WASHINGTON (AP) – Blackstone Group would face a much bigger tax burden under legislation senators proposed Thursday, just days before the private-equity firm's co-founders stand to earn billions in an initial public offering of stock.
The leaders of the tax-writing Senate Finance Committee introduced a bill that would tax as corporations all publicly traded partnerships that gain income from investment services — a definition that Blackstone would fit after its precedent-setting IPO, scheduled for the week of June 25.
The IPO by New York-based Blackstone, one of the world's biggest private-equity firms, is expected to raise as much as $4.75 billion. It has set Wall Street abuzz, attracting the interest of institutions and wealthy investors who haven't previously had access to the world of private equity, and possibly tempting other private-equity firms to follow Blackstone's lead.
Across the Capitol, the Democratic chairman of the House Ways and Means Committee, Rep. Charles Rangel of New York, endorsed the plan crafted by Sen. Max Baucus, D-Mont., and Sen. Charles Grassley, R-Iowa, saying his panel would closely examine the issue.
“The nature of investment vehicles is changing right before our eyes, and the tax code must keep up with the times,” Baucus said in a statement.
The bill he and Grassley proposed could double the tax burden for Blackstone and other private-equity firms that go public because corporations pay their own income taxes and their shareholders pay capital gains taxes on their investment. Members of investment partnerships, by contrast, pay only one level of tax, on their shares of the income generated.
“Creative new structures for investment vehicles may blur the lines for the tax treatment of income,” Baucus said. “We must make the law clear and apply the law fairly, or risk the erosion of our corporate tax base.”
Baucus and Grassley sent letters to Treasury Secretary Henry Paulson and Christopher Cox, the chairman of the Securities and Exchange Commission, saying that the Blackstone IPO raises serious tax questions that must be resolved soon.
The SEC has been reviewing Blackstone's planned IPO. SEC spokesman John Nester declined comment Thursday on the senators' letter.
The bill, if enacted and signed into law, would take effect as of Thursday. But Blackstone, by virtue of having already filed its offering documents with the SEC, would get a five-year reprieve before it would be subject to the new law.
Blackstone spokesman John Ford in New York declined to comment, citing SEC rules requiring companies to refrain from making public statements in the period preceding a new stock offering.
The firm said in a regulatory filing Thursday that its two co-founders and top executives, Chief Executive Stephen Schwarzman and Senior Chairman Peter Peterson, will receive no monetary compensation when they retire, but instead will get preferential access to Blackstone's lucrative funds.
As it stands, they will together receive at least $2.33 billion after the firm lists on the New York Stock Exchange. Schwarzman, 60, will own 24 percent of Blackstone after the IPO, a stake that would be worth about $7.73 billion. Peterson, 80, will get at least $1.88 billion when he sells all but 4 percent of his interest in the firm.
Blackstone, whose $78.7 billion in holdings include Madame Tussaud's waxwork museums in New York and London and real estate company Equity Office Properties Trust, has said the IPO announced in March would enable it to tap new sources of capital for multibillion-dollar acquisitions.
In recent weeks, Baucus and Grassley and their staffs had been looking closely at how the profits of managers of hedge funds and private-equity funds in general are taxed and whether changes are called for. A key question in their inquiry was whether it is fair for the managers' portion of the funds' anticipated future profits to be taxed at 15 percent, the rate for capital gains, rather than at income-tax rates of up to 35 percent.