Blackstone Group LP owners including Stephen Schwarzman will eventually get back some if not all of the taxes they pay on gains from the New York-based buyout firm’s $4.75 billion initial public offering last month, Bloomberg reports.
The IPO uses a tax strategy under which new shareholders will return to the owners most of the value of tax benefits created when the they sold a portion of the company to the public, according to filings made with the U.S. Securities and Exchange commission before the deal was completed. Payments to the owners may reach $1 billion over 15 years.
“These are not dollars that the government would otherwise get,” says Lynn Fowler, a tax attorney at the Atlanta law firm Kilpatrick Stockton. “It is merely an agreement to share the reduced taxes caused by the structure with the legacy Blackstone partners.”
The benefit takes the form of a tax deduction for the assumed erosion of value of ‘goodwill,’ an accounting term for intangible assets such as a brand name. Blackstone’s new public shareholders will return 85 percent of the value of those tax breaks to the firm’s original partners, who will claim those deductions to offset corporate taxes they would owe on management fees over the next 15 years.
Senate Finance Committee Chairman Max Baucus, a Montana Democrat, and Iowa Senator Charles Grassley, the top Republican on the panel, have proposed legislation to make Blackstone and the publicly traded hedge fund Fortress Financial Group LLC pay taxes as corporations at rates as high as 35 percent rate instead of as partnerships, which are subject to rates as low as 15 percent.
Tax experts say the strategy used by Blackstone is commonly employed and is fair because the founders of the firm are effectively being reimbursed for the decline in value of their intangible assets that results from the sale.