Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Boglenaut » Fri Nov 20, 2015 10:25 am

This story will be of interest to people following this thread.

Vanguard, Facing Whistle-Blower Cases, Agrees to Pay Texas Taxes

http://www.bloomberg.com/news/articles/ ... exas-taxes

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Silence Dogood » Fri Nov 20, 2015 5:17 pm

alex_686 wrote:
Doc wrote:
soupcxan wrote:Good riddance to this plaintiff's shameless money grab. Really disgusting.
Hey, if you were a Fidelity fund holder that was paying more taxes then someone else because a law was being broken you would likely have a different opinion. Of course at this point we don't know if any laws were broken because the case was dismissed for other reasons.
That is not the reason why I am miffed - or to be precise, a little confused and trying to figure out if I should be miffed or not.

A for profit organization, like Fidelity, has certain advantages and certain obligations.

A not-for-profit organization, like member owned Northwestern Mutual, has certain advantages and certain obligations.

It is like banks verse credit unions or stores verse co-ops - they compete against each other yet they still have their own niche.

Vanguard's structure seems wrong. It is like finding a not-for-profit bank when you expect a not-for-profit credit union. Like I said in a prior post, I am still picking this apart.
That's strange. To me it seems very "right." Jack Bogle set up Vanguard the way he did to avoid conflicts of interest. Vanguard clients own the funds, the funds own Vanguard. Pretty brilliant.

You're argument seems to be that Vanguard's ownership structure is the problem, which isn't even the question Danon is (or was) raising.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by nisiprius » Fri Nov 20, 2015 5:44 pm

Boglenaut wrote:This story will be of interest to people following this thread.

Vanguard, Facing Whistle-Blower Cases, Agrees to Pay Texas Taxes

http://www.bloomberg.com/news/articles/ ... exas-taxes
Wow. :shock:
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by alex_686 » Fri Nov 20, 2015 5:50 pm

Silence Dogood wrote:That's strange. To me it seems very "right." Jack Bogle set up Vanguard the way he did to avoid conflicts of interest. Vanguard clients own the funds, the funds own Vanguard. Pretty brilliant.
So let me ask you a key question - why is Vanguard's structure more brilliant than the standard not-for-profit mutual structure? A structure that also avoids conflicts of interest?
Silence Dogood wrote:You're argument seems to be that Vanguard's ownership structure is the problem, which isn't even the question Danon is (or was) raising.
I think it is. A mutual structure is a tried and true legal structure which has had all of these issued ironed out. Vanguard structure is unique and innovated. Innovated being a synonym for risky.
Last edited by alex_686 on Fri Nov 20, 2015 6:22 pm, edited 1 time in total.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Silence Dogood » Fri Nov 20, 2015 6:00 pm

alex_686 wrote:
Silence Dogood wrote:You're argument seems to be that Vanguard's ownership structure is the problem, which isn't even the question Danon is (or was) raising.
I think it is. A mutual structure is a tried and true legal structure which has had all of these issued ironed out. Vanguard structure is unique and innovated. Innovated being a synonym for risky.
Please fix your quote.

Vanguard's ownership structure is not at question here. Danon is not alleging that the ownership structure is illegal.

The question is whether or not (see title of this thread) Vanguard has been "failing to charge market rates to and then paying taxes on services to its mutual funds."

We still don't really know the answer to this.

Are you suggesting that Vanguard be set up like a mutual insurance company? If so, as has been said repeatedly, that can't happen. Vanguard is not an insurance company.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by FreeAtLast » Fri Nov 20, 2015 6:09 pm

Boglenaut wrote:This story will be of interest to people following this thread.

Vanguard, Facing Whistle-Blower Cases, Agrees to Pay Texas Taxes

http://www.bloomberg.com/news/articles/ ... exas-taxes
OK, somebody educate me. Why would Vanguard "cave in" in Texas when they fought in New York?
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Silence Dogood » Fri Nov 20, 2015 6:13 pm

nisiprius wrote:
Boglenaut wrote:This story will be of interest to people following this thread.

Vanguard, Facing Whistle-Blower Cases, Agrees to Pay Texas Taxes

http://www.bloomberg.com/news/articles/ ... exas-taxes
Wow. :shock:
I'm not sure what to make of this:
Vanguard’s discussions with Texas began as part of a routine tax audit, said Woerth. At no time during the discussions with the state’s tax authorities “were we asked to address apparent claims by our former in-house counsel,” said the Vanguard spokesman. “We were unaware of such claims until we learned of the payment in November 2015.”
Why else would Vanguard have to pay these back taxes, if not for Danon's claims? Presumably, if it was about the transfer-pricing issue, Vanguard would have fought it, considering that they have "very strong arguments" against that..

