Tax cuts for the very,very rich - how it works... and where some of the money goes

This very happy looking chap with his wife is Stephen A. Schwarzman, he is Chairman, CEO and Co-Founder of Blackstone Group LP in 1985 and the Chairman of the board of directors of its general partner, Blackstone Group Management L.L.C. (who paid him US$400Mn last year) his colleague and co-founder Peter G. Peterson is Chairman of the Council on Foreign Relations.

Stephen was George Bush's room mate at Yale and joined the sinister Yale Skull and Bones sceret society in 1969 simultaneously. He is married to Christine Hearst, an intellectual property lawyer at Cowan, Liebowitz & Latman who, unusually, has kept the name of her second husband, Austin Hearst, father of her 2 children ( She is a daughter of Peggie Mularchuk of Hicksville, L.I.) grandson of the legendary newspaper tycoon Randolph Hearst.The wedding was solemnised by both Rabbi Bertram Siegel and Rev. Sam Matarazzo, a Roman Catholic priest on November 5th 1995.


At his 60th Birthday party on 13th February (total cost US$6 Mn) this year Rod Stewart provided the entertainment - and was allegedly paid US$1 Mn for the gig. (just days after the Blackstone US$39 Bn. purchase of Equity Office Properties in what was the largest leveraged buyout ever.

Last month these guys and their partners sold some of their share of Blackstone to the public and the public paid up US$3.7Bn - give or take the off US$100 Mn. for the flock of lawyers, accountants and PR / Press reptiles who were on hand to do the deal.

Whew ! That's some tax to pay on that pay day ... well yes the partners will initially pay (give or take the odd mill ... a whopping US$ 553 Mn. that's the going rate of 15% on Capital gains (reduced to that rate by his old room mate President Bush in one of his essential tax cutting moves) . Ouuuch!!!!!

But tax lawyers point out that the documents outlining the deal suggest that that tax will be returned to those taxpapers and some US$200 Mn. more ....How ?

Well , the trick is that that US$3.7 Mn. represents intangible assets - Goodwill for which the sellers (because they put this into a seperate entity called a "blocking company" - because it blocks paying tax) can make deductions for the "loss" of that goodwill.

Blackstone can deduct 35 %, 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.

The rub is of course that this tax is only repaid over 15 years, so that the deduction of US$1.1 Mn the partners can make on the US$3.7 Mn works out at in today's dollars US$751 Mn (ish, ish because those pesky lawyers, etc will take a pourboir you can bet)

So hey Presto , this precious prestidigitation means the partners recover US$198 million more than they paid in taxes. (751 - 571)

To reap those savings from the deductions, Blackstone needs to funnel income into that blocker corporation.

So Blackstone directs to the "blocker" corporation the annual fees it receives from investors for managing their money, which is 2 percent of the assets they manage - more than US$850 million last year, far more than the amount needed to write off the good will.
... and the effective tax the partners will have paid is approximately 5%.

Similiar tax structures have been used when the Fortress Investment Group went public in February (Goldman Sachs lead underwriter) , Kohlbreg, Kravis Roberts and Och-Ziff Capital managment identify virtually identical strategies for tax shrinking in their preliminary disclosure documents for their forthcoming floats.

It is of course all perfectly legal.

PS http://www.ipnetwork.com/ was formed by Christine Hearst Schwarzman, as she now calls herself, she founded and named herselfchairman of a new business, IPnetwork.com, which described itself as“the premier licensing and event sponsorship Website” and “the onlineleader in transaction, management and information services for the licensing,event sponsorship and intellectual property communities.” Just as the Internet bubble was poised to pop, she raised $20 million in financing for the venture,*** which she promised would, among other things,help Web site owners avoid copyright infringement litigation.“All of Schwarzman’s friends invested, but it went pfft in the bubble,”says an observer of the financial world. (Michael Gross 740 Park: The Story of The World's Richest Apartment Building (Broadway Books):)

A Whois produces this ....
Registrant:

The Blackstone group , 345 Park Avenue, NEW YORK, NY 10154
Domain Name: IPNETWORK.COM
Administrative Contact , Technical Contact :
Domain, CHS

admin@schwarzman.com

345 Park Ave, New York, NY 10154,US
Phone: 212-583-5000
Record expires on 13-May-2013 - Record created on 25-May-1999

Database last updated on 26-Feb-2007

*** IPnetwork.com, the premier licensing and event sponsorship Website, announced today the initial closing of its $20 million second round of financing. The round was led by Communicade, the Internet investment arm of Omnicom Group Inc., the global advertising, marketing and interactive media giant. Other investors include Chase Capital Partners, Merrill Lynch, Fenway Partners, LGT Capital Management, and Wharton Capital Holding Corp., as well as additional investments from Sir Ronald Grierson and previous investors TL Ventures, Craig McCaw, Reed Hundt, Jay Alix, Jon Moulton of Alchemy Partners and Chris Brody of Vantage Venture
Partners.

Perhaps not a business venture that Stephen will brag about - one imagines that Ron Grierson ex GEC , Craig McCaw, Reed Hundt, Jay Alix, Jon Moulton and Chris Brody might, with hindsight take a rather sour view of their investment.

Christine also hit the headlines in August last year, at a St. Tropez party held by Denise Rich the semi estranged wife of Marc Rich Tax exile, (pardoned by Bill Clinton) held a party abord her husband's Rich's sleek, 145-foot yacht, "Lady Joy," 300 luminaries disembarked to the old port, where an actual merry-go-round had been de-horsed and converted into a rotating dance floor surrounded by go-go girls in cages. Pole-dancing under the flashing lights - principal dancer was Christine - which much amused huisaband Stephen and fellow travellers the beautifully bronzed George Hamilton, Anne Hathaway, Rena Sendi, Terry Allen Kramer and Serena Boardman. P.M. Lounge emcee Unik handed the mike to Sean Combs , who rapped over his new record with James Brown.