Can a nonlawyer tax representative pay a lawyer a percentage of the nonlawyer's contingent fee to handle a North Carolina property-tax appeal?

Plain-English summary

The inquiry concerns a nonlawyer independent tax representative (A) who, under a contingent contract, is entitled to a percentage of a company's property-tax savings if he obtains a reduction in the county assessment. The contract lets A retain counsel so long as it does not increase the company's cost. An appeal to the North Carolina Property Tax Commission requires a licensed lawyer, so A asks whether, with the company's consent, he may retain a lawyer and pay the lawyer out of A's share of the tax savings, either as a percentage or on an hourly basis.

The opinion concludes that the arrangement is improper fee sharing. Rule 5.4(a) regulates the distribution of fees that, because of the prohibition on the unauthorized practice of law, can only be earned by a lawyer. Unless nonlawyers are legally permitted to represent taxpayer/claimants before the taxing authority and to be awarded fees for that representation, paying the lawyer out of the nonlawyer's share violates Rule 5.4(a). The opinion directs that the lawyer should negotiate his fee directly with the company.

The opinion distinguishes its two Social Security disability opinions, 2003 FEO 10 and 2005 FEO 6. Those allow a Social Security lawyer to compensate a nonlawyer representative, and allow a nonlawyer law-firm employee's compensation to be based on income from such representation, because federal law (42 U.S.C. section 406) lets nonlawyers represent disability claimants before the Social Security Administration and be awarded fees. A fee a nonlawyer earns as authorized by law is not a "legal fee" subject to Rule 5.4(a). No comparable authority allows nonlawyers to represent taxpayers before the Property Tax Commission and earn fees, so the tax-appeal arrangement is not similarly exempt.

In practice

Under the North Carolina rule as it stood at the time of the opinion, conduct in which a nonlawyer pays a lawyer out of the nonlawyer's contingent share for handling a matter that requires a licensed lawyer is prohibited as fee sharing under Rule 5.4(a). Per the opinion, the analysis turns on whether the law authorizes nonlawyers to represent the claimant before the particular tribunal and to earn fees: if it does (as with the Social Security Administration under 42 U.S.C. section 406), the nonlawyer's fee is not a "legal fee" and the bar does not apply; if it does not (as with the Property Tax Commission), the fee can only be earned by a lawyer and may not be split with the nonlawyer. The opinion directs that the lawyer negotiate his fee directly with the client.

Common questions

Q: Can a nonlawyer tax representative pay a lawyer a percentage of the nonlawyer's contingent fee to handle a property-tax appeal?

A: No. The opinion concludes that because the North Carolina Property Tax Commission appeal requires a licensed lawyer, the fee may only be earned by a lawyer, and splitting it with the nonlawyer is improper fee sharing under Rule 5.4(a).

Q: Does it matter whether the lawyer is paid hourly or as a percentage of the nonlawyer's share?

A: No. The opinion treats payment out of the nonlawyer's share as improper either way and directs that the lawyer should negotiate his fee directly with the client (Company B), not be paid from the nonlawyer's share.

Q: Why is this different from the Social Security disability fee cases?

A: Because federal law (42 U.S.C. section 406) authorizes nonlawyers to represent disability claimants before the Social Security Administration and to be awarded fees, so that fee is not a "legal fee" subject to Rule 5.4(a). The opinion distinguishes 2003 FEO 10 and 2005 FEO 6 on that basis; no comparable authority covers tax-appeal representation.

Background and rules framework

The opinion applies North Carolina Rule 5.4(a) (professional independence of a lawyer; the bar on sharing legal fees with a nonlawyer, the analogue of Model Rule 5.4(a)). As the opinion notes, citing Comment [1], the prohibition protects a lawyer's independent professional judgment from nonlawyer interference, discourages solicitation, and discourages the unauthorized practice of law. The key analytic move is that Rule 5.4(a) reaches only fees that can be earned solely by a lawyer; a fee a nonlawyer is legally authorized to earn is not a "legal fee" within the rule.

The opinion relies on prior North Carolina authority, 2003 FEO 10 and 2005 FEO 6, addressing nonlawyer representatives of Social Security disability claimants, and on the federal statute (42 U.S.C. section 406) that authorizes such nonlawyer representation and fees.

Citations and references

Rules of Professional Conduct:

• MR 5.4 / NC Rule 5.4(a) (sharing legal fees with a nonlawyer)

Statutes:

• 42 U.S.C. section 406 (nonlawyer representation of Social Security disability claimants and award of fees)

Other opinions cited:

• NC 2003 FEO 10: a Social Security lawyer may compensate a nonlawyer representative for prior representation of a disability claimant before the SSA.
• NC 2005 FEO 6: a nonlawyer law-firm employee's compensation may be based on income from SSA disability representation; such a fee is not a "legal fee" under Rule 5.4(a).

See also

• NC State Bar 2003 FEO 10: Fee Sharing With a Nonlawyer (Social Security)
• ABA Formal Op. 464: Fee Division Across Jurisdictions
• ABA Formal Op. 506: Nonlawyer Assistants & Intake

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2013-formal-ethics-opinion-7/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry:

A is a nonlawyer independent tax representative who has worked with Company B in seeking to achieve a reduction in the county assessment of Company B’s property for ad valorem taxes. Under A’s contract with Company B, if A is successful in achieving a reduction in the assessment, he is entitled to receive a percentage of Company B’s tax savings. It is assumed that A is limiting his representation to activities that do not constitute the practice of law.

Pursuant to the contract with Company B, A is authorized to obtain counsel provided it does not increase the amount Company B is required to pay for representation.

A and Company B want to appeal to the North Carolina Property Tax Commission seeking a reduction in the assessment. A licensed lawyer is required to pursue the appeal.

With Company B’s consent, may A retain Lawyer to represent Company B on the appeal and pay Lawyer a percentage of A’s share of any tax savings for Company B? May Lawyer be paid out of A’s share on an hourly basis?

Opinion:

Rule 5.4(a) regulates the distribution of fees that, because of the prohibition on the unauthorized practice of law, may only be earned by a lawyer. See 2005 FEO 6. The purpose of the prohibition, as noted in comment [1] to the rule, is to protect the lawyer's professional independence of judgment from interference from a nonlawyer. The prohibition also prevents solicitation of cases by lawyers and discourages nonlawyers from engaging in the unauthorized practice of law. See 2003 FEO 10.

Unless nonlawyers are legally permitted to represent taxpayer/claimants before any taxing authority, and to be awarded fees for such representation, the proposed arrangement constitutes improper fee sharing in violation of Rule 5.4(a).

The instant scenario can be distinguished from those addressed previously by the Ethics Committee in 2003 FEO 10 and 2005 FEO 6. The two prior opinions apply to nonlawyer representatives of disability claimants before the Social Security Administration (SSA). 2003 FEO 10 holds that a Social Security lawyer may agree to compensate a nonlawyer representative for the prior representation of a disability claimant before the SSA. 2005 FEO 6 provides that the compensation of a nonlawyer law firm employee who represents Social Security disability claimants before the SSA may be based upon the income generated by such representation. However, nonlawyers are legally permitted to represent disability claimants before the SSA and to be awarded fees for such representation. See 42 U.S.C. § 406. When generated by a nonlawyer as authorized by law, such a fee cannot be designated a “legal fee” subject to the limitations of Rule 5.4(a). See 2005 FEO 6.

Lawyer should negotiate his fee directly with Company B.