(September 4, 2012) – The New York attorney general is investigating a number of leading private equity firms—including Bain Capital and Apollo Global Management—on suspicion of tax evasion, according to the New York Times.
Eric Schneiderman, the attorney general, is looking into whether the firms converted certain management fees into fund investments, thereby qualifying the fees to be taxed at the much lower capital gains rate. In recent weeks, Schneiderman has subpoenaed more than a dozen private equity companies, including Kohlberg Kravis Roberts & Company, Sun Capital Partners, TPG Capital, and Silver Lake Partners, as well as Bain and Apollo.
The tax strategy under investigation came to light publicly last month when Gawker published a 950-page cache of Bain’s internal financial documents. The papers show a total of least $1 billion in fees converted into investments, which then fall under the 15% capital gains tax bracket. Such a move would short the government more than $220 million in federal income and Medicare taxes.
Mitt Romney, Bain’s founder and the Republican presidential nominee, continues to receive income from the private equity firm. His personal financial lawyer, R. Bradform Malt, issued a statement saying Romney never benefitted from the practice.
“Investing fee income is a common, accepted and totally legal practice,” he said. (Other tax experts disagree; the practice’s legal status is debated and ambiguous. Blackstone and the Carlyle Group, for instance, have both made points in regulatory filings that they do not engage in fee-to-investment conversion.) “However, Governor Romney’s retirement agreement did not give the blind trust or him the right to do this, and I can confirm that neither he nor the trust has ever done this, whether before or after he retired from Bain Capital.”
The attorney general’s office did not respond to aiCIO for immediate comment, nor has it officially confirmed or denied the investigation. Schneiderman did release a statement on Labor Day—two days after the New York Times published its report.
“On this Labor Day, we should look to the labor movement’s legacy of lifting up all Americans to fulfill the promise of shared prosperity…That means vigorously enforcing our state’s labor laws using civil and criminal tools so that no unscrupulous employer will get an unfair advantage over law-abiding businesspeople by unlawfully cutting corners…We must continue to uphold New York’s proud tradition of standing up for working people, and protecting those who are struggling in these tough economic times.”