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by alex_686 » Fri Nov 20, 2015 6:51 pm

I have fixed my quote. Thanks
Silence Dogood wrote:Vanguard's ownership structure is not at question here. Danon is not alleging that the ownership structure is illegal.

The question is whether or not (see title of this thread) Vanguard has been "failing to charge market rates to and then paying taxes on services to its mutual funds."
I never said it was illegal - just odd. Why chose an unconventional structure when there are conventional structures that get the job done?

My point specifically is that mutuals with mutual funds have over a 100 years worth or laws and regulations. The issues around conflict of interest between funds and the parent company are well developed and tested.

Vanguard can’t lean on the precedent that has been set with these non-profits. They must forge a new untested trail.
Silence Dogood wrote:Are you suggesting that Vanguard be set up like a mutual insurance company? If so, as has been said repeatedly, that can't happen. Vanguard is not an insurance company.
I missed that that part of the thread. Why can’t they? Most mutuals have both insurance and publicly traded mutual funds. What inherently prevents a mutual from just issuing mutual funds? If not a mutual, then why not a fraternal structure?

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Rysto » Fri Nov 20, 2015 10:47 pm

FreeAtLast wrote:OK, somebody educate me. Why would Vanguard "cave in" in Texas when they fought in New York?
The standing issue didn't apply here because it was the State of Texas demanding the taxes, not the lawyer.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by JDDS » Sat Nov 21, 2015 12:34 am

Silence Dogood wrote:
nisiprius wrote:
Boglenaut wrote:This story will be of interest to people following this thread.

Vanguard, Facing Whistle-Blower Cases, Agrees to Pay Texas Taxes

http://www.bloomberg.com/news/articles/ ... exas-taxes
Wow. :shock:
I'm not sure what to make of this:
Vanguard’s discussions with Texas began as part of a routine tax audit, said Woerth. At no time during the discussions with the state’s tax authorities “were we asked to address apparent claims by our former in-house counsel,” said the Vanguard spokesman. “We were unaware of such claims until we learned of the payment in November 2015.”
Why else would Vanguard have to pay these back taxes, if not for Danon's claims? Presumably, if it was about the transfer-pricing issue, Vanguard would have fought it, considering that they have "very strong arguments" against that..
I am also quite confused by this article. I did not even know Vanguard had operations in Texas, other than selling their products to Texans...

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by BolderBoy » Sat Nov 21, 2015 12:44 pm

Boglenaut wrote:This story will be of interest to people following this thread.

Vanguard, Facing Whistle-Blower Cases, Agrees to Pay Texas Taxes

http://www.bloomberg.com/news/articles/ ... exas-taxes
The article said that Danon was paid a "confidential informant" fee by Texas. Why isn't Vanguard suing Danon (maybe they will?) for breaching his attorney client duty?


Edited to change "privilege" to "duty".
Last edited by BolderBoy on Tue Nov 24, 2015 12:59 pm, edited 1 time in total.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by TIAX » Sat Nov 21, 2015 12:57 pm

BolderBoy wrote:
Boglenaut wrote:This story will be of interest to people following this thread.

Vanguard, Facing Whistle-Blower Cases, Agrees to Pay Texas Taxes

http://www.bloomberg.com/news/articles/ ... exas-taxes
The article said that Danon was paid a "confidential informant" fee by Texas. Why isn't Vanguard suing Danon (maybe they will?) for breaching his attorney client privilege?
They certainly should. And why is Danon not disbarred yet?

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by FreeAtLast » Sat Nov 21, 2015 4:46 pm

Rysto wrote:
FreeAtLast wrote:OK, somebody educate me. Why would Vanguard "cave in" in Texas when they fought in New York?
The standing issue didn't apply here because it was the State of Texas demanding the taxes, not the lawyer.
Thanks Rysto, I kinda thought that was the answer. But here's my next question: Why didn't they fight the State of Texas in court? Aren't they setting up a bad precedent for the other 49 States to follow? Was it that they thought they had no chance with the Texas judiciary and so they took the road of least resistance? (Obviously, I am asking for people's opinions and not a firm legal interpretation).
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Doc » Sat Nov 21, 2015 4:50 pm

FreeAtLast wrote:Why didn't they fight the State of Texas in court? Aren't they setting up a bad precedent for the other 49 States to follow?
Maybe they were trying to set a precedent. If I understand correctly they didn't get hit with a penalty. Maybe that's the precedent. And I think Texas has low taxes so it didn't cost them very much. :wink:
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Alex Frakt » Sat Nov 21, 2015 5:56 pm

FreeAtLast wrote:But here's my next question: Why didn't they fight the State of Texas in court? Aren't they setting up a bad precedent for the other 49 States to follow?
My guess is they did a cost-benefit analysis and decided it would be cheaper to agree to what appears to be a couple of million dollars payment rather than bear the risk of losing and the certainty of high legal expenses of fighting this in court. Remember, we don't know any of the details of this, the only link is the payment to Danon. It's possible the tax authorities decided not to pursue his allegations, but found something else they had overlooked in the course of the investigation.

