Tag Archives: James B. Stewart

TRUMP’S TAX RETURNS: PART I — INFERENCES AND EVIDENCE

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[NOTE: On Friday, October 7, I’ll be appearing at the Thomson Reuters Legal Executive Institute’s “Law Firm Leaders Forum” in New York City. Our panel’s topic is “Long Day’s Journey Into Night: The Evolving Law Firm Partnership and Strategic Models.” Now, on to more important matters…]

Four months ago, I wrote that Donald Trump’s excuses for refusing to release his tax returns were silly. He said he was “under audit,” but his campaign had released a letter from his lawyers at Morgan Lewis & Bockius confirming that the IRS had closed its examination for years prior to 2008 “without assessment or payment, on a net basis, of any deficiency.”

Presumption: Trump Paid Little or No Federal Taxes

If the pending audit is an issue, why wasn’t he releasing returns through 2008? There was no good answer to that one. So in a September 14 interview with the Pittsburgh Tribune-Review, Donald Trump, Jr. offered a new explanation:

“Because he’s got a 12,000-page tax return that would create … financial auditors out of every person in the country asking questions that would distract from [his father’s] main message.”

(The next morning, Trump Jr. made an unfortunate reference to “gas chambers.” Five days later, he compared Syrian refugees to a bowl of Skittles, sprinkled with a few “that could kill you.”)

Eight hours before the first Presidential debate, Republican Congressman Chris Collins came up with an equally absurd reason for Trump’s refusal to release his tax returns:

“He does not want to give his competitors the advantage of knowing the money he makes or doesn’t make in every partnership he’s involved in… You don’t disclose that kind of information to competitors. That is bad business.”

For someone seeking the Presidency, that explanation is idiotic. In fact, the argument is so ridiculous that Trump himself gutted it during the debate, when he pledged to release his returns upon completion of the current IRS audit. The truth is that — win or lose — Trump will never release his tax returns. If the pendency of an audit mattered, he would have released his pre-2008 returns long ago.

Irresistible Inference from Limited Evidence: Trump Paid Little or Federal No Federal Taxes

In May, I suggested that Trump’s reluctance could stem from the fact that, like many real estate developers who can utilize favorable rules relating to that business, he probably has paid relatively little, if any, federal taxes for decades. In August, James B. Stewart of The New York Times picked up that baton and ran with it.

Paying little or no tax, Stewart notes, was consistent with Trump’s “returns from the late 1970s, which he filed with the New Jersey Casino Control Commission when applying for a casino license in 1981. Mr. Trump reported losses and paid no federal income tax in 1978 and 1979 and paid only modest sums — a total of less than $75,000 — for the prior three years.”

Pulitzer prize-winning investigative reporter David Cay Johnston wrote in The Daily Beast that Trump also paid no income tax in 1984, citing a New York State Division of Tax Appeals ruling.

More Evidence That Trump Paid No Taxes

During the first Presidential debate, Hillary Clinton pressed the issue again. Trump took the bait — and then some.

CLINTON: “Or maybe he doesn’t want the American people, all of you watching tonight, to know that he’s paid nothing in federal taxes, because the only years that anybody’s ever seen were a couple of years when he had to turn them over to state authorities when he was trying to get a casino license, and they showed he didn’t pay any federal income tax.”

TRUMP (in one of his 25 interruptions of Clinton): “That makes me smart.”

In the law, Trump’s statement is called an admission. In a courtroom, the trier of fact would hear it. Admissions are the most damning form of evidence against a party. Juries weigh them heavily in deciding contested issues of fact.

Later in the debate, Trump interrupted Clinton again:

CLINTON: “And maybe because you haven’t paid any federal income tax for a lot of years.” [APPLAUSE] “And the other thing I think is important…”

TRUMP: “It would be squandered, too, believe me.”

That’s another admission. After the debate, an NBC reporter followed up directly with Trump in the “spin room,” and he dodged the question.

Conclusion: There’s More

“So if he’s paid zero,” Clinton said, “that means zero for troops, zero for vets, zero for schools or health. And I think probably he’s not all that enthusiastic about having the rest of our country see what the real reasons are, because it must be something really important, even terrible, that he’s trying to hide.”

What could that something terrible be? Clinton offered examples.

“First, maybe he’s not as rich as he says he is. Second, maybe he’s not as charitable as he claims to be. Third, we don’t know all of his business dealings, but we have been told through investigative reporting that he owes about $650 million to Wall Street and foreign banks.”

Trump responded in a bizarre fashion. He offered to release a list of his banks, and said he that he’ll release his tax returns as soon as Clinton releases her 33,000 deleted emails — an obvious impossibility.

“So it’s negotiable,” moderator Lester Holt suggested, referring to the release of Trump’s returns.

“No, it’s not negotiable,” Trump responded, quickly backing away from his meaningless bluff.

