system. Unfortunately, many Americans encounter legal problems that go unresolved because legal fees are not anticipated in their monthly budgets as are other needed items. Medical care is provided through employer payments or monthly deductions from the paycheck. Food, housing, an automobile, life insurance and other items are usually paid for on a monthly basis. Before group legal plans, legal fees, when incurred, had to come out of money left over at the end of the month, money which for many Americans simply does not exist.

A comprehensive 1974 survey of the legal needs of the public conducted by the National Opinion Research Center for the American Bar Foundation indicates more than 35 percent of the population, in a year's time, encounter problems that could be solved by a lawyer, but that only 10 percent actually seek legal assistance. By contrast, our information is that an average of 20 percent of the covered employees in a group plan seek legal services each year. This tends to show that twice as many people are enabled to obtain legal assistance in resolving everyday legal problems by participating in a group plan.

These employee-users, in the main, are receiving preventive legal services that often make it possible to avoid litigation or serious or protracted remedial services. Thus, group legal plans tend to preserve employee morale and productivity and assist in unblocking our overburdened judicial system.

The ABA commenced its support of similar legislation in 1974. In 1976, Congress enacted the legislation, wisely building in a "sunset" provision to permit review after five years of experience. During_that_interval, the Internal Revenue Service has proposed regulations with which the ABA does not necessarily fully agree. We believe that the regulations can be adjusted through the administrative process, and would be glad to offer our assistance should clarifying legislation become necessary. The past five years, however, have shown marked increases in the number of group legal plans and participants. The participants receive better preventive services, employers find better morale and productivity among employees and our society comes a significant step closer to achieving our ideal of equal justice for all our citizens.

The ABA believes the time has come to make permanent the concept of the qualified group legal services plan. We therefore strongly urge the passage of S. 1039.

PREPARED STATEMENT OF JAMES W. BOWLES

I am James W. Bowles. I appear as Executive Director of Oregon Prepaid Legal Insurance Inc. (OPL). OPL is an Oregon non-profit service corporation created in 1973 as a result of a study prepared by the prepaid legal committee appointed by the Board of Governors of the Oregon State Bar. The program was designed and operates to meet the personal legal service needs of Oregon's middle income working people. The plan is sponsored by the Oregon State Bar, but operates independently, and is underwritten by Midwest Mutual Insurance Company.

I appear before this committee in support of Senate Bill 1039 to make permanent the tax provision enacted in 1976, which was designed to encourage employers to provide prepaid legal services for their employees.

The Oregon plan provides a broad range of prepaid legal services. The cornerstone of our program provides what is termed preventative legal services and includes advice in regard to virtually any personal legal problem or transaction, consultation, document review and document preparation. The plan also covers: Non-business bankruptcy; dissolution of marriage, separation or annulment; court adoption proceedings; insanity or infirmity proceedings; juvenile court proceedings; traffic matters; defense of criminal charges; and defense of civil actions.

Legal services are provided by over 1,400 participating attorneys located throughout Oregon who agree to accept what the plan pays as payment in full, thus eliminating almost all out-of-pocket expense for attorneys' fees.

The plan is designed to encourage the beneficiaries to take care of legal matters as necessary before they become troublesome, to prevent "waiting until it's too late" so to speak.

During the first three years of OPL's existence we were able to sell only two plans, covering just over 100 beneficiaries. Employers were unwilling to fund legal service benefits until the cost of the benefits could be considered exempt income to the employees and could be treated and administered in the same manner as other recognized and qualified health and welfare benefits.

OPL has added 26 new groups and currently provides personal legal service benefits for over 3,000 Oregon families. Oregon employers are obviously now more open to providing legal service benefits and organized labor units are now including legal in bargaining sessions at the request of their memberships.

We strongly support Senate Bill 1039. We have had the opportunity to observe OPL's growth despite higher unemployment and adverse economic conditions. The growth indicates to us just how much the working people of Oregon really do need the services of attorneys.

In the past people of moderate_means—working people-have not received the personal legal services they need. The main reason is money. They feel they cannot afford what lawyers charge. They forego timely legal advice when it could help them avoid future problems. They go without essential legal representation because they are not in a position to pay-and without those services they suffer financial and emotional setbacks.

For many of them another problem is accessability. They do not know how to find a lawyer who is responsive and interested in their problems.

