(Bloomberg News) Private equity executives won a major concession in their battle with the Obama administration over plans to increase their taxes when selling stakes in their firms, potentially saving billionaires such as Stephen Schwarzman and David Rubenstein hundreds of millions of dollars.
President Barack Obama and Representative Sander Levin separately signaled this month that proposals to raise taxes on investment performance fees, known as carried interest, won't apply to profits earned when buyout fund founders and other executives sell some or all of their holdings in their own firms. The president and Levin, a Michigan Democrat and the party's ranking member on the House Ways and Means Committee, previously backed legislation that would have increased rates on carried interest as well as the so-called enterprise value.
For founders of private equity firms, hundreds of millions of dollars are riding on how enterprise value is taxed. The biggest firms have leaders who are aging and are seeking to cash out through initial public offerings or secondary sales. Others have privately sold stakes to investors such as public pension funds.
Rubenstein, co-chief executive officer of Carlyle Group, has said one of the reasons he is taking his private equity firm public is to "liquefy" his stake. Blackstone Group LP co- founders Schwarzman and Peter G. Peterson earned $684 million and $1.92 billion, respectively when they sold stakes as part of the 2007 offering. The two took advantage of rules that allow corporations to write down the value of goodwill to offset taxes they paid on the gains.
The industry has labeled the hike in the enterprise value rate as unfair because it singles out private equity managers, and has used the issue to lobby against all proposals to raise its taxes. Excluding enterprise value could make it easier for Congress to boost tax rates on carried interest, said Steve Rosenthal, a Washington-based tax lawyer and fellow at the Urban-Brookings Tax Policy Center.
"Adding an enterprise value provision might be the concession necessary for all sides to declare victory," said Rosenthal.
Industry executives and their lobbyists have been fighting higher taxes on carried interest since 2007 and began emphasizing the enterprise value issue since Congress almost passed an earlier version of Levin's bill in 2010.
The chances of advancing the proposal this year are slim since it faces opposition from Republicans who control the House of Representatives. The enterprise value debate was one of the issues that stalled the carried interest proposal in 2010, Rosenthal said.
Ordinary Income
Under current law, buyout fund managers pay different tax rates on different types of income. They pay ordinary income rates of as much as 35 percent on asset-management fees. They pay capital gains rates of 15 percent on carried interest or profits-based compensation.