Vanguard faces a whistle-blower lawsuit filed by its former in-house tax attorney, who claims that the company's unique structure and intercompany management fees violate tax code Section 482, as well as New York Tax Law Section 211(5). A report submitted to federal authorities in support of a whistleblower claims Vanguard Group Inc. owes $34.6 billion in taxes because it undercharges its affiliated mutual funds for investment advisory services, resulting in a reduced federal tax liability.
Under federal tax rules, services must be priced at arm’s length, or as if between unrelated companies, unless they are subject to an exception, which Vanguard is not.
“Vanguard has no legal justification for its transfer pricing practice of operating its U.S. mutual funds ‘at cost,’” the report says. “If the IRS were to pursue the matter, it will prevail in court on the issue of whether Vanguard should have charged its affiliated funds an arm’s length fee based on industry comparables for the investment management and advisory services Vanguard provided to the funds.”
If Vanguard charged its affiliated mutual funds the industry’s going rate, it would owe about $34.6 billion for 2007 through 2014, the report said. Vanguard also should have paid taxes on a $1.5 billion contingency reserve on its books and the interest income from lending the reserve to its funds, it said.
The report, which was submitted to the IRS and the U.S. Securities and Exchange Commission, was prepared at the request of Thomas Alexander & Forrester LLP, the firm representing whistleblower David Danon, a former Vanguard attorney who has filed a suit in New York state court alleging that the company is skipping out on its taxes. A Vanguard spokesman said the company believes Danon's case is without merit and declined to comment further.
Danon served as associate counsel at Vanguard from August 2008 to June 2013. Last year, Danon asked the SEC to intervene in the case, alleging Vanguard told his lawyer it might sue him for violating company policy and state professional conduct laws.
The case is The case is State of New York ex rel. David Danon v. Vanguard Group Inc. et al., case number 100711-2013, in the Supreme Court of the State of New York, County of New York.
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