Carried Interest Taxation

Unless your Blackberry, laptop and PC died today, you know about the hoopla surrounding the revelation that Blackstone negotiated as part of its IPO to share in the tax savings caused by the structure of their transaction.  We find it hard to understand what all of the fuss is about.  Let's review the bidding-

• Blackstone partners sold partnership interests in the IPO.  By making a common tax election authorized by Section 754 of the Internal Revenue Code, the partnership was entitled to "step up" the basis of assets by the gain recognized by Blackstone partners.  This step up created an amortizable goodwill asset, which can be written off over 15 years.
• Blackstone partners negotiated as part of the IPO to have the beneficiaries of the amortization pay to the partners 85% of the tax savings created by the increased amortization deductions. 

So, these amounts received by Mr. Schwartzman, et al. are not dollars that the fisc would otherwise receive.  Instead, it is a contractual allocation of the value of the tax savings.  Parties do this kind of contractual allocation all of the time.  It does NOT represent an abuse of the tax system. 

We think that some are trying to put a black hat on these guys, which does not appear to be true and should be no more relevant to the debate than the fund managers' painting themselves as the champion of the working class.