[KKR] has set up a corporate subsidiary that can increase the stated value of its assets based on the gain realized by insiders who sell some or all of their stake in the company. This written-up value is tax-deductible to the corporation over 15 years, with the tax savings flowing through to the partnership. (It's what tax techies call a 754 election.)

This nifty little move reduces the partnership's taxes. Does KKR distribute those savings to its owners equally? Nope. It passes on 85% of its savings to the selling insiders, even if it has to borrow the cash to make the payments. (I should say "will pass on"; insiders haven't yet sold any units.) ...

Here's the math. Say Henry Kravis sells $1 million of units, generating $1 million of taxable income. He pays $150,000 in federal taxes, assuming all his proceeds are long-term capital gains. Let's say half that gain -- $500,000 -- becomes deductible to KKR's corporation at a 35% rate. This saves KKR $175,000 in taxes over 15 years.

Of this, $149,000 -- the aforementioned 85% -- goes to Kravis. The payments to Kravis beget further deductions for KKR, begetting further payments to Kravis, and so on. You end up with about $206,000 in payments to Kravis. Adjust for the fact that they're spread over 15 years, and they're equivalent to about $150,000 today. So the public firm would be giving Kravis tax-sharing payments about equivalent to his tax bill, assuming, as I said before, that all his profits are capital gains. ...