Payments to lawyer serving on client's board of directors.

• Author: Weichholz, Jacob

In Letter Ruling 9514008, the IRS determined that a payment to a lawyer employed by a personal service corporation law firm, for serving in his own capacity on a client's board of directors, was income to the lawyer, and not to the firm.

The attorney in the ruling was a shareholder/employee in a law firm whose bylaws required all lawyer-shareholders to remit to the firm any compensation received from third parties for services normally provided by the firm. The lawyer served on his client's board of directors, and also managed and supervised all of the legal services his firm provided to the client. However, because of limitations in the law firm's professional liability insurance policy, an attorney serving as a director of one of the firm's clients was precluded from providing legal advice to such client. The law firm's client considered the lawyer to be serving as a director in an individual capacity, rather than as the firm's agent.

To compensate the lawyer for serving on its board, the client granted nonvested, nontransferable, nonstatutory options on its stock to the lawyer personally. The lawyer planned to exercise some of the options and immediately sell the shares he acquired. In addition (and in accordance with the law firm's bylaws), the lawyer would then remit the net proceeds to the firm.

In evaluating these facts, the Service looked to Rev. Rul. 80-338, in which a partner in an accounting firm was named...