What I found unusual was the small size of the settlement and that there was no announcement from Texas or Vanguard that Vanguard had agreed to change its policies. Perhaps these suggest this was something that has limited broader application?

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by sport » Sat Nov 21, 2015 6:15 pm

Does Vanguard operate in Texas?

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Eric » Sat Nov 21, 2015 6:29 pm

Alex Frakt wrote:What I found unusual was the small size of the settlement and that there was no announcement from Texas or Vanguard that Vanguard had agreed to change its policies. These suggest that it was something they both found to be relatively minor.
The article doesn't say what kind of tax was at issue. But assuming it was the margin tax (what we have in lieu of a corporate income tax), the small amount isn't surprising. The margin tax rate is only about 1%.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by livesoft » Tue Nov 24, 2015 2:17 am

Another story on the Texas taxes http://www.philly.com/philly/business/2 ... _suit.html

Before jumping to conclusions, please read the article. Here is a quote to get you going:
The Texas comptroller of public accounts found a payment "deficiency" from 2010 to 2014 when it audited Vanguard's payments of the 1 percent corporate franchise tax, state records show.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by hornet96 » Tue Nov 24, 2015 9:51 am

livesoft wrote:Another story on the Texas taxes http://www.philly.com/philly/business/2 ... _suit.html

Before jumping to conclusions, please read the article. Here is a quote to get you going:
The Texas comptroller of public accounts found a payment "deficiency" from 2010 to 2014 when it audited Vanguard's payments of the 1 percent corporate franchise tax, state records show.
The franchise tax isn't really even a "pure" income tax (it's more of a "wealth" tax, since Texas doesn't believe in income taxes). Although part of the tax due is calculated on "taxable earned surplus," which starts with reported federal taxable income:

http://comptroller.texas.gov/taxinfo/fr ... anfaq.html

I'm not sure if Texas challenged the amount of federal taxable income reported (seems unlikely) or was perhaps challenging the amount of federal taxable income allocated to Texas (seems more likely).

This part, however, seems interesting:
article wrote:But Sorensen said Danon "could still be paid" by New York state, as he was by Texas, if New York collects back taxes with assistance from Vanguard's information, and if tax officials decide Danon was helpful.
Assuming that Danon's appeals will be denied, I'm not sure how he can legally collect anything that results from these tax audits based on "assistance from Vanguard information," since that information was deemed to have gone way* beyond what is reasonable and necessary to bring forth the whistleblower claim. (e.g. the whole "fruit of the poisonous tree" thing.)

As others have noted, I wouldn't be surprised at all if Vanguard turns around and sues Danon after all this is said and done.

*As noted in the judge's decision (emphasis added): http://assets.law360news.com/0728000/728668/danon.pdf
Judge Madden wrote:...In addition, the extent of the disclosure of Vanguard's confidential information was broader than reasonably necessary to stop the alleged tax violations.[...] In this connection while the core issue in this qui tam action involves Vanguard's "at cost" corporate structure which is publicly known, the complaint goes well beyond articulating the tax implications of this structure with respect to future conduct alleging the continuation of a crime.[...] Significantly, Danon does not attempt to justify the inclusion of this information as necessary to prevent alleged tax violations in the future. Absent any justifiable basis, such broad disclosure of confidential tax information related to past years as revealed in the qui tam complaint, from which Danon stood to profit, was greater than reasonably necessary to prevent Vanguard from committing any alleged future tax violations.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by David Jay » Tue Nov 24, 2015 10:55 am

I read the opinion.

Based on dates in the opinion, it is clear that Danon began taking actions against Vanguard while he was still employed by (and thus representing) Vanguard. IANAL, but I understand that this is a really big no-no.

I believe the following quote from the opinion illuminates Danon's surrendering of his law license:

"…see also New York County Lawyers’ Ass’n, Committee on Professional Ethics Formal Opinion 746 [Oct. 7, 2013] [“As a general principle, there are few circumstances, if any, in which, in the Committee’s view, it would be reasonably necessary within the meaning of [Rule] 1.6(b) for a lawyer to pursue the steps necessary to collect a bounty as a reward for revealing confidential material”]"

Which is, of course, exactly what Danon was attempting.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by matjen » Wed Nov 25, 2015 9:03 am

Matt Levine's take in Bloomberg today.

http://www.bloombergview.com/articles/2 ... onsultants
Vanguard and taxes.

