Bain Capital: Private equity firms face tax strategy probe over management fee waiver

Bain Faces Tax Strategy Probe

Bain Faces Tax Strategy Probe

The Slatest has moved! You can find new stories here.
The Slatest
Your News Companion
Sept. 2 2012 2:56 PM

Several Private Equity Firms, Including Bain Capital, Face Tax Strategy Inquiry

New York Attorney General Eric Schneiderman subpoenaed more than a dozen private-equity firms

Photo by Mark Wilson/Getty Images

The New York attorney general has sent subpoenas to more than a dozen of the country’s largest private-equity firms, including Bain Capital and Apollo Global Management, as part of an investigation into whether they inappropriately saved hundreds of millions from tax bills.  The New York Times was the first to report the news, which was later confirmed by Reuters, the Associated Press, and Bloomberg.

Bain was, of course, founded by Mitt Romney and private-equity executives say they fear Eric Schneiderman, the attorney general, is trying to embarrass the industry as he has close ties to President Obama’s administration, according to the Times.


At the heart of the issue is what is known in the industry as a “management fee waiver.” Private-equity firms charge management fees from investors, usually around 2 percent of assets. But some companies convert those fees into fund investments. Without the conversion the fees would be considered ordinary income and taxed at around 35 percent, but as fund investments, the rate is closer to 15 percent, explains Reuters. The strategy is seen as "perfectly legal by some tax experts, aggressive by others and potentially illegal by some," notes the Times.

That strategy became public last month after Gawker posted hundreds of pages of Bain internal documents online. But the subpoenas predate the leak so there doesn’t appear to be any connection.

Romney’s campaign issued a statement saying the Republican nominee did not benefit from the practice. “Investing fee income is a common, accepted and totally legal practice,” said R. Bradford Malt, a lawyer for Romney. “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.”

Daniel Politi has been contributing to Slate since 2004 and wrote the Today’s Papers column from 2006 to 2009. Follow him on Twitter.