Why does Trump fear transparency in a way that distinguishes him from every presidential candidate in the last four decades? Because, as Trump himself might say, there’s something there. And that something may go well beyond Clinton’s checklist of possibilities.

One reason that Donald Trump refuses to release his tax returns could be the most important of all to voters. In my next post, I’ll discuss it. Here’s a hint: the title of that installment will be “From Russia With Love.”

HAPPINESS IS…CRAVATH?

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Big law’s future has become big news. On September 25, The New York Times published a special section that included several articles on large firms; two are particularly interesting.

“Culture Keeps Firms Together in Trying Times” discusses the handful of large firms that have shunned the widespread eat-what-you-kill approach to partner compensation. It focuses on three firms, Cravath, Swaine & Moore, Debevoise & Plimpton, and Cleary, Gottlieb, Steen & Hamilton, all of which have retained lock-step compensation systems. For any class of associates, those who survive to partner continue advancing together throughout their careers.

“The only way a partner does better is if the firm does better,” says Debevoise presiding partner Michael W. Blair describing the behavior that follows such structural incentives.

Lock-step is a sharp contrast to most other big firms, which follow what Dewey & LeBoeuf’s management called the “barbell” system: Lots of service partners on one side of the barbell balance out a handful of star partners on the other side. Then-Dewey partner Jeffrey Kessler rationalized the yawning equity partner compensation gaps that this approach creates: “The value for the stars has gone up, while the value of service partners has gone down.”

Not worth it

The Times quotes Cleary managing partner Mark Leddy’s answer to the Kesslers of the world: “People who want to be a star and make $10 million a year don’t fit in here…Breaking the lock-step system for them would be an unacceptable cost to our culture.”

Why does culture matter? There are many answers, but Major, Lindsey & Africa’s recent compensation survey may have identified an important one. Almost eighty percent of partners in lock-step compensation systems are satisfied or very satisfied with their work. A closer look at the MLA survey reveals that the combined group of satisfied and very satisfied partners is about the same for lock-step as for non-lock-step firms. But the lock-step firms’ have a big advantage in the very satisfied group — fifty-five percent compared to only twenty-six percent for non-lock-step firms.

Satisfied versus very satisfied

That leads to James B. Stewart’s observations about Cravath, where he was an associate in the 1970s. In “A Law Firm Where Money Seemed Secondary,” Stewart notes that all attorneys in his firm were intelligent, well-credentialed and hard working, but those advancing to partner had something else in common: They loved their work. It gave them a huge competitive advantage over those who didn’t. Returning to the MLA survey, I think Stewart may have captured a significant difference between the lawyers who are very satisfied and those who are merely satisfied: Attitudes about work affect performance.

Stewart also notes that “of the 20 or so associates hired each year, one or two might be chosen to be a partner.” He concludes that “over the ensuing decades, Cravath doesn’t seem to have changed much.” He’s right.

But the rest of the large law firm segment of the profession has. In fact, many have modeled themselves after the Cravath attrition-and-leverage model, but they added an unfortunate twist away from lock-step compensation: Partners eat what they kill, so every year’s compensation review is a new self-justification exercise. That incentive structure produces a much different culture; most of it is ugly and little of it enhances a firm’s long-run stability.

About the associates…

Before getting too misty-eyed over life at Cravath, it’s worth pausing on one more data point. In the most recent Am Law Survey of Midlevel Associate Satisfaction, Cravath placed 119 out of 129 firms — down from 111 in 2011. The firm has been dropping steadily on that list since 2010, when it placed 84th out of 137. (Both Cleary Gottlieb and Debevoise did much better.)

A closer analysis suggests that Cravath associates do, indeed, enjoy their work. Unfortunately, they don’t seem to enjoy it enough to offset the things that place the firm near the bottom of the satisfaction survey.

Cravath scored above the all-firm averages in work-related subcategories, including quality of work assigned, opportunities to work with partners, and level of responsibility. But it received low marks in other subcategories, including likelihood of staying two years, morale, communication about partnership prospects, and family-friendliness. Lock-step partner compensation isn’t a panacea, but imagine how much worse a place like Cravath would be without it.

Following the money

Perhaps the most telling comment about the interaction between compensation and firm culture comes from former Dewey & LeBoeuf partner Ralph Ferrara who spent twenty-three years at lock-step Debevoise before making what he describes as “an imprudent decision” in leaving: “In my heart, I never left Debevoise; it’s a place that I still love to this day.”

If the bankruptcy judge approves the proposed former partners compensation plan, Ferrara will pay almost $3.4 million to help fund repayments to Dewey’s creditors. Even so, given the amounts he reportedly made at Dewey, his move in 2005 was probably advantageous financially. I wonder if the additional money was worth it to him — and how his heirs will spend it.