Taxing the Public Interest

Few young Americans have done more to "work within the system" than a growing band of lawyers who toil overtime honing a new tool of social reform --the public-interest law firm. Convinced that established law firms have hired the nation's best legal minds to concentrate on serving rich corporate clients, the young lawyers have started their own firms to fight for consumer, conservation and other under-represented interests.

In little more than two years of operation, firms like Washington's Center for Law and Social Policy have scored courtroom victories against such giants as General Motors and the rich, tough oil industry. They have stayed alive largely on their eager enthusiasm and their tax-exempt status as charitable organizations.

First Amendment Threat. Last month their opponents got some help from an unexpected source: the Internal Revenue Service. The IRS announced that it was starting a 60-day study that would decide whether to revoke the tax-exempt status of public-interest firms such as those taking corporations to court on pollution and consumer issues. At the same time, the IRS froze applications pending the study's completion. Although corporations routinely deduct legal fees as business expenses, IRS officials suggested that the law firms' tax exemption may wrongly support only one side to a lawsuit in cases where the public interest is unclear. But regardless of the outcome of a suit, says Dean Bernard Wolfman of the University of Pennsylvania Law School, the public interest is served when the two sides to an issue compete in the courtroom. Adds Wolfman, a tax law expert: "The IRS approach seeks to effect a reversal of settled Internal Revenue law by its strained, unjustified new interpretation."

Some supporters of the public-interest firms immediately accused the Nixon Administration of meddling on behalf of big business. Strong criticism of the IRS came from one of the Administration's staunch backers. House Republican Leader Gerald Ford wired the White House that the proposed IRS policy change could effectively block citizen efforts to protect the environment. And North Carolina Senator Sam Ervin, a conservative Democrat, charged that the IRS denial of tax exemptions could endanger the First Amendment right to free expression. By withdrawing the exemptions for organizations seeking redress in the courts, wrote Ervin, the IRS "is striking at the heart of one of the most effective, traditional and basic American freedoms."

A preview of how the IRS could block the efforts of an ecology-minded legal organization was shown early this year, when the New York-based Natural Resources Defense Council, Inc. made an application to the IRS for tax-exempt status. N.R.D.C. lawyers claim they were told that they would be granted the exemption for legal activities only if they cleared prospective lawsuits beforehand. N.R.D.C. says that one of its proposed suits, contesting strip-mining practices in Kentucky, has already been effectively vetoed by the IRS.

Pocketbook Crisis. The tax threat has begun to hit other firms in the pocketbook. Charles Halpern, director of the Center for Law and Social Policy, estimates that more than half of his first year was devoted to tapping foundations and individuals for contributions. Since the IRS announcement, Halpern says, the money has virtually stopped.

As a result, the center may conceivably have to drop its suits challenging the Department of Agriculture's use of DDT and the construction of the trans-Alaskan pipeline system through one of the world's most active earthquake regions. In fact, a negative IRS ruling could close down the center and send home twelve law students, who have thrived on the work and presumably become better lawyers in the process. An adverse ruling could leave groups like Friends of the Earth and the Environmental Defense Fund with a powerful cause and no effective means to work for it. Other potential victims include Ralph Nader and his Raiders, whose investigations into big business and big Government have become legendary.

The public-interest lawyers are convinced that they will eventually have their way. If not, the IRS may only prove to many young skeptics that working "within the system" is pointless.

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