NY State looking into tax strategy of Bain, others

New York Attorney General Eric Schneiderman is reported New York Attorney General Eric Schneiderman is reported to be investigating tax strategies of more than a dozen of the nation's largest private equity firms, including Bain Capital, founded by GOP presidential candidate Mitt Romney. (Jan. 27, 2012) Photo Credit: Getty Images

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ALBANY -- New York Attorney General Eric Schneiderman is investigating tax strategies of some of the nation's largest private equity firms, including Bain Capital, founded by Republican presidential nominee Mitt Romney, an official familiar with the probe said Sunday.

Schneiderman, a Democrat, is examining whether the firms have abused a tax strategy to avoid paying hundreds of millions of dollars in taxes, said the official, who spoke on the condition of anonymity because of the sensitivity of the probe.

The practice involves converting some fees collected for managing accounts into fund investments, resulting in a lower tax rate.

Some tax experts who spoke to The New York Times, which first reported the investigation Sunday, believed the strategy was potentially illegal, though other experts said it was commonplace and proper.

Schneiderman sent subpoenas to more than a dozen firms, including Kohlberg Kravis Roberts & Co., TPG Capital, Sun Capital Partners, Apollo Global Management, Silver Lake Partners and Bain Capital, according to the official.

A spokeswoman for Schneiderman declined to comment.

Bain has been a high-profile target of Democrats as they seek to portray Romney as someone willing to shutter businesses and lay off workers in pursuit of profit. Romney has said lessons he learned at Bain would help him as president to fix the economy and create jobs.

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Though Romney collects benefits as a Bain retired partner, the inquiry isn't focused on the time he ran Bain.

The tax strategy of converting management fees into investments producing capital gains can be attractive because capital gains are subject to a federal tax rate of 15 percent, far less than the top rate of 35 percent for ordinary income. The "management fee waiver" strategy is widely used within the industry, the Times reported.

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, according to Bain financial documents leaked online. Bain partners were able to save more than $200 million in federal income taxes and more than $20 million in Medicare taxes, according to the newspaper.

The attorney general's probe predates the leak of Bain documents.

The Internal Revenue Service has not ruled on whether the waiver strategy complies with tax law, and expert opinion varies.

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