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

Philadelphia 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.