July 31, 2007 9:39

A clearer explanation of Blackstone's sweet tax deal

A few weeks ago David Cay Johnston wrote a front-page NYT story (warning: available to Times Selectoids only) on how Blackstone had "devised a way for its partners to effectively avoid paying taxes on $3.7 billion, the bulk of what it raised last month from selling shares to the public." I wrote a post at the time commenting upon the article but complaining that I didn't really understand it. Johnston sent me an e-mail telling me to reread the chart that accompanied the article. I did, but I still didn't really get it (and I'm not blaming him for that). My main confusion was over whether Blackstone's partners were benefiting at the expense of taxpayers or of the company's new public shareholders.

In the new Fortune, Allan Sloan demonstrates why he gets paid the big bucks by finally making the whole thing clear to dense little me (the column's been online for more than a week, but I first noticed it when I opened up the magazine today):

By shuffling lots of paper, Blackstone Group LP - remember, that's the public company - set up a wholly owned corporation that created a very large asset (called goodwill, if you really want to know) that's tax deductible over 15 years at the 35% corporate rate. The public Blackstone agreed to give Schwarzman, Peterson, and the other sellers 85% of what it realizes from this deduction.

Kicking back 85% of the tax savings to the sellers dates to at least 2005, when Lazard and DreamWorks both did it, as did Fortress earlier this year. But outside of tax techies, almost no one noticed. Now this 85%-to-the-sellers deal, which is perfectly legal but in my opinion shorts the public shareholders, has become standard for "alternative investment" firms seeking to go public while they can. Offerings I've read that do this include KKR, Och-Ziff, and Pzena, with more doubtless to come. ...

The bottom line: The public company is giving Blackstone's selling partners more than half their $700 million capital-gains tab, reducing their tax outlay to 7%. That, fans, is an example of why Steve Schwarzman is worth around $10 billion. And why most of the rest of us aren't.