Does everyone know about the Vanguard tax controversy? It is maybe the wildest financial story I know; it is the faked moon landing of financial news stories, except that it might be true. The Vanguard Group is a mutual fund company whose adviser is owned by the funds, rather than being an independent profit-seeking corporation, so it can charge its funds lower advisory fees than its competitors do. (Disclosure: I am a Vanguard investor.) But the adviser is a taxable corporation, while the funds themselves are not taxable (they just pass through taxes to investors). There is a theory that the adviser should be charging Vanguard higher management fees, to reflect the "arm's length" prices that an independent adviser would charge, rather than the "at-cost" prices that it does in fact charge. Or rather, there is a theory that Vanguard owes taxes on the fees that the adviser should have charged, which would have been profit to the taxable corporation. Crazily, this theory is advocated by a former Vanguard tax lawyer in a purported whistleblower lawsuit seeking billions of dollars in back taxes, of which he wants a cut. Also crazily, there is no obvious flaw in this theory. Like, it seems right? But no one can quite believe it. Anyway here are a blog post and article called "Too Big to Tax? Vanguard and the Arm’s Length Standard," arguing "that the Vanguard 'at cost' pricing is unsustainable under the arm’s length standard, and that the IRS will win in court if it challenges Vanguard’s transfer pricing." It concedes that the IRS and New York attorney general have not gotten involved in the whistleblower case, presumably because no one actually wants to go after Vanguard for undercharging index-fund investors.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by matjen » Wed Nov 25, 2015 9:16 am

Ugh! As Won The Lottery said on page 6 of this thread things don't look so hot for Vanguard.

viewtopic.php?f=10&t=143686&start=300#p2634013

When someone with these qualifications:
The preceding post comes to us from Reuven S. Avi-Yonah, the Irwin I. Cohn Professor of Law and Director, International Tax LLM Program at the University of Michigan Law School. The post is based on his recent article, “Too Big to Tax? Vanguard and the Arm’s Length Standard”, which is available here.
Concludes this:
Under current law, the IRS has the legal ammunition it needs to tax Vanguard on billions of dollars in annual income. So the question remains: Will the IRS be willing to take on many millions of investors? Or is Vanguard too big to tax? Since the IRS (so far) has not publicly acted, this question remains open at present. But there is a good chance that the IRS will determine that Vanguard is liable for tens of billions in taxes, and that its fees will have to be raised to cover this liability, erasing some (but not all) of its competitive advantage over its rivals.

You may have a problem....

http://clsbluesky.law.columbia.edu/2015 ... -standard/

http://papers.ssrn.com/sol3/papers.cfm? ... id=2666426
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Eric » Wed Nov 25, 2015 10:18 am

hornet96 wrote:The franchise tax isn't really even a "pure" income tax (it's more of a "wealth" tax, since Texas doesn't believe in income taxes). Although part of the tax due is calculated on "taxable earned surplus," which starts with reported federal taxable income:

http://comptroller.texas.gov/taxinfo/fr ... anfaq.html
That's an old link:
Texas Comptroller wrote:These questions and answers apply to franchise tax reports originally due before January 1, 2008.
The current version of the franchise (margin) tax is calculated somewhat differently:
Texas Comptroller wrote:3. What is the revised franchise tax base?

Unless a taxable entity qualifies and elects to file using the E-Z Computation, the revised tax base is the taxable entity's margin. Margin equals the lowest of three calculations:

total revenue minus cost of goods sold;
total revenue minus compensation; or
total revenue times 70 percent.
So it's pretty close to an income tax, but without some deductions available in a "normal" income-tax system.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by jhfenton » Wed Nov 25, 2015 10:37 am

matjen wrote:Ugh! As Won The Lottery said on page 6 of this thread things don't look so hot for Vanguard.

viewtopic.php?f=10&t=143686&start=300#p2634013

When someone with these qualifications:
The preceding post comes to us from Reuven S. Avi-Yonah, the Irwin I. Cohn Professor of Law and Director, International Tax LLM Program at the University of Michigan Law School. The post is based on his recent article, “Too Big to Tax? Vanguard and the Arm’s Length Standard”, which is available here.
Concludes this:
Under current law, the IRS has the legal ammunition it needs to tax Vanguard on billions of dollars in annual income. So the question remains: Will the IRS be willing to take on many millions of investors? Or is Vanguard too big to tax? Since the IRS (so far) has not publicly acted, this question remains open at present. But there is a good chance that the IRS will determine that Vanguard is liable for tens of billions in taxes, and that its fees will have to be raised to cover this liability, erasing some (but not all) of its competitive advantage over its rivals.

You may have a problem....

http://clsbluesky.law.columbia.edu/2015 ... -standard/

http://papers.ssrn.com/sol3/papers.cfm? ... id=2666426
Reuven Avi-Yonah's "calculation" of back taxes in his "report" was so shoddy and ridiculous that he should be embarrassed to have put his name on such a document. I'm not saying the legal theory is ridiculous, only that his calculation of what Vanguard's expense ratio should be is so very ridiculous that I can only conclude he allowed himself to be bought (very cheaply).

