Taxation of Private Equity and Hedge Funds - Publicly Traded Partnerships

Publicly Traded Partnerships

In mid-2007, the Blackstone group, a major private equity fund, went public. Ordinarily, a publicly traded partnership is taxed as a corporation. There is, however, an exception for publicly traded partnerships earning only “passive-type” income, such as interest and dividends. Although the investments made by a private equity fund are actively managed, Blackstone took the position that the investments they engaged in fell squarely within literal language of this exception to the usual treatment for publicly traded partnerships. To address what they viewed as a loophole in the law, Senators Baucus and Grassley introduced S. 1624, which would remove the ability for publicly traded partnerships performing asset-management and related services to avoid being taxed as corporations. The result of this bill would be to change the tax treatment of private equity and hedge funds from a single level of taxation at a 15% rate (or 35% in the case of most hedge funds) to a corporate-level tax of 35%, plus a 15% tax on dividends when distributed. While acknowledging that there are concerns with the current treatment of publicly traded partnerships, Treasury Secretary Paulson has declined to endorse the treatment that would be provided under S. 1624.

The House extenders package included a carried interest provision that would apply to publicly traded partnerships beginning in tax years after 31 December 2009.

Various private equity and hedge fund managers followed Fortress, the first fund manager to go public as a PTP. The funds include Oaktree, Blackstone Group, Och-Ziff, KKR, Apollo Global Management, and Carlyle Group.