New York probes private equity tax strategy: NY Times

Sat Sep 1, 2012 7:01pm EDT

(Reuters) - New York state Attorney General Eric Schneiderman has subpoenaed more than a dozen U.S. private equity firms as part of an investigation into a widely used tax strategy in the industry, The New York Times reported on its website on Saturday, citing unnamed executives.

At issue is the conversion of fees that firms typically charge clients for managing assets into investments in the private equity funds, according to the Times. The management fees would be taxed as ordinary income, which attracts a higher tax rate than capital gains from investments.

Schneiderman's office is looking into whether that strategy helped the firms illegally cut their tax bills by hundreds of millions of dollars, the newspaper said.

The firms subpoenaed include Bain Capital, once headed by Republican presidential candidate Mitt Romney, the newspaper said.

Other firms that received subpoenas include Kohlberg Kravis Roberts & Co (KKR.N), TPG Capital TPG.UL, Sun Capital Partners, Apollo Global Management (APO.N) and Silver Lake Partners, the paper said.

The Times said Clayton, Dubilier & Rice, Crestview Partners, H.I.G. Capital, Vestar Capital Partners and Providence Equity Partners also received subpoenas.

The attorney general's office and the private equity firms were not immediately available for comment.

(Reporting By Nivedita Bhattacharjee in Chicago and Greg Roumeliotis in New York; Editing by Peter Cooney)

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Comments (1)
2156 wrote:
This is a total scam by the Private Equity executives. Put this in terms of an ordinary person. If you receive income of, say $100, you are taxable at approximately 35% all-in. You can then take your $65 after-tax income and invest it, for example, in the stock of KKR. When you sell the shares of KKR (assuming minimum holding period) you are taxable at capital gains rates. But, and this is the important point, the money you received at the outset was INCOME in the first instance. So the issue here is not whether the “investment” in the fund (accomplished by deferring receipt of the fees) is capital gains or not, the issue is whether the “fee” is income in the first instance. Had they received the money for management costs (which its assumed purpose) it would have been income in the first instance. They could have subsequently invested the after-tax income just as you and I would have done. By simply deeming the funds to be a capital investment, the executives have been “gifted” an interest in the fund, which is taxable as income. You cannot have it both ways – if it was YOUR money to begin with then it is income in the first instance and an investment in the second instance. If it was NOT your income in the first instance, then the interest in the fund was a gift to you and is taxable at its fair market value, which is the original basis at the time of investment, just as it is for every other investor, all of whom claim their investment as their basis. In either case – if it is the property of the executives at the fund then it has to at some stage have been their income to begin with. They should be taxed at ordinary rates on the deferred amounts and the net amount can then be considered an investment.

Sep 02, 2012 8:36am EDT  --  Report as abuse
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