Regardless of the merits of the legal theory, I suspect the truth is that neither NY nor the IRS has any interest in, as Matt Levine said in the article you linked, going after Vanguard for under-charging mutual fund investors.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Doc » Wed Nov 25, 2015 10:49 am

jhfenton wrote:Regardless of the merits of the legal theory, I suspect the truth is that neither NY nor the IRS has any interest in, as Matt Levine said in the article you linked, going after Vanguard for under-charging mutual fund investors.
You do not think Vanguard's competitors like Fidelity don't have lobbyist that might apply pressure on someone to act if they belive there is merit in the alleged tax evasion?
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by jhfenton » Wed Nov 25, 2015 11:01 am

Doc wrote:
jhfenton wrote:Regardless of the merits of the legal theory, I suspect the truth is that neither NY nor the IRS has any interest in, as Matt Levine said in the article you linked, going after Vanguard for under-charging mutual fund investors.
You do not think Vanguard's competitors like Fidelity don't have lobbyist that might apply pressure on someone to act if they belive there is merit in the alleged tax evasion?
1. It's not tax "evasion." Drop that phrase from the argument. The argument is not as clear cut as the Vanguard detractors claim.

2. If Vanguard has to restate income or restructure, it would not be nearly as dire as Avi-Yonah's paper claims. The "penalty" part of Avi-Yonah's paper is ridiculous.

3. I would never say never, but it's much easier to lobby elected officials than to lobby the IRS. I will be surprised if there are serious adverse consequences for Vanguard. I will not be surprised if we never hear about the case again. I will also not be surprised if there is some minor accommodation made to forestall future problems.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by David Jay » Wed Nov 25, 2015 11:29 am

jhfenton wrote:Reuven Avi-Yonah's "calculation" of back taxes in his "report" was so shoddy and ridiculous that he should be embarrassed to have put his name on such a document. I'm not saying the legal theory is ridiculous, only that his calculation of what Vanguard's expense ratio should be is so very ridiculous that I can only conclude he allowed himself to be bought (very cheaply).
Thank You!

Most people haven't followed this thread all the way through, but I keep pointing out again and again that those calculations showing a 30 or 40 basis point difference (compared to "industry averages") are total bovine excrement. Apples-to-apples (I was using SP500 index funds in earlier posts), other, smaller funds have ERs within 1 or 2 basis points of Vanguard. Taking into account the savings Vanguard has due to scale, the actual cost difference is almost unmeasurable.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Doc » Wed Nov 25, 2015 11:33 am

jhfenton wrote: It's not tax "evasion." Drop that phrase from the argument. The argument is not as clear cut as the Vanguard detractors claim.
Doc wrote:... in the alleged tax evasion?
As I stated upthread tax "avoidance" is good business (and investing) practice. Tax "evasion" is a crime subject to penalties.
DEFINITION of 'Tax Evasion'
An illegal practice where a person, organization or corporation intentionally avoids paying his/her/its true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties.
Read more: Tax Evasion Definition | Investopedia http://www.investopedia.com/terms/t/tax ... z3sWMlNdN4

I agree that there has been no determination by any court that the lack of paying taxes on profit from services provided by VGI to the Vanguard funds is tax avoidance or tax evasion.

The argument that all the Vanguard fund shareholders would be disadvantaged if there was a judgement and that this is somehow "unfair" doesn't seem to me to hold much merit. If Vanguard is allowed to avoid taxes by its unique structure it can be argued that all the fund holders of Fidelity, American funds and Franklin Templeton etc will be disadvantaged instead.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by jhfenton » Wed Nov 25, 2015 11:36 am

Doc wrote:
jhfenton wrote: It's not tax "evasion." Drop that phrase from the argument. The argument is not as clear cut as the Vanguard detractors claim.
Doc wrote:... in the alleged tax evasion?
As I stated upthread tax "avoidance" is good business (and investing) practice. Tax "evasion" is a crime subject to penalties.
DEFINITION of 'Tax Evasion'
An illegal practice where a person, organization or corporation intentionally avoids paying his/her/its true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties.
Read more: Tax Evasion Definition | Investopedia http://www.investopedia.com/terms/t/tax ... z3sWMlNdN4

I agree that there has been no determination by any court that the lack of paying taxes on profit from services provided by VGI to the Vanguard funds is tax avoidance or tax evasion.

