Carlyle Group, L.P. (“Carlyle” and the “Fund”), a private equity firm with $153 billion in assets under management as of last June, has filed an S-1 registration statement with the Securities & Exchange Commission to sell limited partnership interests in the Fund (the “IPO”).

Many in the financial community have wondered why Carlyle is conducting the IPO now.  These commentators point out that other publicly traded private equity firms – Blackstone, KKR, Apollo and Fortress, have suffered far greater declines than the S&P 500 index in the last three months.

But Carlyle may have other timing considerations in mind.  Reuter’s breakdown of Carlyle’s S-1 identifies four negative tax consequences that may result from proposed tax reform legislation once a ten year grace period expires.  First, the Fund could be precluded from being treated as a partnership.  Qualifying as a partnership for tax purposes allows managers’ “carried interest” – partnership profits generated by investment gains – to be treated as capital gains for federal income tax purposes instead of being taxed at much higher rates for ordinary income and avoid two levels of tax on the investment profits.  Second, to avoid being treated as a corporation, the Fund could be forced to hold its “carried interest” through its corporate subsidiaries.  Holding carried interest through subsidiary corporations would lead to double-taxation, at the corporate and individual levels, instead of one-level taxation as in a partnership.  Third, “carried interest” could also be re-characterized for federal tax purposes as service income and taxed at ordinary rates instead of the capital gains rate.  Finally, the capital gains rate may simply be increased in the future.  Any of these results would generate significantly increased tax liabilities for investors in the Fund and consequently decrease the price of the Carlyle units.

The proposed tax reform legislation is part of President Obama’s $467 billion jobs plan.  The budget office has estimated that the proposed legislation could raise up to $18 billion in tax revenue.  The proposal is consistent with investor Warren Buffett’s widely-read August 14 New York Times Op-Ed in which he advocated increased taxes for the “mega-rich”.

Steve Judge, interim chief executive of the Private Equity Growth Capital Council, the industry’s trade group, has criticized the proposed tax reform legislation, arguing that “raising taxes on investments would only sideline employers and investors and create further uncertainty in an already struggling economy.”

By becoming a publicly traded company before any tax legislation takes effect, Victor Fleisher, associate professor at the University of Colorado Law School, says it is possible that the Fund could be “grandfathered” into current tax treatment for “a long time.”