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New Tax Law Already Prompting Growth at Many Law Firms

Posted on January 22, 2018 by Zoe Sagalow

Add one more industry that is seeing benefits from the new tax overhaul: legal professionals.

The Tax Cuts and Jobs Act (P.L. 115-97) has only been in place for a month, but firms are already seeing signs that it will spur more demand for their services that could lead to increased hiring as clients try to adjust their tax plans in response to sweeping changes affecting passthrough businesses and corporations.

In an informal survey of law firms, 11 of 16 told Tax Analysts that they either have hired or will hire more tax attorneys in 2018. One firm, Kirkland & Ellis LLP, said it expects to hire 10 to 15 tax lawyers in its U.S. offices this year, and another five to seven in London.

“The new tax legislation certainly seems likely to increase deal activity, which is our bread and butter,” the firm said of its plans to expand its tax group.

Most firms responding to Tax Analysts had more modest plans, anticipating a need for one to five additional tax attorneys to cope with the increased demand. Five firms said they don’t expect to need additional attorneys at the moment, but that could change.

“Given the transactional nature of our tax practice, until we see evidence that the new tax act, or other forces, are leading to a material uptick in the number of transactions, we don’t envision a need for additional tax resources. Similarly, we don’t see any evidence that we will need any fewer tax attorneys during the upcoming year,” Brian J. Todd of Davis Wright Tremaine LLP said.

All the law firms that spoke with Tax Analysts mentioned some anticipated growth or at least an effect on their practices from the new tax law. The most commonly mentioned growth areas included corporate structure or choice of entity, given the reduced corporate rate and changes to passthrough taxation, as well as international taxation issues.

Beth Kaufman, president of Caplin & Drysdale, said international tax is an area in which her firm expects to see increased demand.

New Opportunities

“Those laws are complex and may provide new planning opportunities in cross-border planning for businesses and individuals,” she said. Caplin & Drysdale, which Kaufman described as a tax boutique, is one of the firms that expects to add tax attorneys this year.

Kaufman said she also expects to see the estate and gift tax practice as a potential growth area “among clients who can afford to use the temporarily increased exemptions from gift and generation-skipping transfer taxes.”

Bradford S. Cohen of Jeffer Mangels Butler & Mitchell LLP said although the lifetime estate and gift tax exemptions were doubled for deaths occurring on or before 2025, he still sees a need for estate plans to be reexamined. 

“Previous planning would concentrate more on the reduction of the estate tax through various planning techniques . . . Depending upon the size of the estate, and the goals of the client, it may be more efficient tax planning to either increase or decrease their lifetime gifting,” Cohen said. 

More SALT Help

Other firms see the changes to the state and local tax (SALT) deduction as driving an increase in business.

“Being based in [California], we anticipate significant changes in the state tax law this year to deal with the substantial elimination of the SALT deduction under the federal legislation. That will feed into our domestic tax planning work,” said Elliot Freier, head of the tax practice at Irell & Manella LLP.

Saba Ashraf, co-leader of the tax group at Ballard Spahr LLP, also said it’s too early to know much detail about potential growth areas for the firm in light of the new tax law, but her initial reaction is that one area will be state and local tax.

“Many states will be figuring out if they want to continue to follow federal law in computing their taxable income; they’ll also be figuring out what reactions they have to several of the provisions in the new tax act,” Ashraf said.

The limited SALT deduction “may cause states to recast the existing taxes as another form of payment that may be deductible,” Ashraf said.

Some states such as New York, California, Maryland, Arizona, Oregon, and Michigan are considering or working on changing their laws in light of the new federal law. California, for example, is considering making state taxes a charitable contribution, whereas New York is considering using an employer-side payroll tax.

The reduction in the corporate tax rate from 35 percent to 21 percent will also create questions for attorneys about whether it’s time for businesses organized as passthrough entities to switch over to C corporations.

For his part, Robert Holo of Simpson Thacher & Bartlett LLP said he doesn’t expect companies to abandon passthrough structures, specifically partnerships and LLCs.

“We don’t know if the corporate rates are going to stay so low; the corporate structure still does involve double taxation; and a corporate structure often cannot be unwound without corporate tax on the appreciated assets in the company,” he said.

M&A Questions Abound

Holo and Ballard Spahr’s Ashraf also said that they will be receiving more questions from clients about the use of debt-financed deals.

There are a few structural questions that will affect cross-border mergers and acquisitions, and the limits on interest deductibility imposed by the new law “are causing clients to rethink the desirability of, and limits to, the use of leverage in deals,” Holo said.  

“Obviously, debt has been a critical driver in deal work, so if debt becomes less advantageous, that could have a significant impact on the market, on deal valuations and on structure,” he said.

More broadly, Kostelanetz & Fink LLP said it expects that unclear parts of the law will prompt more work for the firm over time.

“As time passes, there will be additional compliance and enforcement work stemming from the new law because the law is unclear and has many gaps,” the firm told Tax Analysts. “The ambiguities and gaps inevitably will be addressed, at least in part, through compliance and enforcement.”

David Noren of McDermott Will & Emery also said he sees opportunities stemming from the complexity and errors resulting from “the scope and speed” of the law.

“In the near term, tax lawyers everywhere will be busy identifying these issues and helping clients make difficult judgment calls with relatively little official guidance to rely on,” Noren said. “The legislation has not made the U.S. tax system any less complex, so there is every reason to expect demand for tax advisory services to remain strong well into the future.”

Firm’s Name

Staffing Plans

Caplin & Drysdale

Hiring

Bryan Cave

Hiring

Kostelanetz & Fink

Hiring

Cooley

Hiring

Baker McKenzie

Hiring

Morgan, Lewis & Bockius

Hiring

Chamberlain

Hiring

Kirkland & Ellis

Hiring

Ballard Spahr

Unchanged (recently merged with another firm)

Arnold & Porter

Unchanged

Irell & Manella

Unchanged

Davis Wright Tremaine

Unchanged

 

*Note: Four firms who responded to this question asked for their answers to not be attributed to them.