The argument that all the Vanguard fund shareholders would be disadvantaged if there was a judgement and that this is somehow "unfair" doesn't seem to me to hold much merit. If Vanguard is allowed to avoid taxes by its unique structure it can be argued that all the fund holders of Fidelity, American funds and Franklin Templeton etc will be disadvantaged instead.
I know the definition. That's why I believe it is inappropriate. There is a middle ground between legal tax avoidance and illegal/criminal tax evasion. There are mistaken or rejected, but reasonable, tax positions.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Doc » Wed Nov 25, 2015 11:42 am

David Jay wrote:Most people haven't followed this thread all the way through, but I keep pointing out again and again that those calculations showing a 30 or 40 basis point difference (compared to "industry averages") are total bovine excrement.
Buried deep in article itself there was a table showing profit margins for for all publicly traded US asset management firms.

The average for several years was in the range of 30%. If Vg's average e/r is 20 bps that would translate into maybe a 7 bps increase in the e/r going forward. Not a great big deal unless there was a 10x penalty applied to a number of past years as well.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Doc » Wed Nov 25, 2015 11:47 am

jhfenton wrote: There is a middle ground between legal tax avoidance and illegal/criminal tax evasion. There are mistaken or rejected, but reasonable, tax positions.
I don't know if there is a "legal" distinction for a middle ground. It seems to me that a mistake or rejection would affect the penalty not the guilt or innocence. But we are now way above my pay grade.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Leeraar » Wed Nov 25, 2015 12:55 pm

This is all very interesting.

I have just about finished reading "DDT Wars" by Charles F. Wurster, about the formation of the Environmental Defense Fund and the battle against DDT and dozens of other chlorinated insecticides.

Interesting, because they (a half-dozen birders in Dennis Puleston's living room in Brookhaven, Long Island) found lobbying the political system or government agencies to be ineffective, so they put together the correct and credible scientific evidence and went to the legal system. In doing so, they fundamentally changed US law. (Prior to that, mere citizens did not have the right to sue government agencies for not enforcing the law, they did not have "standing".)

So those complaining against Vanguard may eventually prove to have a point. It depends on what the legal system decides.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Epsilon Delta » Wed Nov 25, 2015 1:48 pm

Doc wrote:
jhfenton wrote: There is a middle ground between legal tax avoidance and illegal/criminal tax evasion. There are mistaken or rejected, but reasonable, tax positions.
I don't know if there is a "legal" distinction for a middle ground. It seems to me that a mistake or rejection would affect the penalty not the guilt or innocence. But we are now way above my pay grade.
There most certainly is a legal middle ground. For a simple example consider a personal tax return with a simple addition error. Certainly not legal tax avoidance and also certainly not tax evasion.

Also remember that a particular act could be one element of a number of civil or criminal violations. The rest of the facts determine which of the violations occurred. Each of these levels is a legal distinction. It's not just that they have different penalties, it's that they are different crimes, or non-crimes for the civil side.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Doc » Wed Nov 25, 2015 2:15 pm

Epsilon Delta wrote:There most certainly is a legal middle ground. For a simple example consider a personal tax return with a simple addition error. Certainly not legal tax avoidance and also certainly not tax evasion.
Is the simple addition error intentional? If yes then it could be tax evasion. If not intentional what is it? The person still has to pay the tax plus interest.

What Vanguard is doing is not a mistake. It probably wasn't even a tax avoidance scheme. It was just trying to follow a low cost business model. But it may have broken the law. Only a court or several levels of appeal courts in all likelihood, will decide. I don't belive that there is nobody out there that doesn't have "standing".

The only question that any of us can answer with some degree of confidence is whether we play the risk/reward trade off and get out assets our of Vanguard now to reduce the risk and go to a higher cost provider thus lowering our return.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by nisiprius » Wed Nov 25, 2015 2:23 pm

Doc wrote:
Epsilon Delta wrote:There most certainly is a legal middle ground. For a simple example consider a personal tax return with a simple addition error. Certainly not legal tax avoidance and also certainly not tax evasion.
Is the simple addition error intentional? If yes then it could be tax evasion. If not intentional what is it? The person still has to pay the tax plus interest.

What Vanguard is doing is not a mistake. It probably wasn't even a tax avoidance scheme. It was just trying to follow a low cost business model. But it may have broken the law. Only a court or several levels of appeal courts in all likelihood, will decide. I don't belive that there is nobody out there that doesn't have "standing".

