The 2026 PEP Residual: $3.59 Million

The Internal Revenue Service, reviewing Form 1065 on 20 July 2026, is plain: a partnership files an information return and does not pay tax on its income; profits pass through to partners, who report them on Schedule K-1. NALP’s equity test uses that K-1. A PPP law firm table that is sold as a paycheck is counting on the reader not to open the form.

Above the Law, on 11 July 2025, citing an Am Law survey, put the typical new-equity capital contribution at 25 to 35 percent of compensation. Nonequity partners typically do not make that contribution. Citi’s 2026 Client Advisory, posted 11 December 2025, noted that partner paid-in capital has risen for years as firms de-risked after 2008–10, and that capital growth has not kept pace with net income. The published cell is a residual. The capital call is cash out the door.

An equity partner at an Am Law 50 New York office told us his last K-1 residual sat “a third below the magazine number” after the capital call posted. That is not a table cell. It is why the table is not take-home.

Above the Law, on 30 April 2026, citing ALM, put 52.1 percent of partners across the Am Law 100 in the nonequity tier, and 92.4 percent at one unnamed firm. Original Jurisdiction, on 30 April 2026, recorded nonequity-partner ranks up almost 7 percent in 2025, equity partners up 2 percent, and overall attorney headcount up about 4 percent. Because headcount grew faster than the equity denominator, leverage rose, which mechanically lifts PEP. Bloomberg Law, on 10 June 2026, in a firm-questionnaire cut, found equity shareholder counts roughly flat while nonequity partners grew 5 percent.

Citi’s 2026 advisory is the uncomfortable operating read under that mix. Large firms added income partners at 6.4 percent a year on average during 2019–24, against 0.7 percent average annual equity-partner growth. In 2024 contribution data, income partners were the least productive lawyers and the lowest contributors to firm profitability; the average counsel contributed almost twice as much to overall firm profitability as the average income partner. Seventy-two percent of large firms still plan to invest in more income partners over the next two years. The title on the door and the PEP cell do not describe the same economics.

Kirkland is the scale illustration, not a payroll file. Bloomberg Law, on 18 March 2026, reported the firm as first past $10 billion, with equity partners up nearly 4 percent to 595 and the salaried-lawyer tier up 11 percent to 1,228. The PEP column moves when the denominator is protected. It does not tell a general counsel what any one of those 595 people took home.

Reuters, on 7 January 2026, citing LSEG, put global announced M&A at $4.6 trillion in 2025, up 49 percent, with 68 deals of $10 billion or more, the most since LSEG records began in 1980. That is the capital-markets engine under elite PEP. Thomson Reuters Institute, in the same January 2026 market report, recorded an atypical simultaneous rise in M&A and litigation hours, weekday-adjusted demand averaging 2.5 percent and hitting 4.4 percent in July, and 1.9 percent demand growth for the average firm for the year. Am Law 100 firms “couldn’t crack 2 percent” on demand; midsize firms ran nearly 5 percent in the latter half of 2025. The residual rose on rates and leverage as much as on hours.

Citi’s 2026 Client Advisory, posted 11 December 2025, is the operating engine under that residual, not a second PEP average. Through the first nine months of 2025, against the same period in 2024, the flash survey recorded industry revenue up 11.3 percent, demand (billable hours) up 1.9 percent, rates up 9.6 percent, inventory up 12.7 percent, headcount up 2.9 percent, equity-partner headcount down 0.5 percent, income-partner growth of 6 percent, and leverage up 4.3 percent. Productivity was down 0.6 percent. Compensation expenses rose 9.8 percent. The Am Law 1–50 cut showed demand up 1.8 percent and revenue up 12.1 percent, with equity headcount flat and all of the headcount growth on the salaried side. That is how the published residual rose on demand that never cracked 2 percent at the Am Law 100.

Executive Order 14209, dated 10 February 2025, paused new FCPA investigations for 180 days. The White House fact sheet the same day cited 26 FCPA-related DOJ and SEC actions in 2024 against a decade average of about 36 a year. WilmerHale, in a 28 January 2026 year-in-review, described FCPA enforcement as almost non-existent in the first three quarters of 2025. The Deputy Attorney General’s 9 June 2025 guidelines did not repeal the statute; they narrowed it toward cartel, infrastructure and identifiable US-company injury. Classic volume fell. The investigations partner who can staff sanctions, tariff evasion and national-security bribery did not leave the table.

The Eastern District of Texas vacated the February 2025 HSR mega-form; the Fifth Circuit’s stay ended on 19 March 2026, and the FTC Premerger Notification Office now accepts the pre-10 February 2025 form. The FTC and DOJ FY2025 HSR Annual Report, issued 2 July 2026, counted 2,006 notified transactions, about 31.8 percent valued at more than $1 billion, and 18 merger enforcement actions. Associate and counsel prep hours inflated, then fell. Equity antitrust partners on mega-deals stayed scarce.

The Supreme Court, on 20 February 2026, held 6–3 that IEEPA does not authorize tariffs (Steptoe, current as of 4 March 2026). Holland & Knight, on 27 July 2026, counted more than 3,700 IEEPA refund suits pending at the Court of International Trade. Goodwin, on 1 September 2026, recorded the Department of Justice standing up a permanent Global Trade & Commerce Enforcement Section on 14 July 2026, with $1 billion in civil and criminal recoveries, penalties, forfeitures and publicly charged losses since the fraud focus announced in January 2026. That is a 2026 book for trade, customs and False Claims Act partners. It is not a cell on the 2026 PEP table.

ALM’s 14 April 2026 hub recorded 2025 revenue growth at nearly all of the 13 firms hit with an executive order or that struck a deal to resolve or head one off. Reuters, on 2–3 May 2025, reported that Judge Beryl Howell of the District of Columbia struck down the Perkins Coie order, and that nine rival firms pledged a combined total of nearly $1 billion in free legal services. The PEP cell did not collapse. ABA Model Rule 5.4 still keeps large-firm PEP inside a lawyer-owned partnership. Sidley, on 25 November 2025, counted 136 Arizona ABS entities as of 30 April 2025; those seats sit mostly outside the Am Law 100 table. Illinois HB 5487, as restated by Holland & Knight on 1 June 2026, exempts firms making more than $300 million annually. The 2026 residual is still a lawyer-owned, hourly-funded pass-through. Ninety percent of legal dollars were still hourly in 2025, Thomson Reuters Institute reported in January 2026.