Blackstone ruling would close loophole, raise taxes

U.S. House and Senate committee members are scrambling to enact legislation that would close what some call a loophole in the Tax Code, a provision that provides tax breaks to partnerships that engage primarily in passive activities and that are publicly traded. The issue took center stage last week with the initial public offering of shares in the Blackstone Group, a large private equity firm.

The tax provisions that apply to companies like Blackstone allow the fund operators to pay tax on earnings at the capital gains tax rate of 15 percent instead of the ordinary income tax rates that can reach as high as 35 percent.

Lawmakers are claiming that the tax law, as written, provides unfair tax benefits to publicly traded partnerships that operate in the asset management arena. A bill that has been introduced in the Senate, the Baucus-Grassley bill (S.1624), would specifically remove the tax benefit for companies like Blackstone, but would include a five-year phase-in period. Members of the House Ways and Means Committee are considering a more far-reaching bill and one that might be enacted more quickly. Legislation in the House would not only cover the Blackstone situation but could also raise taxes on venture capital firms, real estate partnerships, and oil and gas companies.

Changing the tax law to prevent the use of the capital gains tax rate in organizations like the Blackstone partnership could raise between $4 and $6 billion annually in tax revenue. There is speculation that enacting such legislation would help provide an alternative income source to the government should the Alternative Minimum Tax be reduced.

Opponents of the legislation are particularly vocal about the need for lawmakers to not rush into new legislation without considering all of the ramifications. "The last time Congress rushed to judgment we ended up with Sarbanes-Oxley. This bill sends a chill through the financial markets once again sending a clear message that IPOs are not welcome in the U.S. With U.S. financial markets already under competitive pressure from globalization, this bill will only harm the U.S. markets' ability to vie for business," said Steve Milloy, Executive Director, Free Enterprise Education Institute.

Shares in the Blackstone Group opened at $31 in the IPO on Friday. Investors didn't seem swayed by reports that an unfavorable tax ruling could depress the value of the company by as much as 20 percent.

You may like these other stories...

The IRS has announced the special per diem rates for 2014-15 that taxpayers can use for substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home. The new per diem rates...
The issue of international assignees was, for a long time, limited to a small number of companies – meaning only those that operated on an international scale. But in recent years, global expansion has shifted into...
Exclusive: Lois Lerner breaks silenceIn her first press interview since the IRS Tea Party targeting scandal broke 16 months ago, ex-agency official Lois Lerner told Politico that employers won’t hire her, she’s...

Already a member? log in here.

Upcoming CPE Webinars

Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.
Sep 30
This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 21
Kristen Rampe will share how to speak and write more effectively by understanding your own and your audience's communication style.
Oct 23
Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.