Reuters and Bloomberg have picked up the thread on Blackstone's aggressive tax structure. 

Robert Willens, a highly-respected tax commentator, thinks Blackstone is pretty safe.  From the Bloomberg story:

Robert Willens, an accounting analyst at Lehman Brothers Holdings Inc., said Blackstone may be able to accomplish its goal because the tax code clearly identifies the types of income it can earn under the structure it proposes.         

"If Blackstone earns the type of income specified in the requisite quantities, then that should be the end of the inquiry,'' he said. "It's not proper, in these cases, as a matter of statutory construction, to inquire into whether the `spirit' of the statute has been well served.''         

Mr. Willens may be right that, as a matter of statutory construction, the plain language of 7704 is probably enough to carry the day in court, should the IRS choose to challenge the structure.  This isn't the sort of sham transaction structured that begs for a non-literal interpretation of the Code. 

But that hardly diminishes the tax risk going forward, as Congress isn't bound by its failure to address this kind of structure when it first passed the rules in 1987.  Among other things, the Blackstone structure "works" because it sets up blocker entities that check-the-box as corporations, cleansing the "bad" income from management fees and deal advisory fees.  The check-the-box rules didn't come into effect until 1996, and clearly weren't contemplated when Congress wrote the PTP rules. 

The publicly-traded partnership rules have sprung a leak, and I'd be surprised if Congress didn't try to plug it quickly.  Blackstone's avoidance of the 40 Act and the RIC rules won't help its case.  As Willens notes in the Reuters story, Blackstone is walking a fine line "between acting like an investment company, but not having to register as one."  Congress may find the tight-rope act too clever by half.

Related Posts:  The Politics of Taxing Blackstone, Blackstone IPO: Analysis of the Tax Risk,  The Blackstone IPO: Regulatory Arbitrage Extraordinaire

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