Finance Committee met last week
Blackstone Seeks Delay in Effective Date of New Taxes (Update3)
By Ryan J. Donmoyer
Oct. 23 (Bloomberg) — Blackstone Group LP is among the buyout firms that have spent millions this year trying to kill a proposed tax increase. Now, they’re working on a Plan B: asking Congress to delay the pain for as long as a decade.
Lawmakers say pressure from the firms has pushed them into discussions about doubling the five-year grace period contained in a draft of legislation introduced in June by Senate Finance Committee Chairman Max Baucus, a Montana Democrat, and Iowa Senator Charles Grassley, the top Republican on the panel.
The length of the grace period “is in flux,” Grassley, 74, said in an interview. Massachusetts Senator John Kerry, a Democrat on the panel who has expressed skepticism about the legislation, agreed. Ten years is “what we’re looking at,” said Kerry, 63.
For Blackstone, Fortress Investment Group LLC, and Oaktree Capital Management LLC, a 10-year delay might be the next best thing to killing the bill outright. Under the current proposal, those firms would obtain a five-year reprieve because they either completed their initial public offerings or filed to do so before the legislation was introduced.
Private-equity firms spent at least $5.5 million on Washington lobbying in the first half of this year, or almost four times the amount spent in all of 2006. The companies are fighting the Senate bill and a House measure that would tax the share of profits fund managers receive for investment services, known as carried interest, at rates as high as 37.9 percent instead of the 15 percent capital-gains rate.
Industry Rivals
While industry lobbyists say they haven’t given up efforts to scuttle both measures, they are also now trying to ensure that any legislation applies to all hedge-fund and buyout firms that go public. That would help companies that have announced plans for public offerings such as KKR & Co. LP and Och-Ziff Capital Management Group LLC, which wouldn’t get a grace period under the Senate proposal.
“Our members’ position would be that all private-equity firms should be treated equally,” said Doug Lowenstein, president of the Private Equity Council, a Washington trade group created last December by 11 buyout firms including Blackstone, KKR, Carlyle Group, and Apollo Management LP.
Lobbyists and congressional aides who spoke on condition of anonymity said some private-equity firms have told lawmakers that a transition rule that doesn’t cover the entire industry would give Blackstone, especially, an unfair edge for years to come.
Peter Rose, a spokesman for New York-based Blackstone, declined to comment.
Blackstone’s Offering
Baucus and Grassley introduced their legislation on June 14, about a week before Blackstone’s initial public offering. Beginning in 2012, the bill would require Blackstone, Fortress, and Oaktree to pay taxes at the 35 percent corporate rate instead of as partnerships, which allow investors to pay capital-gains taxes of 15 percent on their share of profits.
New York-based Fortress and Blackstone — which has said its annual tax bill would increase by $525 million under the legislation — are traded on the New York Stock Exchange. Los Angeles-based Oaktree is traded on a private exchange operated by Goldman Sachs Group Inc., the world’s biggest securities firm.
Blackstone stock has dropped 16 percent since the firm’s initial public offering. The shares rose 38 cents, or 1.5 percent, to $26.45 at 12:12 p.m. in New York Stock Exchange composite trading.
Precedent, Reversal
Proponents of a 10-year delay cite precedent: When Congress last changed the rules for publicly traded partnerships, in 1987, firms then using the structure such as New York-based AllianceBernstein Holding LP and Sandusky, Ohio-based amusement park owner Cedar Fair LP were allowed to keep their lower tax rate for an additional decade.
A longer grace period would be a reversal for Baucus, 65. A week after introducing the legislation in June, Baucus said he was “open” to shortening or eliminating the five-year delay.
Baucus’ spokeswoman, Carol Guthrie, said he “continues to review the issue.” Baucus “said several months ago that he was willing to consider changes to the transition period, and that remains true,” Guthrie said.
Grassley said last week that he still favors a grace period of fewer than five years, though he would consider an extended grace period for “technical and fairness reasons.”
A longer period may make the legislation more palatable for some Democratic lawmakers who have expressed reservations about the bill such as Kerry and New York Senator Charles Schumer, who counts Blackstone and other buyout firms among his constituents.
Members of the Finance Committee met last week to discuss the grace period and whether to attach the measure to other legislation. The measure is one of several in Congress targeting hedge funds and private-equity firms.
The broader House measure on carried interest may be voted on next year, Senate Majority Leader Harry Reid said in July. Smaller bills that would end the ability of hedge-fund managers to defer large sums of income in offshore accounts and one that would let charities and pension funds invest in domestic hedge funds without triggering a surprise tax bill also are pending.
To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net
Last Updated: October 23, 2007 12:14 EDT
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