NEW YORK -- Partners of private equity firm Blackstone Group 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.
Under the plan, laid out in a U.S. Securities and Exchange Commission filing, investors in the newly public company would be 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 New York Times, which first reported the plan on Friday, said Blackstone partners will get back about $200 million more than the $553 million they paid in tax payments. The Times did not explain how it arrived at those calculations.
Story Continues Below
Blackstone spokesman John Ford declined to comment.
The Times said an unnamed spokesman told the newspaper its analysis of the tax implications was "totally flawed."
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.
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 New York Times.
And private equity pioneer Kohlberg Kravis Roberts [KKR.UL] and hedge fund firm Och-Ziff Capital Management LLC describe similar tax strategies in preliminary prospectuses, the Times said. All three declined to comment, it added.
Congress is weighing whether to raise taxes from 15 percent to 35 percent on the profits made by private equity and hedge fund firms.
© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters.
Editor's note:
Try Intelligent Options for $99. Our lowest price ever.
12 Ways to Recession Proof Your Portfolio
Buffett, Soros, Templeton, Rogers: Learn Their Money-Making Secrets
Buffett: The best book ever written on investing.
