According to the New York Times, New York State Attorney General Eric Schneiderman is investigating Bain Capital, along with several other major private equity firms, to see whether the firms used tax loopholes to avoid paying hundreds of millions in taxes. Schneiderman reportedly issued subpoenas to Bain Capital as well as Kohlberg Kravis Roberts & Company, TPG Capital, Sun Capital Partners, Apollo Global Management and Silver Lake Partners. The subpoenas seek "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."
The tax strategy used by Bain and other firms to convert management fees - the compensation normally taxed as ordinary income - into capital gains is known as a "management fee waiver." The strategy is widely used within the industry: 40 percent of the 35 buyout firms based in the United States surveyed in 2009 by Dow Jones said their partners used at least some of the firm's fees to make investments in their funds.
These fund investments are then taxed at a rate of 15% instead of the top rate of 35%, which would be the tax rate if the investments were listed as regular income. According to the Times, this allowed the Bain partners to save over $200 million in federal income taxes and more than $20 million in Medicare taxes.
The Times also notes that tax strategy "came to light last month when hundreds of pages of Bain's internal financial documents were made available online," by which they mean Gawker, in John Cook's exposé of Romney and Bain's tax dodging.
Romney's lawyer issued a statement denying Romney's involvement in the strategy.
"Investing fee income is a common, accepted and totally legal practice," said R. Bradford Malt, a lawyer for Mr. Romney who manages his family's investments and trusts. "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."
However, the Times points out that "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."
[Image via AP]