Blackstone avoids taxes on 3.7 billion dollars
Rushlimbo
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http://www.nytimes.com/2007/07/13/business/13tax.html?_r=1&ref=business&oref=slogin
Tax Loopholes Sweeten a Deal for Blackstone
By DAVID CAY JOHNSTON
The Blackstone Group, the big buyout firm, has devised a way for its partners to effectively avoid paying taxes on $3.7 billion, the bulk of what it raised last month from selling shares to the public.
Although they will initially pay $553 million in taxes, the partners will get that back, and about $200 million more, from the government over the long term.
The plan, laid out in the fine print of Blackstone’s financial documents, comes as Congress debates how much managers at private equity firms like Blackstone and hedge funds should pay in taxes on their compensation.
Lee Sheppard, a tax lawyer who critiques deals for Tax Notes magazine and has studied the Blackstone arrangement, said it was a reminder of the disconnect between the tax debate in Congress and how the tax system actually operates at the highest levels of the economy.
“These guys have figured out how to turn paying taxes into an annuity,” Ms. Sheppard said. “What people don’t realize is that the private equity managers, the investment bankers, all the financial intermediaries, are in control of their own taxation and so the debate in Washington about what tax rate to pay misses the big picture.”
The debate in Congress is about whether most of the compensation that fund managers earn should be taxed at the 35 percent rate that applies to other highly paid Americans, or at the 15 percent rate for capital gains.
Questions in Congress about possibly raising taxes on such compensation were prompted in part by publicity about the rich rewards for people who run these firms. Stephen A. Schwarzman, the co-founder of the Blackstone Group, made nearly $400 million last year, for example.
The Blackstone partners’ tax deal, however, is for the sale of part of their stake in the management firm, which is why their profits were taxed at the usual 15 percent tax rate for capital gains. Over all, the company raised $4.75 billion in the initial public offering, but the benefits of the tax structure involve just $3.7 billion of that.
Other private equity firms and hedge funds that have gone public, or plan to, make use of similar techniques, their documents show.
The Fortress Investment Group, which went public in February, uses a form of this tax structure. Two funds that plan to go public soon, Kohlberg Kravis Roberts and Och-Ziff Capital Management, describe similar tax strategies in their preliminary disclosure documents.
All three firms declined to comment. However, several tax lawyers, who could not be quoted by name because their firms had restricted them from making public comments on these issues, agreed in principle with the analysis of the tax structure’s implications.
Tax Loopholes Sweeten a Deal for Blackstone
By DAVID CAY JOHNSTON
The Blackstone Group, the big buyout firm, has devised a way for its partners to effectively avoid paying taxes on $3.7 billion, the bulk of what it raised last month from selling shares to the public.
Although they will initially pay $553 million in taxes, the partners will get that back, and about $200 million more, from the government over the long term.
The plan, laid out in the fine print of Blackstone’s financial documents, comes as Congress debates how much managers at private equity firms like Blackstone and hedge funds should pay in taxes on their compensation.
Lee Sheppard, a tax lawyer who critiques deals for Tax Notes magazine and has studied the Blackstone arrangement, said it was a reminder of the disconnect between the tax debate in Congress and how the tax system actually operates at the highest levels of the economy.
“These guys have figured out how to turn paying taxes into an annuity,” Ms. Sheppard said. “What people don’t realize is that the private equity managers, the investment bankers, all the financial intermediaries, are in control of their own taxation and so the debate in Washington about what tax rate to pay misses the big picture.”
The debate in Congress is about whether most of the compensation that fund managers earn should be taxed at the 35 percent rate that applies to other highly paid Americans, or at the 15 percent rate for capital gains.
Questions in Congress about possibly raising taxes on such compensation were prompted in part by publicity about the rich rewards for people who run these firms. Stephen A. Schwarzman, the co-founder of the Blackstone Group, made nearly $400 million last year, for example.
The Blackstone partners’ tax deal, however, is for the sale of part of their stake in the management firm, which is why their profits were taxed at the usual 15 percent tax rate for capital gains. Over all, the company raised $4.75 billion in the initial public offering, but the benefits of the tax structure involve just $3.7 billion of that.
Other private equity firms and hedge funds that have gone public, or plan to, make use of similar techniques, their documents show.
The Fortress Investment Group, which went public in February, uses a form of this tax structure. Two funds that plan to go public soon, Kohlberg Kravis Roberts and Och-Ziff Capital Management, describe similar tax strategies in their preliminary disclosure documents.
All three firms declined to comment. However, several tax lawyers, who could not be quoted by name because their firms had restricted them from making public comments on these issues, agreed in principle with the analysis of the tax structure’s implications.
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Comments
All taxes are eventually paid by individuals anyway.
Anytime you have a tax code, you are going to have people finding ways to reduce thier tax debt. It's just a fact of life. As it stands now, lobbiests are in control of taxation that and these hedge fund managers are part of the reason our tax code is so long, complicated and ridiculous. After all it started out as a flat tax in 1985. I mean hell we have Tax Lawyers now as a profession. That's just all kinds of wrong.
If the taxes are built into the price of the good and you want or need that good, you can't get out of paying it.
Thanks for posting though, interesting read.
you can put everything in a trust and move it offshore. that's the best shelter i've found.