Blackstone And Taxes, Part Whatever Of A Never-Ending Series

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We've been talking about the tax implications of the Blackstone initial public offering for sometime. And not a little of our writing in this area has been informed by the work of VIctor Fleischer. An article by the University Colorado lawschool professor entitled "The Two and Twenty" helped inspire a New York Times editorial yesterday that was more or less an order issued from Times Square to the Democratic leadership on Capitol Hill. The message: start taxing private equity performance fees as ordinary income rather than capital gains.
Until now this was seen as an unlikely scenario. More than doubling the tax on what the private equity folks call "the carry" strikes many folks in the industry as outrageous and catastrophic. So outrageous and catastrophic that it more or less had to be considered "unlikely" in order to allow for a decent night's sleep. But the language of the Times editorial page makes clear that making sure private equity folks get a good night's sleep is not high on everyone's agenda. This might not happen under the watch of George W. Bush but that watch stops ticking in 20 months.
As private equity and hedge funds grow--both in terms of the size of capital they control and the role they play in the minds of the public--they will find themselves increasingly under scrutiny from lawmakers and regulators, and increasingly under pressure to play politics by the ordinary rules. Aint democracy grand, fellas?
Taxing Private Equity [New York Times]

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