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Blackstone Hits Back At NY Times

by Mike Godfrey, Tax-News.com, Washington

17 July 2007


Private equity firm, The Blackstone Group has said that a front page article in 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.

"Blackstone is not in any way taking advantage of tax loopholes, but rather is using a standard tax method used widely by private and public companies when business assets are sold," the company said in a statement issued on Friday.

The Times had suggested that Blackstone partners will effectively avoid paying taxes on the sale of interests, when in fact the Blackstone partners will pay taxes on every dollar they receive from the IPO at a normal capital gains rate, the private equity firm countered. The Times further alleged that the partners at Blackstone would receive benefits from the government in excess of the taxes being paid on the sale of interests, an accusation the company said was "completely inaccurate".

"The partners will not obtain any tax credits or payments from the government, as was alleged by the Times," the statement explained.

The Times article was published against a backdrop of growing criticism from lawmakers and lobbyists of private equity and hedge funds, over the favorable treatment they seemingly receive from the US tax code. Moves are afoot in both houses of Congress to address this.

The Blackstone statement continued:

"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. Normally, a buyer and seller take tax benefits into account in determining the purchase price. The buyer generally pays more if the buyer obtains tax benefits, such as a step-up in basis, 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."

"The only difference in Blackstone’s case is the parties agreed that the public buying the business interests would pay the additional purchase price over time rather than immediately. This same approach has been used in public and private transactions over the years, and is 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."

Blackstone revealed that its partners are expected to pay more than $900 million in tax payments as a result of the IPO, "as opposed to the article’s statement that Blackstone partners will pay no taxes on the sale".

Lastly, the company argued that the report further mischaracterizes the IPO by suggesting that 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.

A comprehensive report in our Intelligence Report series examining tax-sheltering arrangements for investors, including Venture Capital, Forest Finance, Film Finance, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report5.asp

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