Blackstone partners may avoid tax on IPO gains

NEW YORK (Reuters) - Partners of private equity firm Blackstone Group LP BX.N may have devised a way to avoid paying tax on $3.7 billion raised largely in the firm's initial public offering last month, a regulatory filing shows.

In this file photo Tony James, President of the Blackstone Group, speaks during the Reuters Investment Banking Summit in New York, November 14, 2006. Partners of the private equity firm may have devised a way to avoid paying tax on $3.7 billion raised largely in the firm's initial public offering last month, according to a regulatory filing. REUTERS/Keith Bedford

Under the plan, laid out in a U.S. Securities and Exchange Commission filing ahead of Blackstone’s IPO last month and first reported by the New York Times on Friday, investors in the newly public company are required to return certain tax benefits to Blackstone’s partners.

The company expects these benefits to total $863.7 million over 15 years, the filing said.

The Times said Blackstone partners would get back about $200 million more than the $553 million they paid in tax. The paper did not explain how it arrived at those figures.

In a statement later on Friday, Blackstone said the Times article gave “a false impression of Blackstone’s tax situation and that of its partners.”

Blackstone said it was not in any way taking advantage of tax loopholes, but rather is using a standard tax method used by private and public companies when business assets are sold.

The New York Times NYT.N was not immediately available to respond to the Blackstone statement.


The tax move hinges on goodwill, the Times said, an accounting term for the value of the intangible assets built up by a company over time. When goodwill is sold, new owners can deduct it as its value is assumed to erode.

While Blackstone’s partners paid a 15 percent capital gains rate on the shares they sold last month in last month’s IPO, it has arranged for deductions on its $3.7 billion worth of goodwill at a 35 percent rate, the Times said.

Blackstone’s partners are entitled to 85 percent of any cash savings from the different tax treatments through a “tax receivable agreement” with the new investors.

“This is an unusually one-sided tax receivable agreement,” said tax lawyer Lee Sheppard, who has written on Blackstone’s tax structure for the journal Tax Notes.

“That’s because it’s a one-sided relationship. The public investors don’t appear to have any bargaining power.”

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 LLC FIG.N, which went public in February, uses a form of this tax structure, the Times said.

And private equity pioneer Kohlberg Kravis Roberts & Co. KKR.UL and hedge fund firm Och-Ziff Capital Management LLC describe similar tax strategies in preliminary prospectuses, the newspaper said. 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 percent from 15 percent. 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 percent 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 percent capital gains tax on carried interest, not the 35 percent top ordinary income tax rate.