New York Attorney General Eric Schneiderman recently announced his office is reviewing the tax strategies of more than 12 of the nation's largest private equity firms, including Kohlberg Kravis Roberts & Company, TPG Capital, Sun Capital Partners, Apollo Global Management, and Silver Lake Partners.
The strategy in question involves the process of converting management fees into fund investments to benefit from a lower tax rate. The conversion of management fees into investments triggers capital gains, which currently have a 15 percent tax rate, compared to the 35 percent tax rate for ordinary income.
This strategy may have enabled private equity firms to avoid paying hundreds of millions of dollars in taxes. Currently, industry professionals are split on whether the strategy is a violation of tax law. While a large percentage say the method is common among private equity and hedge fund firms, others consider the move to be aggressive at best or illegal at worst, the New York Times reports.
However, Schneiderman is specifically focused on the scenario of firms foregoing management fees altogether and automatically classifying them as investments, Time magazine reports. While the investigation is ongoing, the news source reports that the regardless of what the state office uncovers, it does not have the authority to punish the firms for breaking federal tax law. However, if illegalities are discovered, it may prompt the Internal Revenue Service to conduct its own investigations.