Ezel / Ethics Opinions / NYSBA
NYSBA 2019-01-17

Can a lawyer who runs or works with an R&D tax-credit business pay or receive referral fees from lawyers and from the business?

Short answer: The opinion concludes a lawyer's own tax-credit firm may not pay lawyer referral fees unless Rule 1.5(g) or 7.2 allows it; a lawyer employed by a non-lawyer-owned tax-credit firm may take a referral fee only if the work is not the practice of law; and a non-employee consultant may take a referral fee under Rule 1.8(f) if uninvolved in the transaction, else must disclose and credit the fee.
Currency note: this opinion is from 2019
Subsequent statutory amendments, court decisions, or later opinions or rule amendments may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.
Disclaimer: Advisory only. Not binding precedent.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official ethics opinion. The original opinion (linked at the bottom of this page) is the authoritative source for any reliance.

NYSBA Ethics Opinion 1162: Referral Fees and a Lawyer-Run R&D Tax Credit Business

Short answer: The opinion concludes that a lawyer who forms an R&D tax-credit business may not pay referral fees to other lawyers unless the lawyer or the firm could do so under Rule 1.5(g) or 7.2 (which the proposal does not satisfy); that a lawyer employed by a non-lawyer-owned tax-credit business may receive a referral fee only if none of the lawyer's activities there constitute the practice of law; and that a non-employee consultant may receive a referral fee, even when the referral is the practice of law, if the lawyer is not involved in the underlying transaction and meets Rule 1.8(f), but if the lawyer is involved must disclose the fee and credit it to the client.

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the New York State Bar Association's view of New York's Rules of Professional Conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.

About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. We do not reproduce the opinion text on this page; follow the linked source for the official text, which controls.

Plain-English summary

A New York patent attorney wants to start or work with a business that advises clients on, and prepares, IRS research-and-development tax-credit applications, services that licensed non-lawyer Enrolled Agents may also perform. Because the same factors that determine patentability also determine tax-credit eligibility, and some tax-credit clients would also be the lawyer's law-firm clients, the lawyer asked whether the lawyer's own firm ("RD1") could pay referral fees to lawyers who refer clients, and whether the lawyer could receive a referral fee from a separate firm ("RD2") as either an employee or an unaffiliated referrer. The committee answers only as to the lawyer's own conduct.

For the lawyer-owned firm, the committee finds the tax-credit services are not distinct from the lawyer's legal services under Rule 5.7(a) (same operative facts as the patent work) and would be the practice of law when performed by a lawyer (N.Y. State 779), so the Rules apply to them, including Rule 1.7's conflict analysis for dual practice. Rule 7.2(a) then bars paying for client referrals except through a Rule 5.8 contractual relationship (inapplicable; a tax-credit business is not a listed non-legal professional service, and 5.8 bans paying for the referral anyway) or a Rule 1.5(g) fee division (inapplicable; the proposal is a bare referral, not proportional to work, and the referring lawyers would not assume joint responsibility). So RD1 may not pay lawyer referral fees.

For the non-lawyer-owned firm, the answer turns on the lawyer's role. As an employee doing purely marketing work that is not the practice of law, the lawyer could receive a referral fee; but if the marketing involves applying law to facts so as to be the practice of law, the lawyer could not be employed by a non-lawyer-owned entity at all (citing BCL section 1503, Judiciary Law section 495, and Rule 5.4(d)). As a non-employee, the lawyer may receive a referral fee even when making the referral is the practice of law, provided the lawyer is not otherwise involved in or benefiting from the underlying transaction and obtains the client's informed consent under Rule 1.8(f); if the lawyer is involved in the underlying transaction, the lawyer must advise the client of the arrangement and credit the client with the referral fee (citing N.Y. State 845 and related opinions, and distinguishing 1086 and 981).

In practice

Under this opinion, a lawyer building a side tax-credit business cannot use it to pay lawyers for client referrals unless the payment fits Rule 1.5(g)'s proportional-services or joint-responsibility requirements or another Rule 7.2 exception, because the work is treated as legal services. The opinion holds a lawyer can take a referral fee from a non-lawyer-owned tax-credit firm only if the lawyer's role there is not the practice of law (otherwise the non-lawyer-ownership bars apply), and that an unaffiliated lawyer-referrer may take a referral fee under Rule 1.8(f) when not involved in the underlying transaction, but must disclose and credit the fee to the client when the lawyer is involved.

Common questions

Q: Can a lawyer's own tax-credit business pay referral fees to lawyers who send clients?

A: Per the opinion, no, unless the payment satisfies Rule 1.5(g) (proportional services or written joint responsibility) or another Rule 7.2 exception. A bare referral fee does not qualify, and the tax-credit work is treated as legal services subject to the Rules.

Q: Can the lawyer take a referral fee as an employee of a non-lawyer-owned tax-credit firm?

A: Per the opinion, only if the lawyer's activities there are purely non-legal (such as drafting marketing copy). If they amount to the practice of law, the lawyer could not be employed by a non-lawyer-owned entity at all under BCL 1503, Judiciary Law 495, and Rule 5.4(d).

Q: Can an unaffiliated lawyer take a referral fee from the tax-credit business?

A: Per the opinion, yes, if the lawyer is not involved in or benefiting from the underlying transaction and obtains the client's informed consent under Rule 1.8(f). If the lawyer is involved in the transaction, the lawyer must disclose the arrangement and credit the referral fee to the client.

Background and rules framework

The opinion applies New York Rule 7.2 (no paying for client referrals, with exceptions), Rule 1.5(g) (fee division between unaffiliated lawyers), Rule 5.7 and 5.8 (responsibilities for and referrals to non-legal services), Rule 1.7 (dual-practice conflicts), Rule 1.8(f) (compensation from one other than the client), and Rule 5.4(d) (no practice in a non-lawyer-owned entity). These correspond to ABA Model Rules 7.2, 1.5, 5.7, 1.7, 1.8, and 5.4.

Citations and references

Rules of Professional Conduct:

  • New York Rules of Professional Conduct 7.2(a); 1.5(g) (and Comment [7]); 5.7(a); 5.8; 1.7(a) (and Comment [10]); 1.7(b)(4); 1.8(f); 5.4(d)
  • ABA Model Rules 7.2, 1.5, 5.7, 1.7, 1.8, 5.4 (analogues)

Statutes:

  • New York Business Corporation Law section 1503; New York Judiciary Law section 495 (bars on non-lawyer ownership of law practice)

Other opinions cited:

  • N.Y. State 779 (2004); 1135 (2017); 1155 (2018); 1015 (2014); 206 (1971): dual practice, distinctness, and practice-of-law
  • N.Y. State 845 (2010); 1086 (2016); 981 (2013); 667 (1994); 626 (1992); 576 (1986); 461 (1977): referral fees from non-legal service providers under Rule 1.8(f)

See also

Source