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Law firms fight ‘onerous’ proposed tax change

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Lawyers representing Indiana’s legal profession are heading to Washington, D.C., this week with a message for their congressional delegations – kill a proposal that would change the way many law firms report income-tax obligations.

“It’s a very onerous accounting burden on a firm,” tax attorney Carol Adinamis said of proposals in Congress. Measures that have drawn the ire of the legal community would require law firms and other personal services businesses with annual revenue in excess of $10 million to switch to accrual accounting from the current cash-basis method.

Opponents of the proposal fear it could create financial hardship for some firms, add to accounting expenses and create cash-flow nightmares.

Currently, firms report income-tax liability based on receipts through Dec. 31 of a calendar year. Accrual accounting would require reporting income based on the calendar year in which the right to receive revenue arises, regardless of whether the money was received.

“Firms would be forced to pay taxes on income they have not received and may never receive,” the American Bar Association said in a recent alert to members.

Adinamis, of Adinamis Michael & Saunders P.C. in Indianapolis, also is vice president of the Indiana State Bar Association. On April 9 and 10, an ISBA delegation and state bar groups from around the country will join the American Bar Association on Capitol Hill in lobbying against the measure.

The proposal is contained in the Tax Reform Act of 2013 sponsored by House Ways & Means Chairman Rep. Dave Camp (R-Mich.), and also appears in draft legislation in the Senate. The switch in accounting methods would impact not just law firms, but a host of others including medical-service providers, accounting, engineering, consulting and other professional-services companies with revenue in excess of $10 million.

‘Unnecessary complexity’

ISBA President James Dimos already has sent letters to members of the state’s congressional delegation urging them to reject the proposal. Large firms such as Barnes & Thornburg LLP and others also are opposed.

dimos-jim-mug Dimos

“This far-reaching provision would create unnecessary complexity in the tax law and increased compliance costs by disallowing the use of the simple, straightforward cash method of accounting,” Dimos wrote to Indiana’s congressional delegation.

A partner at Frost Brown Todd LLC in Indianapolis, Dimos is also a former member of the ABA’s Board of Governors and House of Delegates.

While the accrual accounting proposal has been widely characterized as targeting large law firms, Dimos told Indiana Lawyer that the $10 million threshold could reach some small- to mid-sized firms with as few as 20 to 30 attorneys.

“At the minimum, it is going to create a whole other layer of accounting responsibilities within a law firm that may very well necessitate adding staff so the firm is in compliance with the tax code,” Dimos said.

Joseph O’Connor is a partner with the 14-lawyer Bloomington general practice firm Bunger & Robertson. “Someday a firm our size could be affected by this,” O’Connor said.

Even a two-person firm might win a big judgment that would subject it to paying tax on the accrual method, said O’Connor, a past ISBA president and Indiana delegate to the ABA who will be among those in the delegation to Washington.

The accrual method also could be painstaking in cases where revenue goes uncollected or awards are reversed years later on appeal, Dimos said, because taxes on that expected income already would have been paid in the year the income right arose.

The impact for firms could be dramatic, according to Dimos. He imagines some firms organized as partnerships might restructure to avoid being subject to accrual accounting if the measure were enacted.

On the flip side, firms that are below the $10 million threshold might restrain growth if they’re concerned about the challenges that accrual accounting might present, Dimos said.

“It’s certainly a disincentive for bringing in new lawyers,” he said of such firms, “which is something the profession doesn’t need right now.” He also imagines some firms might have to resort to unconventional means to pay taxes on receivables.

The ABA and bar groups have been the loudest voices protesting the proposed change in accounting for personal-services companies. Adinamis suggested that may be because law firm accounting is already tricky enough.

“The biggest problem is, they’re going to be asked to pay taxes on money they haven’t received yet,” she said of accrual accounting. Law firms don’t typically hold back a lot of money, she explained, so any additional tax burden is likely to crimp cash flow.

“A lot of times, we don’t get paid for a long time,” said Adinamis, who’s also a certified public accountant. “Ultimately, I think it will affect the clients we serve. I think no doubt attorneys would be wanting their money sooner than later.”

Dimos said the change also would impact attorneys who counsel professional-services companies, particularly those who also provide accounting services.

Back again?

Indiana University Maurer School of Law Professor Emeritus William D. Popkin is a nationally recognized scholar in tax law and legislation who says this isn’t the first time tax code writers have tried to cast a wider net around law firms and other professional services.


popkin-william-mug Popkin

“I don’t think it has a chance of passing based on past experience,” Popkin said. “Any chance of passage would probably have to exempt smaller law firms.”

Popkin said he expects smaller firms to argue accrual accounting would prove too difficult for them to manage. “Larger businesses will probably go along on their coattails and the whole thing will die.”

