Unusual IPO tax structure may plague Blackstone

By Emily Chasan

NEW YORK, March 30 (Reuters) - As Blackstone Group [BG.UL] plans to go public, prospective investors may find themselves paying as much attention to the U.S. tax code as the private equity firm's prospectus.

Blackstone filed last week to take about 10 percent of itself public for about $4 billion through a unique master limited partnership structure that allows it to retain many private partnership benefits and qualify for hefty tax breaks.

But its master limited partnership format raised eyebrows among those who say it has few precedents in the financial services industry and leaves the door open for the Internal Revenue Service (IRS) to challenge its tax law assumptions.

"Usually when an entity goes public, you know exactly how it is going to be treated for tax purposes," said Victor Fleischer, an associate professor at the University of Colorado Law School. "In this case, I think there is ... a little uncertainty under current law and there's a ton of uncertainty about what's going to happen in the future."

FIFTEEN PERCENT

Under U.S. tax law, master limited partnerships do not pay the 35 percent corporate tax rate, but rather distribute nearly all their profits to common unit-holders who individually are allowed to pay 15 percent capital gains tax on the income.

To retain this status, Blackstone must prove it is primarily an asset management company and that at least 90 percent of its income is derived passively from interest, dividends and gains from selling or holding capital assets.