October 29, 2021 • By Dennis Beaver
We recently hired “Roger,” who is a partner in a large law firm, to handle our small, educational foundation. His firm’s website and LinkedIn states that he has a Master’s in Taxation and represents charities and tax exempt organizations.
Our Articles of Incorporation allow us to send college students majoring in mechanical engineering to a German university for an intensive summer program in addition to improving their German. COVID made travel impossible and the $125,000 in our foundation’s bank account is just sitting there, unused.
So I phoned Roger, and asked if we could donate some of these funds to organizations that help refugees from Afghanistan and still maintain our charitable tax exemptions. We spoke for less than a minute. He said, “Let me do some research on this.”
His bill just arrived and we went insane. He charged $85 for that one minute phone call and close to $800 for himself and his paralegal for two hours of ‘research’ one day and over an hour ‘reviewing’ it and ‘documents’ the same day!’
I Googled our question and found the answer in less than 5 minutes! The senior partner in his firm told me, ‘Roger said that he had to spend this time researching your complicated issue.’
“I asked to be sent copies of his research and the documents he reviewed but have received nothing.
Shouldn’t an attorney who holds himself out as working with tax-exempt organizations know the answer to that question already? Also, don’t I have the right to copies of his research and documents, if they exist at all, as we’re billed for them? What do you think about this?
Should indeed know the answer
I ran this question by Los Angeles attorney William M. Ramseyer whose law practice concentrates on charitable organizations. When I told him what Roger said about having to do research, he replied:
“What research? A lawyer with a Master’s in Taxation who claims to handle tax-exempt matters knows this stuff! We get the same question all the time. He lied to the client and his senior partner. This is bill padding and is illegal.
“Hans should have immediately been told, ‘There is a huge difference between sending students on educational trips and donating money to refugee organizations. You are facing legal and accounting fees that could use up much of your foundation’s money! Be patient. We will all be able to fly again.”
With that as a background, for anyone thinking of starting a charity, or changing the goals and mission statement of your organization, Ramseyer offers recommendations on what needs to be done, beginning with your Articles of Incorporation.
When the articles do not allow for other charitable purposes
“Your readers’ articles had a narrow, specific purpose. This is one of the most common, preventable, and costly errors. If they do not permit funds to be used for other related, charitable purposes, then the cost of changing the organization’s goals can be expensive.
“A new application to the IRS and your state agency — such as the Attorney General — would most likely be required.”
Understand how assets must be used
“Your assets must be dedicated to the specific purpose described in the articles. Any other use is considered a breach of the charitable trust,” he points out.
So, to avoid problems down the road:
(1) Describe your charitable purposes broadly enough to cover related activities you may want to do in the future.
(2) If your articles are too specific, state agencies will likely require that all of your current funds be segregated from new donations and used exclusively for the older purposes. Only newly raised money can be used for the expanded goals.
(3) You must hire a CPA to set up parallel accounting systems.
(4) A good idea would be to have your books audited every year to prove you were following the segregation.
(5) Realize that the cost can easily run into the tens of thousands of dollars. This could consume a large portion of the funds intended for charitable purposes.
“Dennis, an honest lawyer would have immediately told this couple to stick to their original purposes, as we will all be able to fly soon. Fraudulent billing is a common practice in many large law firms. Your reader’s gut instinct was right.”
Los Angeles-based Attorney Fee Arbitrator Aaron Shechet commented:
“While it is often necessary for lawyers to research areas of the law about which they may be unsure, I would disallow all aspects of Roger’s bill that involved legal research for something he clearly must have already known based upon his academic training and law practice which includes tax-exempt organizations. Additionally, his client has a right to that research, and a failure to provide it is telling.”
Los Angeles-based Stan Goldman, Loyola Law School Legal Ethics Professor, provided this analysis:
“When presented with a simple question that any expert could have answered without doing research, charging for it is plain wrong. It is bill padding. Clearly, in that brief phone call, Roger could have answered the question and charging $85 would be have been reasonable, but nothing more.”
Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.