Blackstone partners to pay $900m in IPO tax

In an unprecedented step Blackstone has revealed its partners’ tax liability in a rebuttal of a US newspaper report.

The Blackstone Group’s partners are facing a $900-million-plus (€652 million) tax bill arising from the partial flotation of the partnership.

The buyout firm took the unusual step of revealing the partners’ liability to scotch a story which appeared in US daily news paper the New York Times. The paper suggested the partners would not pay any tax on up to $3.7 billion of the $4.75 billion raised at the IPO.

The New York Times also said that the partners would get back a tax credit of $751 million from the government over the long term – $198 million more than  the $553 million they would have to pay in taxes.

Blackstone said in response: “The New York Times is filled with inaccuracies, myths, and misrepresentations that give a false impression of Blackstone’s tax situation and that of its partners.”

According to the newspaper report, Blackstone partners transferred good will worth $3.7 billion to a new corporation before selling shares to the public, and paid a 15 percent tax on this figure – equivalent to about $553 million.

The good will is deducted at a 35 percent rate by the new corporation, so the tax deduction is worth $1.3 billion over a 15 year period, the paper said.

Blackstone countered saying its partners would pay taxes on every dollar they receive from the IPO at a normal capital gains rate, and rather than taking advantage of tax loopholes, it was using a standard tax method used widely by private and public companies when business assets are sold.

It said the partners would not obtain any tax credits or payments from the government, as was alleged by the Times.

The Blackstone owners sold interests in their business to an entity owned by the public. As in any sale of business assets, the buyer is entitled to tax benefits based on the purchase price, the firm said.

Normally, a buyer and seller take tax benefits into account in determining the purchase price. Individuals creating good will cannot deduct it, but a buyer can – and when it does, it will take 15 years to realise the full tax benefit.

The buyer generally pays more if the buyer obtains tax benefits, than if the buyer does not obtain such tax benefits. This was structured with the underwriters and fully disclosed to the public as part of the IPO, Blackstone said.

The only difference in Blackstone’s case is the parties agreed that the public buying the interests would pay the additional purchase price over time rather than immediately, the firm added.

In pre-IPO filings with the SEC, Blackstone had explained that 85 percent of the tax savings from goodwill would be passed on to the partners, the Times said.

According to the Times report, this brings $1.1 billion of the $1.3 billion in savings to partners. The Times also estimates the current value of the $1.1 billion savings to be $751 million – $198 million more than the $553 million it believes Blackstone paid in tax.

Blackstone said this same approach had been used in public and private transactions over the years, and was not an inappropriate use of the tax code.

“The article failed to mention that Blackstone partners will pay taxes on all of the future payments, which constitute taxable income. The article’s analysis used an unusually low discount rate to attempt to mischaracterize the benefits and omitted any mention that the partners pay taxes on those payments,” it insisted.

Blackstone also said the article further mischaracterised the IPO by saying the partners sold the good will from their “left pocket to their right” when in fact the Blackstone partners sold business interests to the public.