KKR, Apollo reveal tax concerns in filings

The two firms cited changes to the tax status of carried interest and the possibility of having to register with the SEC as investment advisors as threats to their businesses.

Kohlberg Kravis Roberts and Apollo Management both devoted considerable space in recent regulatory filings to pending legislation in the US that could negatively affect their businesses.
The two firms cited legislation passed in the US House of Representatives in December 2009 as a significant regulatory risk. The legislation would change the tax treatment of carried interest and could not only lighten its managers’ pockets, but endanger the firm’s tax status. 
If carried interest were treated as ordinary income instead of investment gains, carried interest would become “non-qualifying income” under the tax rules for publicly traded partnerships. 
Both firms said if the legislation were to pass into law, their management companies would either be precluded from claiming partnership status for US income tax purposes, or they would be required to hold their investments in a taxable US corporation.
“If we were taxed as a corporation, our effective tax rate would increase significantly,” KKR said in a recent SEC filing to register shares on the New York Stock Exchange. “The federal statutory rate for corporations is currently 35 percent. In addition, we would likely be subject to increased state and local taxes. Therefore, if any such legislation or similar legislation were to be enacted and apply to us, it would materially increase our tax liability, which could well result in a reduction in the market price of our common units.”
KKR noted that President Barack Obama’s budget proposals for both 2010 and 2011 contained language similar to the House bill, but with Obama’s proposals also include a transition period. Apollo’s filing said the transition period could defer corporate treatment for as much as ten years.
Both Apollo and KKR also said pending US legislation that would force private equity fund managers to register as investment advisors with the SEC could hurt their businesses.
“If enacted, this [legislation] would likely negatively impact our funds in a number of ways, including increasing the funds’ regulatory costs, imposing additional burdens on the funds’ staff, and potentially requiring the disclosure of sensitive information,” Apollo said. “Moreover, as calls for additional regulation have increased, there may be a related increase in regulatory investigations of the trading and other investment activities of alternative asset management funds, including our funds. Such investigations may impose additional expenses on us, may require the attention of senior management and may result in fines if any of our funds are deemed to have violated any regulations.”