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Friday, July 13, 2007

And you thought big oil was evil...

... try looking into hedge funds, private equity.

So, I work for big oil and was feeling guilty about it as I drove to work listening to my "liberal hippy" station that plays good music but today was playing an oil war song and a "puff there goes the ozone layer" song. Then I arrived at work and read this in the NY Times: Tax Loopholes Sweeten a Deal for Blackstone. Basically, they get to pay 15% taxes on 3.7 billion raised through selling stock when they went public and then turn around and take a 30% deduction on that same money. Read the article, slowly, it's confusing. See some quotes below.

Blackstone’s tax maneuver hinges on its use of good will, an accounting term for the value of the intangible assets, like a well-known brand name, that are built up by a company over time. That value is part of the reason a company is worth more than the sum of its physical parts, like buildings and equipment.

Individuals who create good will cannot deduct it. But when good will is sold the new owners can because its value is assumed to erode. The Blackstone partners sold the good will from their left pocket to their right.

In simplest terms, the Blackstone partners paid a 15 percent capital gains rate on the shares they sold last month in the initial stock offering to outside investors (those shares represented a stake in the Blackstone management company, not its funds).

Blackstone then arranged to get deductions for itself for the $3.7 billion worth of good will at a 35 percent rate. This is a twist on the “buy low, sell high” stock market adage; in this case it would be “tax low, deduct high.”


The tax maneuver starts with Blackstone partners selling to a newly created subsidiary corporation $3.7 billion worth of good will. Such entities are known within the tax trade as blocker corporations, because they help block taxes from reaching the Treasury.

Here is how the structure works: Blackstone can deduct 35 percent, based on the corporate tax rate for depreciation, of the value of $3.7 billion in good will, or $1.3 billion. Because the partners told investors they have the right to 85 percent of that amount, that means they have $1.1 billion worth of deductions.

That amount would be saved over 15 years. But for an apples-to-apples comparison with the taxes it pays on the proceeds this year, the value of $1.1 billion in today’s dollars is $751 million.

How is this legal?


Bubba's Sis said...


cjh said...

Hmm...I don't get it. The "good will" things makes sense. It's brand recognition. But it's the name that's important. If they sell good will wouldn't the people they sell it to be using the same name? If they're using the same name, then how is it depreciating? (I confess I only read your post not the entire article.)

Bubba said...

They sold good will to themselves.

cjh said...

Oooh, I must have missed that part. Yep, that shouldn't be legal... :o)