The only question that any of us can answer with some degree of confidence is whether we play the risk/reward trade off and get out assets our of Vanguard now to reduce the risk and go to a higher cost provider thus lowering our return.
What risk, exactly, would that be? How big is it?
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by David Jay » Wed Nov 25, 2015 2:41 pm

Doc wrote:What Vanguard is doing is not a mistake. It probably wasn't even a tax avoidance scheme. It was just trying to follow a low cost business model. But it may have broken the law. Only a court or several levels of appeal courts in all likelihood, will decide. I don't belive that there is nobody out there that doesn't have "standing".
I actually think that there is a step before the courts - an Agency must take an interest and pursue the issue. If the IRS doesn't pursue it, then the legal issue is moot.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Epsilon Delta » Wed Nov 25, 2015 3:07 pm

Doc wrote:
Epsilon Delta wrote:There most certainly is a legal middle ground. For a simple example consider a personal tax return with a simple addition error. Certainly not legal tax avoidance and also certainly not tax evasion.
Is the simple addition error intentional? If yes then it could be tax evasion. If not intentional what is it? The person still has to pay the tax plus interest.

What Vanguard is doing is not a mistake. It probably wasn't even a tax avoidance scheme. It was just trying to follow a low cost business model. But it may have broken the law. Only a court or several levels of appeal courts in all likelihood, will decide. I don't belive that there is nobody out there that doesn't have "standing".

The only question that any of us can answer with some degree of confidence is whether we play the risk/reward trade off and get out assets our of Vanguard now to reduce the risk and go to a higher cost provider thus lowering our return.
You are claiming "no middle ground between tax evasion and tax avoidance" I am simply claiming there is middle ground and gave one example. In fact there are many middle grounds with exceedingly fine distinctions.

An addition error cannot be tax evasion. A mistake is not intentional. It is true that a tax return with a deliberate misstatement could appear identical to one with an addition error, but for tax evasion to stick the IRS would have to prove that it was intentional and not a mistake. This is hard to do.

As for Vanguard making a mistake, it's clearly not a simple addition mistake, but Vanguard could have filed the tax returns in good faith and be mistaken about the law. That could be a simple error, or it could rise to the level of negligence. Neither is tax evasion.

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Vanguard Tax Controversy

Post by huntertheory » Wed Nov 25, 2015 3:07 pm

I had never heard this and found it pretty interesting. It sounds theoretically correct, though obviously if the adviser entity is found to have undercharged Vanguard and it owes more taxes that isn't good for me as a Vanguard consumer.

See this:

http://clsbluesky.law.columbia.edu/2015 ... -standard/

And this:

http://www.bloombergview.com/articles/2 ... onsultants
Does everyone know about the Vanguard tax controversy? It is maybe the wildest financial story I know; it is the faked moon landing of financial news stories, except that it might be true. The Vanguard Group is a mutual fund company whose adviser is owned by the funds, rather than being an independent profit-seeking corporation, so it can charge its funds lower advisory fees than its competitors do. (Disclosure: I am a Vanguard investor.) But the adviser is a taxable corporation, while the funds themselves are not taxable (they just pass through taxes to investors). There is a theory that the adviser should be charging Vanguard higher management fees, to reflect the "arm's length" prices that an independent adviser would charge, rather than the "at-cost" prices that it does in fact charge. Or rather, there is a theory that Vanguard owes taxes on the fees that the adviser should have charged, which would have been profit to the taxable corporation. Crazily, this theory is advocated by a former Vanguard tax lawyer in a purported whistleblower lawsuit seeking billions of dollars in back taxes, of which he wants a cut. Also crazily, there is no obvious flaw in this theory. Like, it seems right? But no one can quite believe it. Anyway here are a blog post and article called "Too Big to Tax? Vanguard and the Arm’s Length Standard," arguing "that the Vanguard 'at cost' pricing is unsustainable under the arm’s length standard, and that the IRS will win in court if it challenges Vanguard’s transfer pricing." It concedes that the IRS and New York attorney general have not gotten involved in the whistleblower case, presumably because no one actually wants to go after Vanguard for undercharging index-fund investors.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by LadyGeek » Wed Nov 25, 2015 3:29 pm

^^^ I merged huntertheory's thread into here.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Doc » Wed Nov 25, 2015 3:35 pm

nisiprius wrote:What risk, exactly, would that be? How big is it?
I made an estimate of 7 bps. A lot smaller than others have been mentioning. But 7 bps a year for ten years and then a penalty of ten times is OMG. And then you have all those people who aren't Bogelheads bailing out on Vanguard. "Run on the bank?"

Hey, I don't even have a lousey guess. But it's potentially large. On the other hand all those people who have decided that there is no problem because there is some middle ground are also guessing. If I was forced to I would guess that the middle ground would mean that there would be no penalty even if Vanguard was found "guilty". (Paying ten years of back taxes on the other hand would not surprise me.)
David Jay wrote:I actually think that there is a step before the courts - an Agency must take an interest and pursue the issue. If the IRS doesn't pursue it, then the legal issue is moot.
In the OP
A lawsuit filed in New York last year by a then-Vanguard Group Inc. tax attorney, and unsealed Friday in state court in Manhattan, alleges that Vanguard, the nation's largest mutual fund company
Danon is an individual not an agency. I would not hang your hat on the IRS.

