Interest on Trust Accounts, Matter of

• Decision Date: 16 July 1981
• Docket Number: Nos. 51182,60350 and 60351,s. 51182
• Citation: 402 So.2d 389
• Parties: In the Matter of INTEREST ON TRUST ACCOUNTS.
• Court: Florida Supreme Court

Page 389

402 So.2d 389

In the Matter of INTEREST ON TRUST ACCOUNTS.

Nos. 51182, 60350 and 60351.

Supreme Court of Florida.

July 16, 1981.

Rehearing Denied, Opinion Clarified Aug. 5, 1981.

Case of Original Jurisdiction The Florida Bar

Russell Carlisle, President, Florida Bar Foundation, Fort Lauderdale, and Henry G. Zapruder of Cohen & Uretz, Washington, D. C., on behalf of the Florida Bar Foundation, Inc. and sixty-seven active members of The Florida Bar.

John F. Harkness, Jr., Executive Director, Tallahassee, Leonard H. Gilbert, President, Tampa, Samuel S. Smith, President-elect, Miami Beach, and John A. Boggs, Asst. Staff Counsel, Tallahassee, of The Florida Bar, Bill Wagner of Wagner, Cunningham, Vaughan and McLaughlin, Tampa, Chairman for the Florida Bar Integration Rule and Bylaws Committee, and Ben H. Wilkinson, Chairman, Special Committee, Tallahassee, on behalf of the Board of Governors of The Florida Bar.

Roderick N. Petrey and Randall C. Berg, Jr. of the Florida Justice Institute, Inc., Miami, on behalf of: American Civil Liberties Union, Common Cause of Florida, Florida Audubon Society, Florida Clearinghouse on Criminal Justice, Florida Conference of NAACP Branches, Florida Institutional Legal Services, Inc., Florida Legal Services, Inc., Florida Public Defender Association, Governor's Commission on Advocacy for Persons With Developmental Disabilities, Project Directors' Association, Southern Christian Leadership Conference, and Southern Legal Counsel, Inc.

Sara-Ann Determan, Chairperson, Special Committee on Public Interest Practice, Washington, D. C., on behalf of: the American Bar Association.

L. Orin Slagle, Dean, Florida State University College of Law, Tallahassee, on behalf of: Florida State University College of Law, the University of Florida, Spessard L. Holland Law Center, Nova University for the Study of Law, and Stetson University College of Law.

Robert M. Curtis, Fort Lauderdale, Henry P. Trawick, Jr., Sarasota, and Gerald L. Brown, Pensacola, Responding to Petition.

ENGLAND, Justice.

This proceeding emerges from the Court's 1978 program designed to generate interest on lawyers' trust accounts for the improvement of the administration of justice in Florida. ¹ The original plan, permitting voluntary participation by lawyers and law firms, was once amended to meet technical requirements of the Internal Revenue Service (IRS) and to accommodate The Florida Bar's request that we remove a requirement that compliance certificates be prepared for attorneys by certified public accountants. ² Notwithstanding these alterations, the program has never been implemented for its intended purposes due to delays in resolving with IRS the appropriate federal income tax treatment of the earnings, payable to the Florida Bar Foundation, Inc., to be generated on clients' funds held in lawyers' accounts.

Representing that tax considerations could be favorably resolved with IRS by a minor amendment to the program, the Foundation, joined by the Bar, has proposed amendments to the program for that purpose. In doing so, the Foundation has also asked that the program be made mandatory for all Florida attorneys, a position made possible by recent changes in the banking laws. In light of the latter proposal, the Foundation asked that we announce the changes and solicit comments from all interested parties. Promptly after the change proposals were submitted we did just that, simultaneously suspending the original program until further order of the

                Court.  3 We have received responses and comments on the Foundation's proposals in abundance, and spirited oral argument was held on June 2
                

I

The response to our request for comments was an outpouring of mail and filings, predominantly hostile to the proposed changes. ⁴ In addition to communications from the Foundation explaining the changes proposed, and from the Bar (presenting a catalogue of unanswered concerns), we have heard from attorneys, law firms, bar associations, bar committees, law schools, the Florida Bankers' Association, and various public interest law organizations. All these materials have been extremely helpful to us. They properly and candidly raise moral, legal and practical problems that inhere in the Foundation's proposals, and they express the sentiments of many attorneys, both on their own behalf and on behalf of their clients generally.

