Paul L. Caron

Thursday, September 24, 2015

Avi-Yonah: Vanguard Owes $35 Billion In Back Taxes

VanguardPhiladelphia Inquirer, Whistleblower's Expert Says Vanguard Owes Billions in Back Taxes:

A tax expert retained by former Vanguard Group tax lawyer David Danon in his whistle-blower complaints against the mutual fund giant has sent the IRS a report estimating the company's unpaid federal income tax liabilities at $34.6 billion from 2007 to 2014.

"If the IRS were to pursue this matter, it will prevail in court," wrote Reuven S. Avi-Yonah, law professor at the University of Michigan Law School, in his report.

Malvern-based Vanguard, the nation's largest mutual fund company, "has no legal justification" for charging its mutual funds artificially low management fees that reduce its reported profits and tax obligations, Avi-Yonah wrote. And Vanguard failed to pay taxes on a $1.5 billion "contingency reserve" set aside from investors' funds, he added.

Vanguard executives have reviewed a copy of the report. "As we've stated previously, we believe the case is without merit and decline to comment further," company spokesman John Woerth wrote. ...

Avi-Yonah, who has also taught tax law at Harvard and the University of Pennsylvania, is a veteran of 25 years of tax law at major New York, Washington, and Boston law firms. He has advised the U.S. Treasury and international agencies on tax matters, and has testified on major corporate tax cases before Congress. "He's a big deal. Very bright guy," said Lee Sheppard, a tax lawyer and contributing editor to Tax Notes, a Washington tax journal, who has found merit in the questions Danon raised about Vanguard.

"It seems like a pretty clear-cut case," said Robert Willens, a prominent New York business tax attorney, after reviewing highlights of Avi-Yonah's report. "I know Vanguard says they have meritorious defenses and special circumstances that might excuse them. But the principle in law is that they have to deal with their funds at arm's length," and the funds must pay Vanguard's management company fees as if they were paying an independent contractor, not a special low price, Willens said. ...

Avi-Yonah, who is charging $850 an hour, calculated damages based on Morningstar Inc.'s estimates of mutual fund expenses for the industry, including Vanguard's relatively low-fee funds. That makes his estimate conservative, said Danon's lawyer, Stephen Sorensen.

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Can't Vanguard make a wal-mart style argument that they want to make money through volume of assets under management and offering low fees allows them to obtain the volume they need to run their business model. I say this with little investigation or care into their business model. To me, this is different from multinationals stashing profits abroad through transfer pricing, as Vanguards main thrust is to offer low fees to the outside consumer/investor. More than willing to be told how wrong this assumption is.

Posted by: Daniel | Sep 25, 2015 7:35:17 AM

I would not want to be the attorney representing the IRS who must argue that the Internal Revenue Code prevents all investors in Vanguard mutual funds from paying low costs because other fund companies have higher costs. There are other fund companies where the charges for index funds are as low as Vanguard. What about all the Vanguard funds that subcontract the management to other third party firms? What if all the Vanguard funds just changed their boards so that there was no overlap with Vanguard?

Posted by: Mark Siegal | Sep 24, 2015 9:47:26 PM