According to coverage in The Daily Journal, Robert Blashek, a tax partner at O’Melveny & Myers, said the impact could hit law firms, particularly large ones, very hard. One of the most potentially explosive repercussions would be an across-the-board increase in law firm debt, assuming (quite reasonably, I believe) that market pressures would force firms to advance the money to partners to pay their unfunded tax liability. For an AmLaw 25 firm, this could easily amount to $50-$100-million of additional debt. For firms who have already pledged a large proportion of their WIP and A/R, it’s not clear under what terms, if at all, banks would be willing to lend such amounts.
Said David Roberts, partner in charge of RBZ LLP, an LA-based public accounting firm, “To say this could be the death [knell] for many law firm’s wouldn’t be too far fetched.” Elliot Freier, a tax law specialist at Irell & Manella, took a similarly harsh view: Firms would have to “jump a high hurdle” to provide that certain income would never be received, showing that there was some “identifiable event” making it clear that it wouldn’t be able to collect from a client.
“In the meantime the government has your money and you haven’t seen a dime; it’s a rather unpleasant situation.”
And Freier is also not optimistic that Congress will hold its fire until it can mount a concerted effort at comprehensive tax reform: “With Congress, anything can happen. I have seen the most amazing things done in the name of generating revenue.”
Finally, let me address head-on an undercurrent of commentary that has arisen to defend the supposed merits of accrual accounting as a superior measure of an organization’s true economic performance. This view, as well-intentioned as it may be, is just plain wrong for a few critical reasons. Let us not succumb to the temptation of getting bogged down in the “cash beats accrual/accrual beats cash” debate and lose sight of the one enormous issue here.
Why are the accrual acolytes wrong-headed?
Re your arguments
•The four-year transitional period puts US-based firms at a competitive disadvantage to UK-based firms with no phantom income overhang.
The UK based firms have had accrual accounting for many years. And the UK tax authorities adoption of FRS 5 (Long term Contract WIP) for revenue recognition has created an even greater absurdity.
I sympathise with you, but this justification does not pass muster
Hi, Brian, and thanks for this.
Perhaps I’m missing something, but my intended point was that during the four year transition period US-firm partners would be paying for the overhang while UK-firm partners have no such liability.
The differential only exists during the four years; if everyone had always been on accrual your point would be utterly correct and my argument empty. But four years is a long time!
How many Congressmen came out of Big Law Firms? How many expect to retire into a big firm? Some senators seem to make that move, but not too many congressmen. Seems like big firm lawyers going into government service land on a federal bench.
How receptive will they be to the issues so well defined here?