Adopted 1986

QUESTION PRESENTED

May a lawyer, with the consent of the laywer’s [sic] clients, cause interest on clients’ funds deposited in a trust account to be paid to a third-party entity which is exempt from Federal income taxation under IRC § 501 (c)(3) or (c)(6)7

ANSWER

A lawyer could, with the written consent of the lawyer’s clients given after full disclosure, cause the interest generated by an interest-bearing trust account, on consenting clients’ funds deposited in such account which are nominal in amount or are on deposit for a short period of time, to be paid to a third-party entity which is tax-exempt under IRS § 501 (c)(3) or (c)(6); however, the present language of DR 9-102 (C) appears to limit authorization for the use of such interest-bearing trust accounts to the Oklahoma IOLTA Program.

DISCUSSION

The Oklahoma Trial Lawyers Association has requested an opinion from the Board of Governors as to the propriety of an arrangement by which interest on lawyers’ trust accounts, with the consent of the clients obtained in advance, would be paid to the Oklahoma Trial Lawyers Education Foundation. Oral inquiry has developed that the intention would be to establish a voluntary program comparable to the Interest on Lawyers’ Trust Accounts (“IOLTA”) arrangement authorized by DR 9-102 (C), adopted by Oklahoma Supreme Court Orders promulgated on April 18 and May 23, 1983.

The guideline opinion in this area is Formal Opinion 348 of the American Bar Association (“ABA”) issued on July 23, 1982. While that opinion approved the concept of IOLTA programs such as that subsequently adopted in Oklahoma, it also dealt with several underlying and related issues which are of relevance in responding to the present inquiry.

Opinion 348 first noted that historically, clients’ funds have been deposited together in noninterest bearing trust accounts. This has been done because the earnings potential of such funds in relations to the administrative costs would not justify investment. However, where the amount and expected holding period would result in earnings which would exceed the adminstrative [sic] costs, lawyers have deposited a clients’ funds in a separate trust account, with the interest thereon credited to the client.

The Opinion goes on to note that DR9-102 (A) and (B) do not prohibit a lawyer from depositing a clients’ funds in an interest-bearing account. It further states that where the amount of funds held for a specific client and the expected holding period make it obvious that the interest which would be earned would exceed administrative costs and bank charges, the client should be consulted and investment instructions obtained.

In response to the question of whether a lawyer may retain interest earned on clients’ funds where administrative costs would exceed the interest earned, the Opinion, citing earlier informal opinions, held that the Code does not permit this, “without the specific and informed consent of the client.” (Emphasis added). In support, the Opinion cites DR 5-104, which provides (Subsection A) that a lawyer shall not enter into a business transaction with a client “if they have differing interests therein …. unless the client has consented after full disclosure.”

The Opinion then went on to approve the implementation of IOLTA programs, which do not require notice to, or consent by, the client. However, those programs, as in the case of Oklahoma, are state-authorized, either by legislative or state supreme court action.

According to the ABA/BNA Lawyers’ Manual on Professional on Professional Conduct, 45:201, 45:205, although most authorities say that interest earned on the trust accounts must be credited to the client(s), others add the qualification that other uses (e.g., defraying record-keeping costs) may be possible if the client consents. The language of ABA Opinion 348 quoted above also appears to contemplate that other uses of interest on lawyer’s trust accounts could be made if the requirement of DR 5-104 (A) for client consent after full disclosure is met. It is also apparent that for the protection of both the client and lawyer, such disclosure and consent should be in writing.

However, in order to avoid a conflict with the lawyer’s duty to zealously pursue the client’s interest (DR 7-101) (A), it would not be appropriate to ask the client to forego a claim for interest on amounts that are of such a magnitude or will be on deposit for a sufficient period of time that the interest which could potentially be earned would offest [sic] any administrative costs or bank charges.

It is therefore held, subject to the problem discussed in the last paragraph of this Opinion, that a lawyer could implement an arrangement whereby a client could, after full disclosure, consent that such client’s funds, which are minimal in amount or will be on deposit for a short period of time, may be deposited in an interest-bearing account, the interest on which would be remitted by the client’s lawyer to a third-party tax-exempt entity. For the purposes of this Opinion, it is assumed that the third-party entity is not one which has the purpose or effect of conferring a personal financial benefit on the laywer [sic], but rather is an organization which qualifies for tax-exempt status under IRC § 501 (c)(3) (charitable) or (c)(6) (business league/trade association).

Furthermore, since ethics opinion are not intended to rule on questions of law, this opinion does not address the following questions:

1. Under such an arrangement, is the interest legally attributable to the lawyer or the client for tax purposes, and would the person to whom the income is attributed be entitled to an off setting tax deduction? (Under IOLTA programs, the IRS apparently takes the position that the income is never the client’s property and is therefore not taxable to the client. (Rev. Rul. 81-209).

2. If the interest should be treated as attributable to the client, and is paid to a Section 501 (c)(6), rather than a (c)(3), organization, would it be tax-deductible for the client?

It is obvious that providing answers to the foregoing questions would be an indispensable part of the disclosure which would have to be made to the client in order to obtain the client’s informed consent under DR 5-104(A).

Finally, notwithstanding the foregoing discussion, there remains an impediment to the implementation of such a program in the language of DR 9- 102(C), establishing the Oklahoma IOLTA Program. The relevant language states: “The attorney electing to utilize interest-bearing trust accounts shall comply with the following provisions ….” Then follow the provisions for the IOLTA Program, including the requirement that interest or dividends be remitted to the Oklahoma Bar Foundation, Inc. The clear implications of the quoted language is that no other procedure or disposition of interest earned on such accounts is permitted. Therefore, although there would be no other ethical prohibition which would prevent the effectuation of the proposed arrangement, an amendment of DR 9-102(E) would be required.