Editor’s Note: Erika Nijenhuis is a partner in Cleary Gottlieb Steen & Hamilton’s New York office. She is a recognized expert in tax issues relating to derivatives and other financial products, capital market transactions, and inbound and outbound business operations. She has received many honors and distinctions, including being named New York City Tax Law Lawyer of the Year in 2015 and 2017 by The Best Lawyers in America.
Q: Erika, good morning. Thanks for sitting down with me to talk.
A: Good morning, Tom, it’s a pleasure.
Q: Where do you practice?
A: I’m in New York City. I have worked at Cleary Gottlieb in their New York office since 1990.
Q: Can you tell me how you came into tax?
A: I have a slightly winding road to tax. I loved my tax classes in law school, but I wasn’t sure I wanted to be a tax lawyer when I got out. What I wanted to do was something international. I clerked for a year and then I was fortunate enough to spend two years with the Treasury Department in the Honors Program of the General Counsel Department. There were a series of rotations, four rotations, in different parts of either Treasury or its Bureaus and Agencies. So I did two rotations with the General Counsel’s Office, and one with the U.S. Attorney’s Office for the Eastern District of Virginia. That was obviously not Treasury, but was—I have to say—a blast. And then the last rotation was with the IRS. At the end of that period I had to get a real job. There’s a story about how I got from the point I just described to being a Cleary tax lawyer, but that was the path.
Q: Can you share that story?
A: Oh, sure. I had really enjoyed my work with the government, and I thought seriously about staying with the government in one capacity or another. In fact, I applied to the Southern District of New York because my six months as a Special Assistant U.S. Attorney were really the most intense fun I have ever had. It was an amazing job. But I thought I should at least go and talk to some law firms because if I stayed with the government, I thought that I was probably locking myself into government work unless I wanted to be in Washington. I wasn’t sure I wanted to be in Washington. My husband’s a New Yorker, and I prefer New York.
By that point, it was four years since I’d been a summer associate at Cleary, and I felt very out of touch with what was going on in New York. So I called up Cleary, explained who I was, and said that I was interested in coming in and talking to them, just on an informational basis. The person I talked to said they were not interested in hiring corporate lawyers at that point, and he had no idea whether the tax group was interested in me or not, but if I was ever in New York, I could come by. That was not the warmest of welcomes, but I decided to seize on it. So I said, “Well, actually, I’m going to be in New York this weekend.” Now, it happened to be upstate New York and not New York City, but I figured those were details.
When I called back the next day, I got the head of Legal Personnel, and that conversation was completely different. She said, “Oh, the tax group is interested in meeting you and I’ve got you set up for a whole slate of interviews and you’re going out to lunch with so-and-so.” I said, “No, no, no, you don’t understand. I just wanted to come in and talk to an associate and get the lay of the land.” And she said, “Look, just come in and if you decide you don’t want to pursue it, that’s fine. But if you do, you know, then we’ll be on the road.”
So I came in for those interviews and I was completely blown away. I said, “These are amazing people, they do amazing things. This is where I want to be. This is what I want to do.” I went and interviewed with one other law firm just because I thought I should check it out, and that didn’t change my view at all. And so I called up the Southern District and said I was withdrawing my application and here I am.
Q: Your practice is largely focused on financial services and financial products. How did that come to be?
A: When I came to Cleary, there was a “me-sized” hole in the tax group, which was to do exactly that kind of work. I wound up working for much of my career, and my entire career as an associate, with a brilliant man named Ed Kleinbard, who was one of the leaders of that practice in the country. We worked very closely and I learned everything I know—at least what I knew at that point—from Ed. And so that’s what set me on this path.
Q: Many find the practice of international financial transactions and international financial products overwhelmingly and blindingly complicated. How do you explain your field in an accessible way to encourage someone to come in and join you?
A: Let me tell you a story and then I’ll come back and answer your question. I was working last year with quite a good midlevel associate. There hasn’t been as much financial product work since the financial crisis, so our associates don’t have a lot of experience with it. We were asked a question by a client about a moderately complicated transaction. The client asked three questions. The associate sent me an email with his proposed answers to those three questions. Every one of them was a perfectly reasonable answer—and every one of them was wrong. So that really brought home to me how complicated the field is.
People tend to self-select. Law students arrive at Cleary, and we talk to them about what they’re interested in doing. A number say that they’re interested in financial products and so we try to send the work that we have in their direction and train them up.