The Oregon program is providing access to lawyers and provides necessary legal services for plan beneficiaries at an extremely low cost.

From first hand experience we can definitely state that the future of prepaid legal services depends on the continuation of tax exempt status.

In conclusion, and speaking for 3,000 Oregon families now covered by prepaid legal services plans and for hundreds of thousands more who need and want group legal benefits, I ask for your positive support to make the tax exempt status for qualified plans permanent.

PREPARED STATEMENT OF STEPHEN A. BLEYER

Good morning. I am Stephen A. Bleyer, and I am appearing on behalf of the Federal Tax Division of the American Institute of Certified Public Accountants. Internal Revenue Code Section 120, as currently drafted, gives no clear guidance as to what the term "legal services" is intended to encompass. Neither do the Committee reports give any indication as to the scope of the term.

Proposed regulations issued by the Internal Revenue Service on April 29, 1980 concerning qualified group legal services plans define "legal services' as services performed by a lawyer, if the performing of the services constitutes the practice of law. Furthermore, "legal services" may include services performed by a person who is not a lawyer, only if the service is performed under the direction or control of a lawyer, in connection with a legal service performed by the lawyer, and the fee for the service is included in the legal fee of the lawyer.

"Legal services," as so defined, would appear to include the preparation of a tax return and the rendering of tax advice when done by a lawyer, or under his control; while at the same time, such services can be legally performed by a CPA acting on his own and yet, in that instance, would not be includable as part of a qualified group legal services plan. Additionally, there are many financial and estate planning-related services that can be legally performed by CPA's, banks, insurance companies, stock brokers, Certified Financial Planners and others, as well as by attorneys. The effect of the proposed regulations would be to give attorneys a competitive advantage over all of these groups in these areas.

Fees paid by the employer on behalf of the employee for tax services would, of course, currently be handled under the normal rules of Sections 162 and 212(3). This, however, is not an adequate remedy, since the employee would have to include reimbursements in his income and then might receive a corresponding itemized deduction for them. In the case of a rank-and-file employee of a major corporation, it is very possible that this employee would not be in a position to itemize his deductions. Thus in the case of tax services performed by a CPA, acting on his own, for an employee of that corporation, where the CPA's fee was reimbursed to the employee by the corporation, the employee who does not have sufficient itemized deductions would have additional taxable income to the extent of the reimbursed fee, with no offsetting deduction. Furthermore, such rank-and-file employees appear to be the very ones that the qualified group legal services provisions are intended to assist.

In an instance such as the one just cited, a corporation would, to most fully benefit its employees, probably leave all tax counselling to the attorneys, since the tax advice provided by them would be includable under the qualified group legal services plan, thereby depriving CPA's of potential business. It would also appear to be administratively easier for the corporation to have tax services handled through the plan rather than to incur the additional expense and effort required by providing these services outside the plan.

In light of the ambiguities of Internal Revenue Code Section 120, as currently drafted and as illustrated by the proposed regulations cited above, we feet that any legislation enacted to make permanent the exclusion from gross income of employer-provided legal services benefits should contain language to clarify the definition of the term "legal services."

This clarification could be accomplished in one of two ways. The statutory language of Section 120 could be changed to provide for an expansion of the services allowable under the current group legal services plan rules so that tax services provided by a CPA, an enrolled agent, or a public accountant, working independently of an attorney, would be permissible as part of the plan. The AICPA feels this solution is the more appropriate. An alternative, however, would be to provide that the term "legal services" will be strictly construed to mean services that can only be legally performed by a lawyer. This will eliminate the potentially discriminatory treatment in favor of attorneys and allow equal treatment where the same service is legally performed by other professionals. With this change, any reimbursements made by an employer to an employee for tax services would be handled under the rules of Section 162 and 212(3).

Either of these solutions certainly seem to be in keeping with the overall policies of the federal government, which have always been to encourage competition. Furthermore, the intent of the legislation is to promote prepaid legal services plans for rank-and-file employees and not to provide attorneys with a competitive advantage and stifle competition in the area of tax services.

I want to thank you on behalf of the AICPA for the opportunity to present our position.

If you have any questions, I will be happy to try to answer them.

Senator PACKWOOD. We will conclude S. 1039 with a panel of Arthur Ericson, Richard Scupi, and Sandra Dement.

Mr. Ericson.

