Blackstone Gets a Big Break in New Tax Proposal
The recent tax proposal submitted by the two top lawmakers on the Senate Finance Committee "closes a loophole" in the treatment of publicly traded partnerships.
Years ago, 1987 to be exact, Congress passed legislation treating publicly traded partnerships as corporations. It excluded however partnerships that derived at least 90% of their income from interest, dividends, and gains from the disposition of a capital asset. Blackstone and other private equity firms that are flocking to go public have relied on this exemption since most of their income qualifies for the exclusion. The exemption is huge -- corporations pay up to 35% of their income to Uncle Sam.
The new bill provides that the exception from corporate treatment for a publicly traded partnership, 90 percent or more of whose gross income is qualifying income, does not apply in the case of a partnership that derives income from investment adviser services or related asset management services. Such a partnership is treated as a corporation for Federal tax purposes and is subject to the corporate income tax.
This strikes at the heart of the private equity firm, which receives fees and carried interests from investment adviser services. As such, the legislation is pointed directly at firms such as Blackstone that hoped to be publicly traded partnerships without paying a corporate tax.
Reflecting, however, the strong connections that Blackstone must have in Washington, the new bill contains a 5-year exception for any private equity firm that is already public or that has an IPO registration statement already on file with the SEC. As my tax colleague Stephen Foley notes, Blackstone may have successfully lobbied for the ability to be one of the few private equity firms that can ever go public.
