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IVCA Profile Q&A: Mark J. Blumenthal, Partner at Blackman Kallick

Featured Speaker at June 24th IVCA Breakfast Event: focusing on Strategies in a Rising Tax Environment

IVCA: What can attendees expect when you give your presentation on June 24th?

Mark Blumenthal: Taxes are a very hot subject right now, and on a daily basis we have new proposals coming out of Washington. It's quite possible that the day before, during or right after my talk we may see a resolution on a host of issues – one in particular that is a primary concern to IVCA members is carried interest. Right now there is a House bill and Senate discussions, and it still would have to go to conference. The whole carried interest issue, which before seemed like something in the future, could be resolved within days or weeks.
There is also a lot of confusion around this new 3.8% tax on investment income and the .9% tax on compensation, so I will talk about that in detail. I'm also going to talk about the latest news from Springfield Illinois.

Another big story is the expiring Bush tax cuts. There is much planning that needs to be done in 2010 in anticipation of the expiration of those cuts, which will happen on January 1, 2011. I don't remember any year in my practice where we've had as much uncertainty and changes in the law that are all kicking in at the same time. Having said that, I also cannot remember a time when there were as many opportunities to take advantage of lower tax rates and other planning vehicles as in 2010. It's a wild year for taxes.

IVCA: Will the AMT – the Alternate Minimum Tax – be affected?

MB: That has been a thorn in all of our sides for a long time. I'm going to talk about some strategies where we can utilize the fact that if you are in the AMT, then you are in the 28% tax bracket. Instead of dreading and hating the AMT, you can make it your friend.

IVCA: Because of the recent economic slowdown, why should taxes be a subject on everyone's mind right now?

MB: The slowdown is actually contributing to a loss of tax revenue and is part of the reason Congress and the states are dialing for dollars. Many businesses are still profitable and are paying taxes today and others hope to be profitable and be able to pay taxes in the near future. Because of the economic slowdown, there is less revenue coming in. Therefore, the federal government and the states (in particular Illinois) are looking to raise additional revenue. Many people believe, depending on which economist you subscribe to, that if you raise taxes you will slow down business and therefore slow down the intake of tax revenue.
I'm not a politician, I'm a tax adviser. I know that taxes are going to go up, because the Bush tax cuts will expire, that is a fact. I believe there will be additional tax increases as a result of the slowdown and more importantly because of the federal and state deficits.

IVCA: So which tax man should we be most wary of, the federal government or the Illinois State government, and why?

MB: I think you need to be wary of all of them. Clearly the federal government is taking the bigger bite out of your wallet than the states. But as a percentage increase, the states change may be larger than the federal government. The states are also getting very aggressive in their collection practices. So the answer is if anyone says to you that “we're from the government, we're here to help,” it doesn't matter if they're wearing a state hat or a federal one, you have to be wary.

IVCA: What potential tax code or law keeps a person in your area of expertise up at night?

MB: What keeps me up at night really is the level of uncertainty. You enter into a business contract, forgetting about taxes for a moment, and you believe that through the term of that contract that the law will not change and you will get what you bargained for. On the tax side, you may buy something or start a business in a certain way following all the rules. Then, when you go to sell your investment or business somewhere down the road all the rules have changed; now it is taxed differently in a way that had you know in advance you may not have bought that investment or started that business. That's the uncertainty.

But at the event, I'm going to talk about a concept called ‘tax equilibrium.' That is going to be a big part of everything I talk about. Under tax equilibrium, you try not to overreact or under react to taxes. Taxes are merely a drag on business and investment returns, period--the end. So if you have a mindset of tax equilibrium you will sleep better at night.

IVCA: How do tax lawyers and CPAs view the landscape differently? What are their separate responsibilities when it comes down to making sense of these complex codes and laws?

MB: I can't speak for all tax attorneys or all CPAs, but generally we work as a team with the lawyers. The lawyers draft all the documents including the operating agreements and make sure the law is followed. We look at the deal structure and think about how the numbers will impact the tax returns and then the cash in the bank. We work very closely with our clients and the lawyers on partnership allocation issues and the choice of entity for a particular investment.

IVCA: How is setting up tax structures for families different than private industries or portfolio companies? What factors make it different?

MB: When you put the word 'family' into the equation, you get a much broader universe. When you talk about private business, you have to think about who is the ultimate owner of that business. There are certain funds that are set up, with taxable investors that are buying Limited Liability Companies. At the fund level, the fund is thinking about who their investors are and are planning to minimize income taxes. When a family makes an investment in a fund or makes a direct investment in portfolio companies, they are not just thinking about income taxes, but they are focused on wealth transfer and estate taxes.

So another thing I'll talk about at the event is estate taxes. There are still unbelievable opportunities that exist in 2010 for wealth transfer and we will discuss a few of these ideas at the breakfast.

IVCA: So you've done many talks on various subjects. Why is it important to you as an expert individual to keep communicating in forums such as the breakfast event?

MB: I always learn something new from the questions of the audience at these events. It forces me to think outside of the box.
Also, we're all trying to stay current. When you're giving a talk, you have to stay current by the hour. I'm going to check the reports from Washington shortly before my talk, because I know there is a good chance that something has changed that will be relevant to what I'm speaking about.

Mark J. Blumenthal of Blackman Kallick, LLP. Mr. Blumenthal is a CPA and Partner at Blackman Kallick in Chicago. He is Chairman of Blackman's Family Office Services Group and Co-Chairman of their Private Equity/Venture Capital practice. He is a strategic advisor to families, family offices, private equity/venture capital funds and mature private businesses.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.