The most important thing is to understand the transactions. And that’s quite challenging because a lot of the other areas in which we advise on tax issues have some connection to real life. In the case of financial products, that’s not true. I used to have a little Post-It up in my office for the first year that I was at Cleary, with a table that showed how options performed under various scenarios. I looked at that Post-It every time Ed called me because it wasn’t intuitive to think how options worked. After a year I took the Post-It down. So I would just say keep at it.
Q: A transaction can be infinitely complicated: you may think you understand a transaction when you look at one piece of it, but you may not even understand how the economics get pulled in a different direction by a different set of instruments you haven’t yet focused on.
A: For me, it has been critical since day one—and I still do this—if someone starts talking to me about a transaction, I pull out a piece of paper and I chart out boxes and arrows. I need to know who pays whom, when, under what circumstances. Because if you don’t know that, you don’t get anywhere.
Q: We are now in the wake of the largest tax reform that’s happened in a generation. And financial products were largely left unaddressed. Is that a good thing or a lost opportunity?
A: Well, I would say it’s both, both a good thing and a lost opportunity. What I mean by that is that there has been proposed legislation floating around for a while, first in the Camp Bill and then Senator Wyden’s proposal, what he referred to as the Modernization of Derivatives Tax Act or MODA, that would have put derivatives, broadly speaking, on mark-to-market.
My own view of that legislation is that it created as many problems as it solved and that the new problems were not necessarily easier to deal with than the existing problems under current law. The existing problems with current law are very complicated. Depending on how you structure something, you can get different results. I don’t think there’s quite as much flexibility as people think, but, still, there’s a fair amount of flexibility. You have to spend years doing it before you really have a sense of the landscape.
What this mandatory mark-to-market legislation held out was the promise of consistency, simplification, and getting rid of a lot of provisions of the Code. The problem is that the mark-to-market proposals didn’t intersect very well with the rest of the Code. The rest of the Code is not on mark–to-market, so the boundaries between what is on mark-to-market and what is not on mark-to-market would be a new source of enormous complexity and tension and the like. And in my view, the legislation improved over time as it went through the legislative process with different members of Congress and staff trying their hand at taking what the last guys did and improving the proposal. But some of the fundamental issues with that legislation were never, in my view, satisfactorily addressed. And so I’m not sorry that that legislation didn’t make it into tax reform, but I do think that there’s a lost opportunity to do something about the taxation of financial products.
Q: Is there is a way to simplify the taxation of financial products, make it better?
A: Well, for taxpayers who, as an accounting matter, have their derivatives on mark to market, following that approach for tax makes a lot of sense. I agree with that. But actually getting there is more complicated, I think, than the drafters thought.
Q: I want to come back to something you said before. You said, it’s important to you to chart the economics out. How did you learn that? How did you come to understand the economics of a transaction?
A: Well, as I said before, I was fortunate to work very closely with Ed Kleinbard. It was a combination of Ed teaching me, and a lot of times me sitting with a blank piece of paper and a pen and trying to work out under every different scenario who pays who when. That combination is what got me there. Really, it’s not different from any other area of tax.
Q: A common thread that runs through these interviews has shown up here in our conversation. Often, for successful tax practitioners, there was someone—in your case it’s Ed—who brought you along. A common question is how do I find that person? Do you have any advice for a young practitioner who would love to learn at the knee of someone who’s great, whether it’s organizational advice or personal advice?
A: I’m a very bad advisor on that question because I was lucky. I was lucky to come to Cleary. I was lucky to work with Ed, and that was not without its challenges. But, fundamentally, I just fell into a situation that really worked for me.
It is a good idea to let the people you want to work with know that you want to work with them. People are sometimes hesitant to impose, but frankly, senior lawyers are always looking for good people to work with. And so if you know somebody is interested in the kind of work that you do, you are likely to reach out to them.
One of the great things about Cleary is that it’s very invested in learning. And that includes writing articles and working on bar association projects. So those are all things that Ed was interested in and I took an active role in all those things. There’s a lot of work that we do to further good tax law, but also to promote ourselves, that isn’t necessarily all that much fun to do and that can still be a great learning experience. At least for me, one of the things that was helpful is I did a lot of that kind of work. That shifts the burden from the senior lawyer to the junior lawyer. So I sometimes tell associates, “Look, if you’re interested in a particular area and you’ve done some work with a partner in that area, why don’t you suggest that maybe this is something we could write up?”
And if you do that as an associate, you change your relationship to the partner. Now you’re actually affirmatively helping them do the things that they and the firm need to do in order to be seen as the experts. That worked for me. That isn’t necessarily the only approach, but it is something one might put on the list of things to keep in mind.
