Today, as you probably know, is the deadline for filing your taxes. As was the case last year, the combination of April 15 falling on a weekend and the little-known holiday of Emancipation Day pushed the filing deadline back a bit.
Did you appreciate the extra time to fill out your tax return? Partners at Dewey & LeBoeuf probably did, due to some problems with their K-1 forms.
And speaking of partners at Dewey, their numbers continue to decline. Let’s look at the latest defections, as well as the tax issue.
UPDATE (10:30 AM): The game of musical chairs continues. Six more Dewey departures, which we learned about shortly after publishing this post, after the jump.
We’ll start with the defections. The Dewey partner countdown continues. As we mentioned last week, when the Dewey partner losses for 2012 to date stood at around 50, about 45 more departures could create problems with respect to Dewey’s loan covenants.
That was last week’s count. Yesterday brought word of eight new partner departures. The number of partners lost by the firm in 2012 now exceeds 60, according to Am Law Daily. For those keeping track at home, another 35 to 40 defections could get Dewey in deep doo-doo with its lenders. The firm’s creditors, as you may recall, include not just banks but also bondholders. In addition to any money borrowed under its $100 million revolving credit line, which the firm is currently in the process of renegotiating with its banks, Dewey also owes an estimated $125 million in connection with a private bond issue.
UPDATE (10:30 AM): Make that another 30 or so defections. Hunton & Williams just announced that it’s adding six Dewey lawyers to its global energy practice: Bud Ellis, Kevin C. Felz, Michael F. Fitzpatrick Jr., Steven C. Friend, Steve R. Loeshelle, and Peter K. O’Brien. All were partners at Dewey except for Felz, who was counsel. You can read the Hunton press release here.
Now, on to the tax issue. Casey Sullivan had this report yesterday in the Daily Journal (sub. req.):
Some partners who have left Dewey & LeBoeuf LLP this year have recently claimed their updated K-1 tax forms, issued April 12, contain allocations of 2011 taxable income that are drastically inconsistent with what the partners were actually paid.
One ex-Dewey partner said his taxable income came in at a small fraction of the amount he was actually paid for the year of 2011, while another ex-Dewey partner said the tax form pegged his taxable income at nearly double the amount of compensation he received for last year. Two partners said they knew of several current and former Dewey partners who expressed similar concerns over their K-1 forms.
When law firm partners can’t make heads or tails of their tax forms, you know things have gotten bad. What’s behind the apparent discrepancies?
The New York firm has lost more than 50 partners since the beginning of the year, many of the defectors claiming firm leaders slashed or deferred a significant chunk of their compensation because they couldn’t afford to pay compensation guarantees owed to other high-ranking Dewey rainmakers. Now, as the firm has issued updated tax forms for the year of 2011, confusion has overcome certain partners who say they have been either under-allocated or over-allocated taxable income.
The firm did get professional help in preparing these forms. Dewey retained PricewaterhouseCoopers to help sort through “the complexity of compensation arrangements with partners and the distributions of cash in 2011.” Here’s how PWC’s cover letter for the updated K-1 forms explained matters:
“The updated 2011 estimate is likely to be different than the one provided to you in January 2012. Based on the updated allocations, partners that have guaranteed compensation generally will receive additional taxable income allocations related to the cash received for both the current and prior years if applicable, and the remaining partners generally will be allocated a reduced share of taxable income. These updated allocations provide a more equitable basis for connecting taxable income with cash received.”
One former Dewey partner said the following in an email to the Daily Journal: “All I know is I’m paying a lot of taxes for 2011, luckily I have the resources to do it, and I’ll figure out what they did down the road.” In other words, pay all your taxes now, and let God — or the IRS (same difference) — sort them out later.
One of ATL’s Dewey sources confirmed the confusion among Dewey partners, current and former, on the tax front. This tipster told us:
All of the partners are completely confused about these reports. They are not consistent with earlier estimates given to the partners in January and are not consistent with the cash actually distributed to partners. They are not consistent with the numbers reported to Am Law or even in Am Law’s restated numbers.
Younger partners are being told that the a big part of their cash distributions for 2011 were for repayment of capital. Only these partners were told they were getting profit distributions and treated them accordingly. These partners largely borrowed money for their capital accounts through lending facilities set up by Dewey. So, these folks still owe the banks on their capital notes. A bunch of celebrity chefs [?] received K 1′s that report income higher than they actually received. The covering memo says that Price Waterhouse helped the firm come up with a “more equitable” allocation of the cash actually received. Huh? Cash profit distributions should be cash profit distributions.
Here’s what this source suspects might be going on:
There is a lot of confusion and some anger as to what this is all about. Some folks think that the firm is setting up the partners for an additional capital call. Some partners think that the firm is in trouble with its lenders, [both] for the debentures and the banks. Apparently, the debentures have limitations on profit distributions if revenue falls below a certain number and this may be a subterfuge for the money actually paid out. There is a lot of confusion and mistrust and almost no information given to the partners. The fact that returns need to be filed [today] adds to the bedlam.
This could be the straw that breaks the camel’s back for a lot of fence sitters.
Some observers — such as Steven Harper, over at The Belly of the Beast — have questioned the wisdom or propriety of former Dewey partner John Altorelli’s pessimistic comments to the media about Dewey’s future. His remarks might not have been politic, but whether they’ll be proven wrong is another story.
Latest Dewey Losses Span the Globe, Push 2012 Departure Figure Above 60 [Am Law Daily]
More Dewey Partners Say Adieu: 57 Exits Since January [WSJ Law Blog]
UNFORTUNATE (AND IRONIC) COMMENT AWARD [Belly of the Beast]
Hunton & Williams LLP Adds Six Partners To Global Energy Practice [Hunton & Williams (press release)]
Ex-Dewey partners confused about tax forms [Daily Journal (sub. req.)]