O’Connor said that there may be an element of public perception at play in the proposal. Because the measure is promoted as tax reform aimed at big law firms, “it’s hard to generate much sympathy for the new method, even though I think it creates all kinds of headache and hardship for everybody involved,” he said.

Dimos isn’t as certain as Popkin that lawmakers will drop the proposal.

“What I do think is going on here is an effort to make the (government’s) books look good in the short term,” Dimos said. “Over the long run it should balance out, but in the short term, you’ll see increased tax revenues to the government.

“That will then be not a result of increased economic activity, but it will be because law firms and other personal-services businesses had to go out and pay taxes sooner, or in some cases had to borrow or go into savings to pay the newly expedited taxes,” he said.

In addition to opposing the proposed accounting change, Dimos and O’Connor said members of the delegation will ask lawmakers to adequately fund the Legal Services Corp. The program that provides civil legal assistance to low-income Americans is requesting a budget of $486 million for fiscal year 2015, the same it received in FY 2014.•

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  1. I have been on this program while on parole from 2011-2013. No person should be forced mentally to share private details of their personal life with total strangers. Also giving permission for a mental therapist to report to your parole agent that your not participating in group therapy because you don't have the financial mean to be in the group therapy. I was personally singled out and sent back three times for not having money and also sent back within the six month when you aren't to be sent according to state law. I will work to het this INSOMM's removed from this state. I also had twelve or thirteen parole agents with a fifteen month period. Thanks for your time.

  2. Our nation produces very few jurists of the caliber of Justice DOUGLAS and his peers these days. Here is that great civil libertarian, who recognized government as both a blessing and, when corrupted by ideological interests, a curse: "Once the investigator has only the conscience of government as a guide, the conscience can become ‘ravenous,’ as Cromwell, bent on destroying Thomas More, said in Bolt, A Man For All Seasons (1960), p. 120. The First Amendment mirrors many episodes where men, harried and harassed by government, sought refuge in their conscience, as these lines of Thomas More show: ‘MORE: And when we stand before God, and you are sent to Paradise for doing according to your conscience, *575 and I am damned for not doing according to mine, will you come with me, for fellowship? ‘CRANMER: So those of us whose names are there are damned, Sir Thomas? ‘MORE: I don't know, Your Grace. I have no window to look into another man's conscience. I condemn no one. ‘CRANMER: Then the matter is capable of question? ‘MORE: Certainly. ‘CRANMER: But that you owe obedience to your King is not capable of question. So weigh a doubt against a certainty—and sign. ‘MORE: Some men think the Earth is round, others think it flat; it is a matter capable of question. But if it is flat, will the King's command make it round? And if it is round, will the King's command flatten it? No, I will not sign.’ Id., pp. 132—133. DOUGLAS THEN WROTE: Where government is the Big Brother,11 privacy gives way to surveillance. **909 But our commitment is otherwise. *576 By the First Amendment we have staked our security on freedom to promote a multiplicity of ideas, to associate at will with kindred spirits, and to defy governmental intrusion into these precincts" Gibson v. Florida Legislative Investigation Comm., 372 U.S. 539, 574-76, 83 S. Ct. 889, 908-09, 9 L. Ed. 2d 929 (1963) Mr. Justice DOUGLAS, concurring. I write: Happy Memorial Day to all -- God please bless our fallen who lived and died to preserve constitutional governance in our wonderful series of Republics. And God open the eyes of those government officials who denounce the constitutions of these Republics by arbitrary actions arising out capricious motives.

  3. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

  4. "Meanwhile small- and mid-size firms are getting squeezed and likely will not survive unless they become a boutique firm." I've been a business attorney in small, and now mid-size firm for over 30 years, and for over 30 years legal consultants have been preaching this exact same mantra of impending doom for small and mid-sized firms -- verbatim. This claim apparently helps them gin up merger opportunities from smaller firms who become convinced that they need to become larger overnight. The claim that large corporations are interested in cost-saving and efficiency has likewise been preached for decades, and is likewise bunk. If large corporations had any real interest in saving money they wouldn't use large law firms whose rates are substantially higher than those of high-quality mid-sized firms.

  5. The family is the foundation of all human government. That is the Grand Design. Modern governments throw off this Design and make bureaucratic war against the family, as does Hollywood and cultural elitists such as third wave feminists. Since WWII we have been on a ship of fools that way, with both the elite and government and their social engineering hacks relentlessly attacking the very foundation of social order. And their success? See it in the streets of Fergusson, on the food stamp doles (mostly broken families)and in the above article. Reject the Grand Design for true social function, enter the Glorious State to manage social dysfunction. Our Brave New World will be a prison camp, and we will welcome it as the only way to manage given the anarchy without it.

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