Q: I want to come back to something you said right at the beginning of our conversation. You said that the work around financial products and volume of financial products and transactions has not come back to the peak that it was, let’s say, in 2006 and 2007. Why is that?
A: Well, probably a tax lawyer isn’t the right person to answer that question. But in the aftermath of the financial crisis, both the demand and supply for complex financial products dropped dramatically. On the demand side, there was some renewed appreciation of risk, and a lot of companies went back to their knitting, so to speak. On the supply side, banks have been just overwhelmed by the volume and the pace of new regulations that are intended to make the financial system safer and sounder. There has just been no bandwidth at the banks to do that kind of work. I am seeing a little bit more of it coming on now, though.
I have to say the financial product-related work that I’ve done since the financial crisis has been mostly in connection with changes to either the derivatives markets or to the types of capital instruments that banks issue. There’s been a tremendous amount of change in that area. For example, there is a tax provision in Dodd-Frank which may have come out of an article that I wrote. And, you know, there are just other things out there that, if you spend a fair amount of time hanging out with your regulatory colleagues, as I do, you hear about things that are coming and can start thinking about the tax consequences. That is really what I’ve been doing for the last ten years.
Q: What you’re talking about is tax very much following in behind other regulatory efforts, whereas my sense was in 2006 and 2007, tax was very much a part of the development of financial products. Has that relationship changed?
A: No, I think that’s pretty much right. For example, clearly in the Dodd-Frank context, Congress was charging along, coming up with new rules for the derivatives market, in particular, requiring derivatives to be cleared and nobody was thinking very hard about tax issues. And it wasn’t until the very end of the process, when the bill was scored, and suddenly there was an unexpected billion dollar cost associated with the derivatives title because of these tax uncertainties that tax became important. Thanks to my discussions with my regulatory colleagues, I had been thinking about those issues for a while and had just finished a draft article analyzing them. And so I just happened to be at the right place at the right time in order to make some suggestions in my article about how to fix the tax problems, which I then sent to everyone I knew in Washington. An amendment to Dodd-Frank that appeared shortly after that eliminated the billion dollar cost and appeared to be inspired by one of the suggestions in the article. So that’s very much the way these things happened. You know, in that case, the tax universe was able to step in and get something dealt with before it actually became a problem, but any number of times things happen and only after that do the tax lawyers find out about it.
Q: And so turning to the tax reform bill that we’re all coming to grips with, have you found, as others have, unintended consequences?
A: I have been spending most of my time thinking about the BEAT, the Base Erosion and Anti-Abuse Tax, as applied to financial institutions. And part of what’s taking time is consequences that may or may not have been intended since the official legislative history does not address them. And part of it is thinking about, well, here we are, this is what the legislation says. How does it actually apply now? What can be done by way of talking with the Fed or Treasury about interpreting the rules, or possibly persuading the Fed to take a new look at some of their rules that might mitigate the effect on banks. That is to say, if you look at the statute now, there is a whole list of types of payments that are potentially subject to the BEAT either in this way or in that way. And so if you look at the best case and the worst case, there’s a very big range between them—the bid-ask spread, in Wall Street terms. And so the question is, where on that continuum are we going to land? And, can anything be done in terms of talking to either the bank regulatory side of the government or the tax policy side of the government to try to land in a place on the continuum that’s fairly manageable as opposed to the worst case scenario?
Q: So let’s close our conversation. We talked about working on bar reports, and here at the Tax Section we’re mobilizing across all of our committees to do the work you were just talking about. That is, engaging with the IRS and Treasury to help them understand the consequences, unintended or otherwise, of the new law. So again, speaking to a younger practitioner, whether they’re with the New York State Bar Association or the Tax Section, how can someone who’s interested in engaging with the new tax law get involved?
A: Working on those kinds of reports is just an amazing experience, because you get on the phone with experts from all over the country who are talking about issues of enormous sophistication and a common interest in getting to the right answer.
First, look around in your firm to see if there’s someone at your firm who’s involved in that kind of activity. Go to that person and say, “I’m interested in doing this work, too. Can I work with you?” And then if that isn’t the case, I would reach out to the chair of that particular committee and just identify yourself as someone who’s interested in doing that kind of work and hopefully you’ll wind up on the list of people who gets invited to conference calls. And after that, it gets a bit more complicated because reports are written in different ways. Sometimes you have someone take the lead. Sometimes bits and pieces are parceled out and you can volunteer to write a piece. You know, there’s usually not a surplus of people who are actually willing to do the work of writing a report. So you can take advantage of that. ■