STATEMENTS OF ARTHUR W. ERICSON, VICE PRESIDENT AND ASSOCIATE ACTUARY, PRUDENTIAL INSURANCE CO. OF AMERICA; RICHARD SCUPI, DIRECTOR, UAW LEGAL SERVICES PLAN; AND SANDRA DEMENT

Mr. ERICSON. Thank you, Senator. My name is Arthur Ericson and I am vice president and associate actuary in the Group Insurance Department of the Prudential Insurance Co. of America. I am accompanied today by Ted Groom of Groom & Nordberg, Washington counsel to Prudential.

Before offering my comments on S. 1039, I would like to express our appreciation to you, Mr. Chairman, for your help in furthering the development of group legal services plans.

I would also like to say that like Prudential, a number of other major insurance companies offer or are considering offering group legal insurance plans including John Hancock Mutual Life Insurance Co., the Equitable Life Assurance Society of the United States, Aetna Life & Casualty Co., and Connecticut General Life Insurance Co.

The companies I have named have reviewed and endorsed this statement on S. 1039.

Although the number of group legal service plans established during the past few years may be relatively small, we believe that many more plans will be established in the future if the tax exclusion for contributions and benefits is made permanent.

The exclusion provides a meaningful impetus for the development of group legal services plans and it should be made permanent. We strongly support S. 1039.

At the same time we agree with you, Senator, that currently proposed rules for qualifying for the exclusion are unduly restricted in some respects.

Senator PACKWOOD. They look like they were almost intentionally drafted to prohibit qualifying.

Mr. ERICSON. In many respects, yes sir, they do.

When you introduced your bill, Senator, you identified several aspects of the current rules which are of concern to you and they are of concern to us as well. While we recognize that the most important current legislative goal for group legal services plans is to make the tax exclusion permanent, it is also important to resolve other problems related to tax exclusion at the earliest possible time and therefore, we ask the subcommittee to address these problems in connection with its consideration of S. 1039.

While the areas of concern which you mentioned is the limitations on initial consultations with a lawyer. This is an area of great concern to us. The regulations place limits on the extent to which a

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qualified plan may provide initial consultations and the way in which a lawyer may conduct an initial consultation.

In my written comments, I refer to several statistical facts and reasons which I believe support the need for unlimited consultations in these plans.

Therefore, we ask the subcommittee to amend S. 1039 by adding a provision to make it clear that initial consultations under qualified plans are not limited.

Another area of concern, which you mentioned, is the excessive restrictions on employee contributions and this is also of great concern to us. The proposed regulations virtually prohibit employee contributions under qualified plans.

Again, in my written comments on this matter, I cite two important reasons for our belief that employee contributions under qualified plans should be allowed.

There are several other areas that you identified and also concern us. One of these is the excessive restrictions on the definition of personal legal services. We support an amendment to code section 120 to define the term personal legal services as legal services other than legal services primarily related to the conduct of a trade or business of an employee, his spouse or dependent.

Another area is reliance on actual utilization rates of planned benefits to determine if a plan is entitled to qualification. Actual utilization rates of legal services generally are fortuitous and therefore, unpredictable.

Thus, reliance on such rates for purposes of determining plan qualification is likely to deter the establishment of new plans, especially for small employers.

We prefer that actual utilization rates not be used in determining plan qualification.

A related problem which is associated with the statutory limitation on contributions for shareholders is the fortuity of employment levels. Because of the unpredictability of employment levels, the 25 percent limitation on contributions for shareholders is likely to be a strong deterrent to the establishment of group legal services plans again for small employers.

We believe that the subcommittee should explore ways of making qualified group legal service plans a more feasible alternative for small employers.

We would be happy to cooperate with the subcommittee in this endeavor.

We thank you for this opportunity, Senator, to present our views. We strongly support S. 1039 and we hope that the subcommittee will also expand the bill in the ways that we have suggested. Thank you.

Senator PACKWOOD. I will be very surprised if we can't make this permanent. The objections that were initially raised have simply faded away and I don't think those objections exist anymore.

I think we can accomplish most of the changes to take care of the IRS problems, either simply ruling over them or getting them to change their views.

Mr. ERICSON. Well, Senator, I am pleased to hear that.

Senator PACKWOOD. Thank you. Mr. Scupi.

Mr. SCUPI. Thank you. Mr. Chairman, my name is Richard Scupi. I am the director of the UAW legal services plan.