Today the New York Attorney General Released the the False Claims Act case filed by Plaintiff-Relator David Danon against The Vanguard Group, Inc. (“VGI”), subsidiaries of VGI (collectively with VGI, “Vanguard”) and the Vanguard group of mutual funds (the “Funds”, and, collectively with Vanguard, the “Vanguard Group”).
According to the unsealed complaint, Vanguard has operated as an illegal tax shelter for nearly forty years, providing services to the Funds at prices designed to avoid federal and state income tax, sheltering hundreds of millions of dollars of income annually, avoiding approximately $1 billion of U.S. federal income tax and at least $20 million of New York tax over the last ten years.
Vanguard Falsely Claimed All New York Tax Returns Filed
According to the unsealed complaint, in 2003, 2008, and 2001, Vanguard falsely stated in “Vendor Responsibility Questionnaires” submitted to the State of New York that it had filed all required New York returns and paid all required New York taxes.
In its submission to the State of New York for management of New York’s Section 529 college savings plan (the “529 plan”)—which Vanguard has managed since 2004—Vanguard represented that it had filed all required New York returns and paid all required New York taxes.
According to the unsealed complaint, since at least 2004, Vanguard has had extensive and significant business contacts and activity with and in New York. Such activity includes, but is not limited to, significant employee activity in New York, extensive advertising targeting New York investors, management of tens of billions of assets under management (“AUM”) belonging to New York residents and domiciliary entities.
According to the unsealed complaint, despite clearly meeting the “doing business/nexus” standard requiring the filing of New York income tax returns, Vanguard failed to file such returns for the period preceding 2011 (the “Failure to File Years”).
According to the unsealed complaint, Vanguard’s bid for, and acceptance of, the 529 Plan management contract was a representation and acceptance that it would conduct acts creating a New York income tax nexus—a representation that directly contradicts its representation that it filed all required New York tax returns and paid all taxes due to New York.
According to the unsealed complaint, In 2011 and 2012—when it filed New York returns and paid New York taxes—Vanguard filed false returns, ignoring New York’s “shareholder based apportionment” rule and reported distorted and/or artificial income.
IRS Tax Code
Section 482 (“Section 482”) of the Internal Revenue Code (the “Code”), Section211(5) (“Section 211(5)) of New York Tax Law (the “Tax Law”)—as well as the laws of dozens of other jurisdictions—require that transactions between commonly controlled parties occur at market, “arms length” prices, and not bargain prices, or at prices otherwise designed to avoid federal or state income tax.
Vanguard and the Funds are commonly controlled. Vanguard violates Section 211(5) and Section 482 by providing services to the Funds at artificially low, “at cost” prices. As a result, Vanguard shows little or no profit and pays little or no federal or state income tax despite managing Funds with nearly $2 trillion in assets.
Vanguard Knowingly Failed to Pay Federal & New York State Income Tax
According to the unsealed complaint, Vanguard knowingly and fraudulently failed to report and pay tax on its $1.5billion “Contingency Reserve,” avoiding approximately $500 million of U.S. federal income tax and $10 million of New York tax, even though the Contingency Reserve (1) is under VGI control and used for general Vanguard purposes, (2) has been funded by Fund service fee payments that reduce Fund net asset value (“NAV”), and which therefore reduce the value of a shareholder’s investment in a Fund, and (3) Vanguard represents the Contingency Reserve as a VGI asset to third parties and regulators.
Guiliano Law Group
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