## Facts

- The Internal Revenue Service issued administrative guidelines for recognizing and monitoring “public interest law firms” as charitable organizations under I.R.C. § 501(c)(3).
- Prior IRS procedures had largely restricted such firms from charging or accepting fees to prevent them from resembling private law practices.
- The guidance applies in ruling and determination-letter practice for new organizations and in evaluating organizations already recognized as exempt.
- The IRS concluded that a categorical ban on fees was unnecessary if safeguards could ensure the firm’s work primarily serves a broad public interest rather than private interests.
- The procedure permits court-awarded fees paid by opposing parties under specified conditions and permits certain client-paid fees subject to stricter safeguards.
- The procedure requires transparency measures, including an attachment to the annual information return describing litigation and disclosing fees sought and recovered.

## Issues

1. Under what conditions may a public interest law firm qualify or continue to qualify as a charitable organization under I.R.C. § 501(c)(3) while accepting attorneys’ fees?
2. What safeguards must be in place to ensure fee activity does not cause the organization to resemble a private, for-profit law firm?
3. What reporting and recordkeeping obligations are required to support IRS oversight of fee practices and case selection?

## Decision

- The IRS set guidelines under which a public interest law firm may qualify and remain qualified under § 501(c)(3) while accepting attorneys’ fees.
- The firm’s litigation must primarily serve a broad public interest and be designed to present positions on matters of public interest on behalf of the public at large.
- Court-awarded fees from opposing parties are permitted if safeguards ensure fee prospects do not substantially motivate case selection and fee proceeds further exempt purposes.
- Client-paid fees may be charged or accepted only if detailed safeguards are satisfied, including limits and practices that prevent the firm from operating like a commercial law practice.
- The IRS required annual reporting that identifies litigated matters and discloses fee amounts sought and recovered to support continued exemption review.
- The guidelines are not treated as rigid rules; organizations may show, based on facts and circumstances, that variations still satisfy § 501(c)(3).

## Legal Principles

- A public interest law firm can satisfy § 501(c)(3) if its litigation activities are directed to a broad public interest rather than serving private interests.
- The expectation or possibility of fee recovery may not be a substantial motivating factor in selecting cases; case selection must be driven by public-interest impact.
- Court-awarded fees are compatible with exemption when awarded by a court or administrative agency, used for exempt purposes, and accompanied by safeguards against fee-driven docketing.
- Client-paid fees are permissible only with safeguards, including below-market or otherwise constrained fee policies and assurance that inability to pay does not bar appropriate public-interest representation.
- Attorney compensation should not be directly tied to fees generated in a manner that creates private benefit concerns or for-profit characteristics.
- An exempt public interest law firm must maintain records and publicly report litigation information and fee amounts sought and recovered through attachments to its annual information return.
- Standard § 501(c)(3) constraints continue to apply, including limits on political campaign activity, lobbying restrictions, and prohibitions on inurement and substantial private benefit.

## Conclusion

The IRS established administrative standards under which a public interest law firm may accept court-awarded fees and, with additional safeguards, certain client-paid fees while remaining eligible for § 501(c)(3) status, provided its litigation serves a broad public interest, fees do not drive case selection, and detailed reporting supports oversight.


Rev. Proc. 92-59, 1992-2 C.B. 411 (1992)