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When I initially discussed the Blackstone Group’s upcoming IPO, one of the issues that I pointed out was the murkiness of the tax situation. Congress has come out with a bill that essentially takes away the tax advantage that Blackstone would have over other publicly traded entities. The reason for the difference is that Blackstone is structured (technically) as a limited partnership while most publicly traded entities are corporations. Partnerships do not pay tax on their income while corporations do.

Well, the IRS didn’t much like that idea. Senators Baucus and Grassley, the Chairman and Ranking Member of the Senate Finance Committee respectively, have introduced a bill to eliminate that advantage by taxing all publicly traded entities as corporations. On top of not paying taxes, the companies can generally structure their operations so that all their income is treated as capital gains in the hands of their partners. That lowers the partner’s tax bill from 35% to 15%.

While private equity and hedge funds are the primary focus of the bill, there could be precedent in Canada for the type of tax playing that goes on when such an advantage is available. Canada used to have a structure called an income trust that worked similarly to a Real Estate Investment Trust. As long as the company paid out a high percentage of earnings (usually 90%), there was no tax levied at the company level.

Well, when tax consultants figured out how to shoehorn other companies into this structure many companies converted to this income trust. The initial target for this kind of trust was small oil and gas companies that have little operations and basically operate as partnerships, large corporations began converting so that they would have a market advantage. The two largest telephone companies in Canada, Bell Canada and Telus, planned to convert until the government took the exemption away. The value of income trusts dropped around 20% in the days after the budget was introduced.

Could the same happen here? Blackstone has said that the legislation would have a material effect on their valuation and stock price, and some analysts have floated the idea of 20%. The Washington Post says that the Senators were concerned about other firms testing the waters after Blackstone’s IPO, expected by next Friday.

I wouldn’t have invested in the IPO before, but the murkiness of the tax situation has to give investors additional pause. Like I said earlier, I doubt that Blackstone will have trouble placing the shares, but I’m not sure I want to be holding them at the end of the day.