In September 2010, a team of Shearman & Sterling's San Francisco and Washington DC litigators and tax lawyers filed an appellate amicus brief in a groundbreaking pro bono case in California. The appeal arose from a state trial court writ proceeding that invalidated an effort by the County of Alameda in the San Francisco Bay Area to reduce General Assistance (GA) payments to the poorest of California's poor.
Under California law, counties are required to provide GA payments to residents who do not qualify for any other government support. The typical GA recipient is over the age of 45, unemployed, without family support or regular housing, and often suffering from mental health issues. The GA payments are the only stable source of financial support they receive. In 2009, the GA payment in Alameda was approximately $300 per month—in a region of the US notorious for an extremely high cost of living. The GA distribution consists of a cash portion that goes to the recipient and a rent payment that goes directly to the landlord.
In early 2010, the Public Interest Law Project (PILP) in Oakland, California, brought a writ proceeding in the California Superior Court challenging an effort by Alameda to slash GA payments to residents. Alameda had announced that it would require landlords to submit federal W9 forms for GA money received for rent. If the landlord failed to submit the W9, the County would cut the GA payment by about 50% to $147 per month. Public proceedings and documents obtained in discovery underscored that the County's motive in requiring the W9 was to reduce its GA payment obligation. Most landlords for GA recipients are other very poor residents who are renting out a bed or a portion of a room, and are unlikely for a variety of reasons to return a W9. The County estimated that it would avoid over $2 million annually in GA disbursements with the W9 requirement.
PILP persuaded the Superior Court to issue a writ blocking the W9 requirement and the County appealed. PILP reached out to Shearman & Sterling to provide an amicus brief addressing the dispositive federal tax issues at the heart of the case. The County's main defense was that US Treasury Regulation section 1.6041-1(e)(1) – the "Middleman Rule" – imposed a W9 reporting obligation on entities like Alameda that make payments to third parties on behalf of another person. The County also claimed that it had received a private letter ruling from the IRS that validated the County's tax law conclusions.
Shearman & Sterling partners Jim Donato (San Francisco-Litigation) and Thomas Johnston (Washington, DC-Tax) and associates Keith Palfin (Washington, DC-Litigation) and Jerry Feige (Washington, DC-Tax) took on the case. The team wrote an amicus brief on behalf of the Asian Law Caucus and California Tax Reform Association demonstrating that the Middleman Rule applies only in situations where the payor exercises management or oversight functions in connection with the payments and is completely inapplicable to the County's GA program. The team also eviscerated the County's reliance on the letter ruling by showing that it solicited the letter on an expedited basis from the IRS during the writ proceedings and failed to present the facts and circumstances honestly to the agency.
The matter is currently pending in the California Court of Appeal in San Francisco. The Shearman & Sterling brief was praised as "a beautiful piece of work" by the lawyers at PILP. Says Donato, “This case was a rare opportunity to do tax litigation in a pro bono context, with the added value of working on behalf of some of the most neglected residents of California. Because the tax and welfare policy issues are ones of first impression, the case may reach the California Supreme Court.”