Analysis: New York AG's private equity probe may have little bite

Fri Sep 7, 2012 1:37am EDT
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By Greg Roumeliotis and Karen Freifeld

NEW YORK (Reuters) - New York state attorney general Eric Schneiderman's investigation of the private equity industry's tax practices may have attracted a lot of publicity in recent days, yet it's uncertain whether it will result in big financial settlements.

His action may be limited to whether private equity fund managers dodged paying the state's top tax rate, currently at 8.82 percent, which applies to both ordinary income and capital gains.

Schneiderman does not have jurisdiction over whether firms improperly took advantage of a difference in federal tax rates by paying a 15 percent capital gains rate rather than the 35 percent rate on ordinary income.

"It would not seem to be what they call a high-yielding kind of inquiry," said Robert Willens, a New York accounting and tax expert and a professor at Columbia Business School.

But how much money exactly is at stake is still not clear. The attorney general has yet to gather enough information to make an assessment of potential liabilities, according to a source familiar with the investigation.

The New York attorney general is armed with a new tool - an enhanced state False Claims Act that allows for treble damages and penalties in tax cases.

His office's lawsuit against Sprint Nextel Corp (S.N: Quote) in April for more than $300 million in uncollected taxes and penalties was the first tax enforcement action filed under the Act, which was tweaked by Schneiderman himself to crack down on large-scale corporate tax fraud schemes. <ID: nL1E8HELEV>

U.S. banks and funds have settled with prosecutors before to avoid lengthy legal battles.   Continued...

New York Attorney General Eric Schneiderman (L) is sworn in by Chief Judge Jonathan Lippman during a ceremony at the Capitol in Albany, New York, January 1, 2011. Schneiderman's daughter Catherine is at center. REUTERS/Mike Groll/Pool