Lawmakers scrutinize Blackstone tax bill, IPO

By Kevin Drawbaugh

WASHINGTON (Reuters) - A co-author of a U.S. Senate bill that would raise taxes on private equity firms going public said on Wednesday he was open to discussing shortening a built-in transition period that cushions any potential tax hit on Blackstone Group LP.

Sen. Max Baucus has received feedback about his legislation suggesting a five-year transition period is too long and should be shortened, his office said late on Wednesday.

"Chairman Baucus said today that he is open to discussing that possibility," his office said in a statement

The comments from the Montana Democrat, who chairs the Senate Finance Committee, came as a handful of lawmakers voiced wide-ranging concerns about both his bill and a planned initial public stock offer by leading private equity firm Blackstone.

Set to price on Thursday, the Blackstone IPO was expected to raise more than $4 billion.

Citing specific concerns about Blackstone, Baucus and senior Finance Committee Republican Sen. Chuck Grassley, of Iowa, introduced a bipartisan bill last week to close what they see as a loophole allowing private equity firms to go public without paying corporate tax rates.

Leaders of the Senate Banking Committee on Wednesday asked the Treasury Department and the Securities and Exchange Commission for analysis of the Baucus-Grassley legislation.

Sens. Christopher Dodd and Richard Shelby, the Democratic chairman and senior Republican on the panel, respectively, asked about the bill's "likely impact on the nation's capital markets, including the potential effects on investor protection, capital formation and other relevant issues."

Baucus-Grassley would require publicly traded partnerships deriving income from investment adviser and asset management services to pay the federal corporation tax rate of up to 35 percent instead of the 15 percent rate their partners now pay.

Blackstone would be affected by the proposed tax code change, if it becomes law, but not for five years under the transition period written into the bill.

Rep. Peter Welch, a Vermont Democrat, introduced on Wednesday a bill that would make the same tax change as Baucus-Grassley, but drop the transition period cushioning any impact on Blackstone and at least one other firm, Fortress Investment Group, which is already publicly traded.

CARRIED INTEREST

In related news, Baucus said he intends to hold two public hearings before Congress' August recess on the tax treatment of "carried interest," or the 20 percent cut of profits from the sale of companies by private equity firms that the firms' partners typically keep as compensation.

Under present law, carried interest is taxed at capital gains tax rates of 15 percent and not at higher income tax rates. The committee has been studying the carried interest issue for some time. Any hike in carried interest taxes would affect all private equity firms, not just those going public.

Finally, Virginia Democratic Sen. Jim Webb on Wednesday asked the SEC, Treasury and Homeland Security Department to look into "national security implications" he said were posed by Chinese government involvement with Blackstone.