Interestingly, the federal problems which necessitated submission of program changes attracted almost no interest from those who communicated with us. Some concern was expressed about the uncertainty and vagueness of the terms which IRS deems essential to describe the categories of clients' funds brought within the ambit of this trust account program those "held for a short period of time" or "nominal in amount." But those concerns present neither an impediment to the adoption of a revised program nor an occasion for more specificity, for the plan we adopted in 1978 always contemplated precisely the same "nominal" and "short" standards, which have classicly and historically governed attorneys in their trust account practices. ⁵

Changes which are said to be necessary to make the program acceptable to IRS revolve around the federal income tax concept known to tax practitioners as the "assignment of income" doctrine. That doctrine, which is an outgrowth of a graduated, federal income tax rate structure, was first articulated in Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731 (1930). It evolved to prevent persons who generate income by their services or with their property from shifting that income to other persons in whose hands the income either would not be taxed or would be taxed at significantly lower rates. Classic income assignment situations involve conscious, tax avoidance schemes by taxpayers in high income brackets. Over the years the common elements of prohibited income assignment have been a tax avoidance motive and a scheme or device for shifting income to related or controlled taxpayers. See, e. g., United States v. Basye, 410 U.S. 441, 93 S.Ct. 1080, 35 L.Ed.2d 412 (1973); Commissioner v. First Security Bank of Utah, 405 U.S. 394, 92 S.Ct. 1085, 31 L.Ed.2d 318 (1972); Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75 (1940); Poe v. Seaborn, 282 U.S. 101, 51 S.Ct. 58, 75 L.Ed. 239 (1930).

In its efforts to enforce the tax laws and prevent erosion of the nation's tax base, the Internal Revenue Service has always been wary of plans with tax connotations which, although not designed for tax avoidance, might create precedent capable of being used for that purpose. Thus, any tax-shifting proposal submitted to IRS for approval invariably receives special scrutiny, not only for its motivations but as well for any incidental or implicit precedential potential.

This Court's 1978 program for the generation of income on client's accounts, seen by IRS as involving a conceptual reassignment of interest income from clients to the Foundation, raised concerns within IRS that the Eventually, tax counsel was able to obtain firm assurances from IRS that the tax treatment being sought for the program would be approved so long as clients could in no way and to no degree control the creation or destiny of earnings generated on their attorney-held funds. ⁷ The linchpin of approval was removal of all client control over the placement or non-placement of funds at interest that is, elimination of the client's veto over the investment of funds from which he could never benefit because the amounts on deposit were either too small in amount or to be held for only a short duration. On the basis of IRS' proposal for approval, and despite the continued belief by the Foundation's tax counsel both that no client "income" ever existed under the program and that the principles of Lucas v. Earl were in no wise implicated, the Foundation proposed that we amend the program to eliminate all client control and, in the process, reaffirm the "nominal in amount" and "short in time" standards for program applicability. This we now do.

                program could become a breeding ground for yet unborn tax avoidance schemes.  As a result, hesitancy existed to approve taxability to the Foundation of the interest generated on lawyers' commingled trust accounts.  IRS acknowledged that, unlike all prior, prohibited assignment of income situations, the Court's program did not in any way involve taxpayer-initiated, tax evasion among related or controlled taxpayers.  Indeed, it was noted that the Service had approved income transfer plans fraught with far more tax avoidance risk as precedent than the Court's program.  6 Nonetheless, the Service was slow to rule approvingly on the Court's program as originally adopted, and because the feasibility of implementing the program depended upon the earned income on trust accounts being treated as taxable to the Foundation rather than to individual clients, the withholding of approval effectively barred implementation of the program
                

But it was not the tax aspects of the Foundation's proposal which raised the brouhaha which attended its submission to the Court. The Foundation's other proposal that the program be converted from a voluntary to a mandatory plan has evoked the most vehement response from bar members. The range of comments on this point run from respectful disagreement to hyberbolic outrage. ⁸ Specific objections can be categorized as concerns that the Foundation's revised program will have these effects:

1. burden attorneys with new record-keeping responsibilities and costs 2. be unfair to clients, or deprive them of their earnings;

3. adversely affect (or some say, further erode) the public image of the legal profession;

4. generate potential disciplinary problems for attorneys, due to the absence of specific guidelines or standards for handling clients' accounts;

5. produce undetermined effects on professional liability insurance premiums;

6. discriminate unfairly,...