Welcome to The Tax Intelligence Report!
The December 2005 issue of The Tax Intelligence Report will highlight the impressive career track of David Colker, Tax Partner at DLA Piper Rudnick in Palo Alto, CA. Mr. Colker was recognized as one of California’s consummate tax attorneys in the Super Lawyer Survey. We encourage you to read this month’s interview and learn about his remarkable career in tax.

Respectfully,
Kathleen Jennings
President, ET Search, Inc.

The new firm, DLA Piper Rudnick Gray Cary, is one of the world’s largest law firms. David chairs the international tax practice of DLA Piper Rudnick Gray Cary. I recently interviewed David to learn more about the merger and the firm’s tax practice. We also talked about the growth of tax practices within law firms and DLA’s specific plans to expand their tax offerings. Finally, I asked David to describe some of his most challenging assignments over the last few years and the lessons he learned from them.

KJ - When I talked with you last year, you were managing the tax practice at Gray Cary. Now you are with DLA Piper Rudnick Gray Cary, one of the largest law firms in the world. Can you give me a brief overview of the new firm?

DC - The January 2005 transaction that created DLA Piper Rudnick Gray Cary was one of the largest combinations of law firms from different countries and the only such merger of firms with more than 1,000 lawyers on each side of the Atlantic. DLA Piper has more than 3,000 lawyers in 56 offices in 21 countries worldwide. In the US, DLA Piper has more than 1,500 lawyers located in key economic, governmental, and technology centers including Baltimore, Boston, Chicago, New York, Los Angeles, San Diego, San Francisco, Silicon Valley, and Washington, D.C. The firm's clients include public and private companies, ranging from Fortune 500 companies to startup entities developing industry-leading technologies. We joke that we also have one of the longest names. But seriously, the market reaction has been very positive.

KJ - How has Sarbanes affected the tax work done by law firms?

DC - Most public companies no longer use their audit firm for tax planning work because of the obvious independence issues. Also, audit firms are prohibited from doing any tax controversy work for their audit clients. As a consequence, public companies have been seeking alternative tax service providers and law firms have captured some of that work. Also, since under Sarbanes, audit firms are precluded from doing tax controversy work, law firms have experienced an increase in such work. Our firm certainly has been doing much more tax planning work. The work, however, did not just fall in our laps. Since the passage of Sarbanes, we added international tax experts who had been providing tax services at Big 4 accounting firms and international law firms. We also have economists on staff to help with transfer pricing. By providing tax analysis and planning, the legal documents necessary to implement or modify international structures, and transfer pricing analysis and support, we offer clients a “turn key” capability. The market has been very receptive to that. We also are doing more tax controversy work. In particular, we are getting involved in such projects at an earlier stage—during the audit— and can help “quarterback” the audit with the client’s tax manager.


KJ - With that additional work, what steps is DLA taking to continue to grow its international tax practice?

DC - First, we are continuing on the course we set several years ago of hiring more senior international tax lawyers. During 2005 we added experienced international tax partners in New York, Palo Alto, and Los Angeles. At the same time our offices outside of the US added experienced international tax lawyers in China, the former Soviet Republic, several countries in Europe, and the UK. Second, the merger with DLA has obviously strengthened our global tax capabilities. During 2005 our ability to service US-based clients with the help of our colleagues in various foreign offices helped us efficiently implement many projects for clients. From a personal perspective, China is a critical marketplace for almost all of our Silicon Valley clients. The additions to our tax team in China have proved to be enormously valuable. For 2006, we would like to increase our recognition in the marketplace as a premier provider of international tax services. We are building that reputation one client at a time, and I am confident we will succeed.


KJ - Moving away from law firm issues, what have been some of your more challenging tax projects over the last few years?

DC - Several immediately come to mind. One project was an appeal of an IRS audit where the tax assessment, including interest, was about $150,000,000. The major issues were mostly international including transfer pricing and cost sharing, although there were domestic issues relating to research credits and expensed equipment. Particularly noteworthy were the complex interaction among the issues and the complex interaction of various carryforwards and carrybacks with the issues. Although the audit was only of three years, 10 years were impacted. The first thing we did was build an Excel model of the tax return for a 10 year period so that we could understand how the resolution of various issues in combination impacted the bottom line. Second, we investigated the returns as filed to identify as many beneficial adjustments as possible. In order to try to favorably settle this case, it was essential to identify new positions the taxpayer could assert that offset the bona fide adjustments identified by the IRS. The IRS is not always 100% wrong. In this case, among other things, we filed two set-offs under section 482 which helped us enormously. We also used our model to identify a potentially achievable set of issue resolutions that produced the desired result. After about a one year negotiation with the IRS Appeals Division, the case was resolved with the client receiving about a $500,000 refund. Two other projects are worth noting. In both cases, the accounting firm auditor of a public company announced to the audit committee that the international tax structure that the accounting firm previously had approved (and in one case designed and implemented) in fact did not work. Over a very short period of time, we had to evaluate the problem and develop a solution to the satisfaction of the auditors that would not result in an adverse financial impact on the client. Although the solutions differed, we were able to achieve our goal in both cases. The clear lesson here is that companies continually need to take a very close look at complex tax structures to avoid year-end surprises.

KJ- David, I want to personally thank you for the time you have taken to answer my questions. Your perspective will undoubtedly be very valuable to anyone considering a tax career at a law firm.

Kathleen Jennings (KJ)
Editor, The Tax Intelligence ReportDavid Colker (DC)
Tax Partner, DLA Piper Rudnick, Palo Alto, CA

We welcome any comments you may have regarding The Tax Intelligence Report! You may email the Editor Kathleen Jennings at kitty@etsearch.com or the subject of this months feature article David Colker at David.Colker@dlapiper.com.