Blackstone partners may avoid tax on IPO gain

Blackstone partners may avoid tax on IPO gain
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First Published: Sun, Jul 15 2007. 12 20 PM IST
Updated: Sun, Jul 15 2007. 12 20 PM IST
New York: Partners of private equity firm Blackstone Group may have devised a way to avoid paying tax on $3.7 billion (Rs 1,49,739 crore) raised largely in the firm’s initial public offering (IPO) last month, the NYT reported on Friday 13 July.
Blackstone partners may recoup $553 million in tax payments, and some $200 million more over the long term without explaining how it arrived at those calculations.
Congress is currently weighing whether to raise taxes on the profits made by private equity and hedge fund firms, which would more than double the tax rate from 15 to 35%.
Blackstone’s tax move hinged on its use of goodwill, an accounting term for the value of the intangible assets built up by a company over time.
Under the plan, partners paid a 15% capital gains rate on the shares they sold last month in the IPO. However, Blackstone then arranged to get deductions for itself for $3.7 billion worth of goodwill at a 35% rate, in deductions that must be spread out over 15 years.
The Times said a spokesman told the newspaper its analysis of the tax implications was “totally flawed.”
Blackstone spokesman John Ford told Reuters he had no comment on the matter.
Other private equity and hedge fund firms that have already gone public, or plan to, make use of similar techniques, the Times said.
Fortress Investment Group, which went public in February, uses a form of this tax structure, according to the NYT.
And private equity pioneer Kohlberg Kravis Roberts and hedge fund firm Och-Ziff Capital Management describe similar tax strategies in preliminary prospectuses. All three declined to comment, it added.
Congress is weighing whether to raise taxes on the profits made by private equity and hedge fund firms to 35% from 15%. One such bill was introduced last month by Rep. Sander Levin, a Democrat from Michigan.
New York Senator Hillary Clinton, the leading Democratic presidential candidate, said on Friday the low taxes paid by a few top financiers represented a ”glaring inequity”, and she joined other lawmakers in pushing to raise the tax rate on ”carried interest” gains.
Carried interest is the 20% cut of profits above targeted returns that is typically kept by private equity and hedge fund managers on major transactions.
Under present law, these investment managers are allowed to pay 15% capital gains tax on carried interest, not the 35% top ordinary income tax rate.
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First Published: Sun, Jul 15 2007. 12 20 PM IST
More Topics: Money Matters | Equities |