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Law firm partners can run, but they cannot hide their profits. Cash-strapped San Francisco is taking aim at the presumably plump partnership distributions that go to professional groups such as doctors, lawyers and accountants. Last week, the Board of Supervisors’ finance committee began weighing the merits of a November ballot measure that would extend the city’s controversial 1.5 percent payroll tax to such partnerships. The city hopes to gain a $15.8 million windfall to bolster the city’s anemic budget. Lawyers, of course — and perhaps understandably — don’t like it. Who would pay a new tax without a bit of grumbling? When news of the proposal came out, attorneys at first kept a low profile, letting James Mathias of the Chamber of Commerce speak for them at the finance committee meeting. He said every law firm partner he has spoken to is opposed to extending the tax. “It’s not just the big firms; it’s the small firms too.” Another chamber spokesman speculated that law firm partners were hesitant to speak out because of the public’s overall poor perception of the legal community — how’s it going to look if supposedly wealthy lawyers fight taxation? This week, as the threat of taxation began to outweigh concerns about public opinion, the chorus of voices opposed to the proposal got a little stronger. The Bar Association of San Francisco came out against the proposal Wednesday, issuing a statement urging the Board of Supervisors to reject the idea before it scares more business out of San Francisco. “Like other business organizations located in San Francisco, partnerships both small and large already pay the city’s 1.5 percent payroll tax on the salaries of their employees,” BASF said. We think the talk about scaring business out of the city is a smoke screen. We don’t think the proposal to tax partnerships is off base. The real issue is whether law firm partners are employees. Ronald Ruma, managing partner for Hancock Rothert & Bunshoft’s San Francisco office, told the finance committee Wednesday that the proposal is an effort to impose an income tax on partners, according to the Daily Journal. “It’s not that we are opposed to payroll tax,” he said. “We pay payroll tax. We pay plenty of payroll tax — on employees. But the owners are not employees.” Well, sometimes. At small firms that employ a handful of lawyers, yes, partners are owners who usually all play a role in the operation and direction of the firm. But at big firms like Morrison & Foerster or Brobeck, Phleger & Harrison, which employ hundreds of lawyers, partnerships are a different story. These firms typically have traditional “top-down” corporate management structures, where a managing partner and management committee make executive decisions about day-to-day operations, staffing and business strategy. At these firms, many “partners” act, look, walk and talk just like employees. They can be hired or fired, or they can leave any time they want for another firm. Few of them are involved in management or strategic decisions. Their salaries typically are based on seniority, their ability to drum up business and, in effect, their place in the pecking order. Their “cut of the profits” usually is decided by a management group and typically is not an even share based on the number of partners divvying up the pool. We don’t buy that these partners are “owners” of the firm in the traditional sense. We think these kinds of partnerships should pay their share of taxes, and in San Francisco, that may just mean a 1.5 percent payroll tax on profits. Before it goes on the ballot, we do think the measure needs careful review. It will be important for the Board of Supervisors to assess the actual impact of the proposal on partnerships, particularly on smaller groups. But the main issue for the board will be to distinguish the difference between the small shop partnerships (a couple or a handful of people) and partnerships of hundreds of people (generally lawyers), where profit has a different meaning.

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