A link you posted elsewhere, thought it belongs here too:
theconglomerate.org
Excerpt:
Blackstone's IPO structure takes an aggressive tax stance.
Background. By operating in partnership form, private equity funds take advantage of a quirk in the tax law that allows fund managers to receive compensation in the form of equity taxed at long term capital gains rates (15%) instead of ordinary income rates (35%). The partnership form also allows the asset management aspect of the operation to take place without incurring an entity-level corporate tax. Private equity funds also want to avoid operating as RICs (regulated investment companies), which get pass-through taxation but subject the firm to the restrictive regulation of the Investment Company Act of 1940. Publicly-traded entities are normally taxed as corporations; accessing the liquidity of the public equity markets usually requires paying a steep toll charge in the form of an entity-level tax.
The tax issue. Blackstone elegantly finesses this tax problem by trying to qualify to an exception to the publicly-traded partnership rules (section 7704) for entities that earn "passive-type income." Normally, publicly-traded partnerships are taxed as corporations, regardless of how they are organized under state law. Section 7704 carves out exceptions for partnerships with "passive-type income," which include interest, dividends, real property rents, certain oil and gas activities, and gain from the sale or disposition of most capital assets. The exception thus distinguishes passive investment activities, for which pass-through treatment is appropriate, from the operation of an active trade or business, for which it's not appropriate.
What's at stake. Failing to qualify for pass-through treatment wouldn't be fatal to Blackstone's future. But it would hurt. A lot. It would lose two key tax advantages: (1) the capital gains preference on carried interest distributions, which I address in Two and Twenty, and (2) the ability to pass income through to investors without incurring an entity-level tax. Blackstone's impressive IRRs depend, in part, on the availability of these tax preferences. |
