A Plug for Cunningham on IRC 199A
Tax issues always have been an integral factor in valuing closely held business entities, whether for purposes of a court-supervised buyout or otherwise. The Tax Reform Act of 2018 added an important, new deduction for pass-through business owners, called the 199A deduction, providing business owners with federal income tax deductions of up to 20% of their net business income. I’ve started to see business appraisals that deal with the 199A deduction and, of course, the 199A deduction can provide substantial tax savings for business owners in the ordinary course, having nothing to do with appraisals or business divorce scenarios.
Taking advantage of the 199A deduction also can require a restructuring of the business, which is why I’m recommending a new book by my friend John Cunningham called Maximizing Pass-through Deductions under IRC Section 199A published by Wolters Kluwer. John has made it his mission to educate and help business owners navigate the complexities of the 199A deduction and with restructuring their businesses when required. Some of you may recognize John’s name from posts on this blog or my interview of John on my podcast on various LLC issues–a topic on which John also is a top expert and author of the leading LLC formbook and practice manual entitled Drafting Limited Liability Company Operating Agreements also published by Wolters Kluwer.
It was, as both principals of a start-up management consulting business testified at trial, a “partnership made in heaven,” which doesn’t exactly bode well for the celestial ambitions of the rest of us given that the litigation between the partners lasted longer than the partnership.
Vice Chancellor Glasscock’s recent valuation opinion in Smith v Promontory Financial Group, LLC, Mem. Op., C.A. No. 11255-VCG [Del Ch Apr. 30, 2019], tells the fascinating story of two individuals — Neil Smith, a seasoned management consultant in the profit improvement field, and Eugene Ludwig, a former U.S. comptroller of the currency and head of a financial services advisory firm — who together formed a Delaware company called Promontory Growth and Innovation, LLC (PGI), to provide management consulting services to financial services companies to enhance earnings and business performance.
Essentially, Ludwig had the rainmaking connections with CEOs of large companies while Smith had the expertise to close the deals and perform the client projects. PGI’s business model contemplated a very small number of one-shot engagements each year with large corporations, charging a contingency fee based on a percentage of the client’s increased profits. Landing an account, as Smith described it at trial, was like “finding the needle in the haystack,” requiring meeting with the right executive at the right time. Continue Reading Half-Baked LLC Agreement Yields Improvised Valuation Decision