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A good tax lawyer can mine arcane rules and emerge with a defensible structure. These skills were put to the test in launching McKee Nelson, Ernst & Young, the first law firm in the country to include a Big Five name. Take the firm’s location in Washington, D.C. That jurisdiction is the nation’s least restrictive when it comes to alliances between law firms and other professions. Then there’s McKee Nelson’s policy not to represent Ernst & Young audit clients, which eliminates a conflict under the Securities and Exchange Commission’s rules for auditor independence. Here’s how it came about. Pressure from international affiliate law firms for a U.S. legal presence led to a push by Ernst & Young to establish an American law affiliate, said Bill Lipton, Ernst & Young’s vice chairman of tax services. E&Y had been eager to enter the U.S. legal services market since 1996, he explained, but “daunting” restrictions on multidisciplinary practices (MDPs) kept the Big Five firm at bay. Whenever foreign law affiliates needed U.S. legal capacity, “our retort was always ‘Sorry, we can’t help you.’” Then, last year, E&Y discovered, while working with Atlanta-based King & Spalding tax lawyers on a series of similar tax-planning matters for different clients, that “we were actually operating like a virtual MDP. “We really could show the client that we’d done this before together,” Lipton said, and that the repeat teaming brought efficiencies. Ernst & Young tried to “formalize” the alliance by approaching two partners at King & Spalding, William McKee and William Nelson, with the idea of launching a new law firm. “Of course, we were skeptical,” recalled Nelson, a former chief counsel for the Internal Revenue Service. But Nelson and McKee, who had been a law professor at the University of Virginia School of Law before joining King & Spalding, said that they were captivated by the idea of launching a U.S. law firm with access to the global resources — including the client base, technology, multinational presence and global professional force — of Ernst & Young. The lawyers and the Big Five firm hired separate expert lawyers to advise them on the legal and ethical rules and to help them devise a firm that would not be in violation of any restrictions. As for getting business, that’s been no problem. The tax partners took almost all of their clients with them, and McKee Nelson has gotten additional work from E&Y, adding up to a very fast start indeed. The firm said that its revenue figures have grown steadily, but it declined to provide numbers. McKee Nelson began with three tax lawyers in November and now has 15 partners and 17 associates, with the expectation of reaching at least 50 total lawyers by 2001. The firm branched out from its tax practice into corporate work with the March hiring of Stephen M. Piper, former vice president and general counsel at Lockheed Martin’s subsidiary, Global Telecommunications Inc. Tax lawyers who move to McKee Nelson can have some confidence that if the firm does not work out for regulatory or other reasons, they can find homes at E&Y — one of the world’s largest employers of tax lawyers. In addition, the reputations of E&Y’s tax partners are a strong magnet. Piper saw his offer to join McKee Nelson as “the quintessential opportunity to get in on the ground floor. “If it works, I’m a partner in a firm with these tax superstars, and if it doesn’t work, I’m looking for work with recommendations from these tax superstars.” In addition to financing from E&Y in the form of a loan (McKee Nelson refused to disclose the amount), the firm sublets office space from E&Y, uses E&Y’s technology and databases and plans to market its services with E&Y. So far, McKee Nelson’s structure has not been challenged by any regulator. But MDP-related rules and SEC independence restrictions are under review and are likely to change. Whether they will help or hinder the firm is unclear.

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