Payments to lawyer serving on client's board of directors.
The attorney in the ruling was a shareholder/employee in a law firm whose bylaws required all lawyer-shareholders to remit to the firm any compensation received from third parties for services normally provided by the firm. The lawyer served on his client's board of directors, and also managed and supervised all of the legal services his firm provided to the client. However, because of limitations in the law firm's professional liability insurance policy, an attorney serving as a director of one of the firm's clients was precluded from providing legal advice to such client. The law firm's client considered the lawyer to be serving as a director in an individual capacity, rather than as the firm's agent.
To compensate the lawyer for serving on its board, the client granted nonvested, nontransferable, nonstatutory options on its stock to the lawyer personally. The lawyer planned to exercise some of the options and immediately sell the shares he acquired. In addition (and in accordance with the law firm's bylaws), the lawyer would then remit the net proceeds to the firm.
In evaluating these facts, the Service looked to Rev. Rul. 80-338, in which a partner in an accounting firm was named executor to one of his client's estates. He was required to remit all executor's fees earned by him to his firm. The IRS concluded that the services rendered by the accountant acting as executor depended on his accounting expertise and were substantially similar to the services he provided as a partner in the firm. Therefore, any fees earned by him would constitute partnership income when paid to the partnership.
The Service distinguished the facts in Rev. Rul. 80-338 from the facts in Letter Ruling 9514008. The attorney who served as a director was precluded from providing legal advice to his client under his employer's professional liability insurance coverage. Thus, services performed as a director were conceptually different from those performed as an employee of die law firm. Since the lawyer's services as a director on his client's board of directors were not similar to the services he normally provided as an employee of his law firm, the IRS concluded that any income arising from the lawyer's exercise of the options was includible in his individual gross income. The lawyer's service as a director was found to be in his individual capacity, not as an agent of the firm.
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|Publication:||The Tax Adviser|
|Date:||Jan 1, 1996|
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