Paul L. Caron

Thursday, July 15, 2010

Fleischer: KKR's Tax Motivation in Going Public

KKR Logo KKR began trading on the NYSE today, and Vic Fleischer (Colorado) blogs the tax motivations behind the decision to take the firm public:

[T]he senior principals (Kravis et al) will be able to sell their shares to the public or redeem their shares with the newly-public holding company.  Under current law, Kravis will be taxed at long-term capital gains rates on the profit from this sale or redemption.  If Kravis sells $500 million to the public, he’d owe $75 million in income tax on the sale, less any tax basis he has in the shares (likely zero).

The pending carried interest legislation in Congress would change this result.  The idea behind the carried interest legislation is that carried interest represents, in part, a return on labor rather than a return on financial capital, and thus it should be taxed in part at ordinary rates.  The Senate’s latest version of the bill would tax 75% or 50% of carried interest at ordinary rates, thus shifting the tax rate on carried interest allocations from 15% to about 25% or 30%, depending on how long the underlying investment funds have held portfolio assets.

Christine Hurt (Illinois) has more in KKR is on the Big Board or Boy, Do I Miss Vic Fleischer!

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