In its Sunday edition, http://www.nytimes.com/2012/09/02/business/inquiry-on-tax-strategy-adds-to-scrutiny-of-finance-firms.html?pagewanted=1&_r=1&hp">The New York Times is reporting that New York Attorney General Eric Schneiderman is investigating several private equity firms, including Bain Capital for possibly abusing a tax strategy "in order to slice hundreds of millions of dollars from their tax bills."
The attorney general, Eric T. Schneiderman, has in recent weeks subpoenaed more than a dozen firms seeking documents that would reveal whether they converted certain management fees collected from their investors into fund investments, which are taxed at a far lower rate than ordinary income.
Among the firms to receive subpoenas are Kohlberg Kravis Roberts & Company, TPG Capital, Sun Capital Partners, Apollo Global Management, Silver Lake Partners and Bain Capital, which was founded by Mitt Romney, the Republican nominee for president. Representatives for the firms declined to comment on the inquiry.
Mr. Schneiderman’s investigation will intensify scrutiny of an industry already bruised by the campaign season, as President Obama and the Democrats have sought to depict Mr. Romney through his long career in private equity as a businessman who dismantled companies and laid off workers while amassing a personal fortune estimated at $250 million.
The subpoenas, by a Democrat, went out before a huge document leak recently that raised questions about Bain Capital's practices:
The tax strategy — which is viewed as perfectly legal by some tax experts, aggressive by others and potentially illegal by some — came to light last month when hundreds of pages of Bain’s internal financial documents were made available online. The financial statements show that at least $1 billion in accumulated fees that otherwise would have been taxed as ordinary income for Bain executives had been converted into investments producing capital gains, which are subject to a federal tax of 15 percent, versus a top rate of 35 percent for ordinary income. That means the Bain partners saved more than $200 million in federal income taxes and more than $20 million in Medicare taxes.
The subpoenas, which executives said were issued in July, predated the leak of the Bain documents by several weeks and do not appear to be connected with them. Mr. Schneiderman, who is also co-chairman of a mortgage fraud task force appointed by Mr. Obama, has made cracking down on large-scale tax evasion a priority of his first term.
As a retired partner, Mr. Romney continues to receive profits from Bain Capital and has had investments in some of the funds that documents show used the tax strategy.
Be sure to read the entire article for a succinct explanation about the fees/interest practices of many financial firms. This ends the piece:
The leaked documents show that Bain has in recent years waived management fees in at least eight private equity and other funds, including one formed as early as January 2002. The documents stated that Bain executives had the right to decide either annually or each quarter whether to waive some or all of their management fees; they also had the ability to convert the waived fees into investments in particular companies held by the funds.
Victor Fleischer, a law professor and finance expert at the University of Colorado who has been critical of the tax rules for private equity firms, said he believed Bain had waived management fees into investments with so little risk that the arrangement would not qualify for the capital gains rate if challenged by the I.R.S. “There is a tension between economic risk and tax risk that is supposed to be inversely proportional,” Mr. Fleischer said. “The way Bain set it up there’s not much risk at all, so it’s hard to see how this income should receive capital gains treatment.”