The Good, The Bad, and The Ugly of Tax Exempt Law Firms
Serving the poor is the quintessential charitable activity for which tax exemption is authorized. So it is no surprise that a law firm providing below cost representation can be tax exempt. Like exempt hospitals, exempt law firms can accept donations from the public and fees from clients, as long as those fees are determined by the client’s financial ability and the firm does not distribute profit.
Does that mean exempt law firms, like exempt hospitals, can charge normal rates to clients able to pay those normal rates? The health care approach says that charging able clients normal rates is permissible so long as the profits are used to subsidize indigent clients. The fragmentation approach is that services provided to able clients constitutes an unrelated business. If fees from those services predominate, the law firm operates for a substantial non-exempt purpose and should not be tax exempt even if the fees subsidize law firm “charity care.”
Revenue Ruling 78-428 appears to limit tax exemption to firms that are formed and operated “for the sole purpose of providing legal services to indigent persons who are otherwise financially incapable of obtaining such services.” So exempt law firms serving the poor can’t also accept non-indigent clients. Health care has a sort of “per se” character making tax exemption not so exclusively dependent on serving the poor. Legal services don’t enjoy that characteristic so using paying clients to subsidize indigent clients is probably a taxable unrelated business.
The Texas Legal Services Center (TLSC) is a good example of an exempt law firm serving poor clients. A different set of rules apply, by the way, for public interest law firms. Those are firms, like American Alliance for Equal Rights, that litigate cases of broad public interest. Public interest law firms take on cases that don’t attract paying clients. No single person has sufficient economic interest to pay for-profit firms to finance those cases. Public interest firms may accept court-awarded attorney fees, but those fees can’t be the firm’s primary motivation.
The bad and the ugly of tax exempt law are those firms that claim to be charitable or devoted to public interest, but which operate for their managers’ own private benefit. According to TLSC’s IRS complaint, American Family Law Center (AFLC) is one such bad and ugly example. The complaint asserts that AFLC is tax exempt but preys on indigent clients for private benefit. It uses fees to subsidize its founder’s personal consumption directly and indirectly through the founder’s private businesses. The law firm and the associated private businesses all have the same managers and directors. If the facts in the complaint are true there is fraud and private benefit all over the place. Here is a bit from the alarming complaint:
America Family Law Center (AFLC) is a Texas nonprofit corporation and is currently tax-exempt under section 501(c)(3) of the Internal Revenue Code. AFLC targets vulnerable people throughout Texas who are enduring family law crises and tricks them into paying for services it does not actually provide, eventually scamming hundreds and sometimes even thousands of dollars from people with low income.
AFLC uses its status as a registered nonprofit and 501(c)(3) organization to trick vulnerable people with low income into paying for legal assistance it does not actually provide. It intentionally markets itself to people who have low income and spends hundreds of thousands of dollars in search engine optimization every year to drive people to its own websites and call center.3 AFLC puts its nonprofit status front and center in its websites and marketing materials to lure people who have little or no money, claiming that it is devoted to helping the low- income and underserved get family law help and assistance in Texas, and that it seeks to help close the Justice Gap for low-income Texans. In reality, AFLC scams desperately needed funds from the people it purports to serve and funnels that money to the private individuals sitting on its board of directors.
Individuals call AFLC because they are experiencing a legal crisis and have limited means. AFLC is running a large-scale operation: it can field roughly 2,000 calls a day and may convince 10-20 of those callers to art with their scarce resources. To make this scheme profitable, it pressures its employees to meet numerical quotas with bonuses, commissions, and penalties,4 and uses several aliases, programs, and DBAs. Once it convinces people with legal crises to contact its call centers, AFLC’s employees make bold – but false – promises to provide legal assistance that AFLC does not, and will not, provide.
Bob Lansink founded AFLC, and soon after, installed his old high school flame, Teresa Kenton, as its Chief Executive Officer. Lansink and Kenton are engaged and share finances and properties. Lansink’s fiancée runs AFLC on his behalf, and she wears many hats while doing so. Kenton is not only the organization’s Executive Director, but its accountant and bookkeeper, as well as the Treasurer on its board of directors. The two sit at the top of the AFLC pyramid, where they are aware of and encourage AFLC’s employees to make false and material misrepresentations and conceal important facts from clients and potential clients. Kenton has admitted to misrepresenting important facts to the IRS, too, in her role as AFLC’s Treasurer, accountant, and bookkeeper, including misreporting millions of dollars in payments to AFLC’s officers, directors, trustees, and key employees for the last few years that AFLC filed 990s. Unsurprisingly, AFLC lacks the standard safeguards that nonprofits should have in place to prevent blatant conflicts of interest and nepotism.
Under Lansink and Kenton’s direction, AFLC does not just swindle money from people in legal crises who can least afford to lose it; it redirects hundreds of thousands – if not millions – of untaxed dollars into other Lansink companies and organizations that can more directly benefit Lansink and Kenton. AFCA, LLC and Fast Legal Document Service are two of these. Fast Legal Document Service is another supposed nonprofit that solicits money from unsuspecting people who need family law representation. AFLC refers clients to Fast Legal Document Service, which takes more of their money and then fails to provide promised legal documents or, worse, furnishes documents that cause its clients to lose their cases. Although Fast Legal Document Service is registered as a nonprofit, its only three board members are Lansink, his fiancée, and her son.
Lansink’s AFCA, LLC, meanwhile, poses as a technology company. AFLC has paid hundreds of thousands, if not millions, of the dollars it swindled from clients to Lansink’s company over the years, directly and indirectly benefiting Lansink in the process. For example, the $279,000 in “legal expenses” that AFLC reported to the IRS in its 990 filed in 2021 was actually paid to AFCA, LLC . The same 990 from 2021 also lists over three quarters of a million dollars in “information technology” expenses that AFLC also paid to AFCA, LLC for “the development of different apps.” This means that AFLC paid half of its revenue – over $1 million – directly to a company owned by the President of its own Board of Directors.
darryll k. jones