The best estimate I’ve seen of the one-time revenue infusion comes (again) from PwC, who estimated it at $50-billion, for all affected professional service firms.* Just how tantalizing could $50-billion be to the eyes and hands of our 535 paragons of selfless virtue? Here are some comparables, to put context around that figure. $50-billion is equivalent to:
- An extra four months of tax receipts from all corporations in the US;
- The price of 12 Nimitz class aircraft carriers; or, if you want to have much more fun with it than that, and with a nod to Super Bowl Sunday now 48 hours away;
- The value of all 33 NFL teams—with about $20-billion in walking-around money left over.
With the help of one of those AmLaw CFO’s, I’ve come up with some estimates of the impact on you.
Begin with the premise/assumption that the amount of “phantom” non-cash income that would be subject to taxation is three months of revenue, and that equity partners would pay tax on that at the top federal rate, 39.6%. We’ll round to 40%, but we will not add any booster for state and local income taxes, which of course in jurisdictions such as the one I’m sitting in—New York City—take the marginal rate to 50% and above in no time flat. (Note to the green eyeshade crowd: To arrive at the figures for the impact on individual partners in each of the following cohorts, I assume (a) that 100% of each firm’s net income is distributed out on K-1’s; and (b) that equity (and no non-equity) partners receive 100% of that distributed income.)
Here are the numbers:
- Revenue for AmLaw 50 firms in 2012 was $60B. So the total phantom income impact is $15B, total tax impact at 40% = $6B. According to the AmLaw 2012 figures, there were 12,533 equity partners in the AmLaw 50, for an average personal tax liability of $478,736.
- Revenue for AmLaw 51-100 firms in 2012 was $25B. So the total phantom income impact is $6.25B, and the total tax impact at 40% = $2.5B. Cumulative tax impact for AmLaw 100 therefore is $8.5B. Since there were 6,692 equity partners in this group, the average personal tax liability would be $373,580.
- Revenue for AmLaw 101-200 firms in 2012 was $18.5B. So the total phantom income impact is $4.6B, and the total tax impact at 40% = $1.85B. Cumulative tax impact for AmLaw 200 therefore is $10.35B. In this group of 9,647 equity partners, average personal tax liability is $191,769.
- It’s hard to get revenue numbers for the NLJ 350, but if you make some plausible assumptions about the way the AmLaw 200 revenue numbers decline by size of firm, it’s reasonable to assume that reveue of firms 201—350 is around $15B, for phantom income of $3.75B and tax @ 40% of $1.5B
Bottom line impact for the largest 350 law firms in the US: A one-time unfunded tax liability of $11.85-billion.
Since on or about September 15, 2008, every managing partner, executive committee member, and Executive Director/CFO/COO that I know has been pulling every available lever and string to cut expenses, right down to the Keurig coffee machines and yes, you know who you are. We have been struggling mightily to nip here and tuck there, and now we find a freight train bearing down us.
Finally, to maintain continuity of invoking Biblical phraseology between this installment and the first, the analogy here might be to the admonition against looking at the mote that is in your brother’s eye, while ignoring the log in your own.
We can and have dealt with the motes; it’s high time to snap to as an industry and do all we can to fend off this Congressional log.
If you don’t feel an ample sense of urgency yet, just wait for Part III.
*Speaking of “all affected” professional service firms, word seems to slowly be starting to spread. according to the online journal AccountingWeb, other groups who have chimed in in opposition to the proposal include not just the ABA and the AICPA, but also, in a jointly signed January 17 letter, the American Council of Engineering Companies, American Dental Association, American Institute of Architects, American Farm Bureau Federation, and the S Corporation Association.