Has anyone ever considered where we would be now if Danon was an accountant instead of an attorney? Do you think maybe Vanguard has some disgruntled former accountants? Maybe some of the attorneys that post here can address the standing question.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by CrossOverGuy » Wed Nov 25, 2015 5:53 pm

Do you think maybe Vanguard has some disgruntled former accountants?
I'm not sure if accountants have any kind of confidentiality agreement like attorney-client privilege, but any such accountant could have signed some sort of legally binding non-disclosure agreement with Vanguard at some time during their employment there. Plus, Danon, while working as an attorney at Vanguard, was surreptitiously (or rather, sneakily) copying documents from the firm to use to bolster his hoped-for claim for a whistle-blowing payment bonanza. If some accountant did this while they were at Vanguard, wouldn't that violate a confidentiality clause regardless of if they started a lawsuit against Vanguard during their time of employment or afterwards? If they tried to initiate a lawsuit against Vanguard based on a suspicion of something after they had left Vanguard's employ, either they had documents copied while they were there (possibly illegal) or they won't have access to supporting documents anymore and may not as an individual have standing to say, subpoena them to court.

Question: Why did Vanguard settle in Texas though? What's to stop someone (with the legal standing to sue) from suing all the other states in the U.S. or federally? Or would the NY judgment against Danon be precedent for him and his attorney to not sue anywhere else? Plus Danon lives in Pennsylvania anyway -- why did they sue in New York? Higher taxes and a bigger percentage of his hoped for whistleblower's fee? Presumably Vanguard could sue Dannon to get his "whistleblower's fee" back from what he was paid in Texas, as well as lawyer's fees for the New York and Texas proceedings in which he is now on record by judicial order that he has no standing and no right to profit from.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Silence Dogood » Sat Nov 28, 2015 11:15 am

alex_686 wrote:
I never said it was illegal - just odd. Why chose an unconventional structure when there are conventional structures that get the job done?

My point specifically is that mutuals with mutual funds have over a 100 years worth or laws and regulations. The issues around conflict of interest between funds and the parent company are well developed and tested.

Vanguard can’t lean on the precedent that has been set with these non-profits. They must forge a new untested trail.
Huh?

What do you mean by "mutuals"? I assume you are referring to mutual insurance companies? I can't think of any mutual insurance company that has been offering mutual funds for a hundred years. Can you? I'm not even sure if I can think of any mutual insurance companies that offer mutual funds today (TIAA-CREF?).

In fact, the first mutual fund was started less than 100 years ago (in 1924). The Investment Company Act of 1940 is the rule of law for the mutual fund industry. Vanguard was founded 35 years later, in 1975. Certainly there was not "over a 100 years worth of laws and regulations" when Vanguard was founded.

Anyway, Vanguard's unique ownership structure is what gives it such an advantage over the other investment companies. There is no conflict of interest between the owners of the company and the clients.

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Doc » Sat Nov 28, 2015 1:49 pm

Silence Dogood wrote: Anyway, Vanguard's unique ownership structure is what gives it such an advantage over the other investment companies. There is no conflict of interest between the owners of the company and the clients.
It is not the unique ownership structure that is the sole advantage it is the low cost in total. The structure only affects the amount of "profit" on the base cost of the services. Other fund companies can also lower their cost if they so choose by lowering their profit margin or reducing the actual cost of the fund management before profit. Say by not doing any analysis on the investments they acquire or by paying their customer service reps a low salary. There is also economies of scale in the mix. Vanguard's low cost business model would likely give them an advantage even if they had a markup on their services - no analysts, no profit and low paid CSRs.

It seems to me that the "lawsuit" only affects the profit portion of their overall low cost.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Seattlenative » Mon Nov 30, 2015 2:21 am

Although the sites "vanguardlawsuits.com" and "whyileftvanguard.com" are primarily about other lawsuits filed against The Vanguard Group and its subsidiary entities, it's worth a glance as it certainly presents a pro-David Danon "whistleblower" point of view:

http://www.vanguardlawsuits.com/vanguar ... documents/
http://www.vanguardlawsuits.com/vanguard-in-the-news/
http://www.vanguardlawsuits.com/what-em ... -vanguard/
http://whyileftvanguard.com/?p=372
http://whyileftvanguard.com/?p=339

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by teacher » Mon Nov 30, 2015 7:40 am

Is there conjecture, or has it been determined what Danon's motivations are? Why is he going after Vanguard? What's in it for him?

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by David Jay » Mon Nov 30, 2015 8:25 am

teacher wrote:Is there conjecture, or has it been determined what Danon's motivations are? Why is he going after Vanguard? What's in it for him?
15%-30% of the judgement, depending on the facts of the case.
Last edited by David Jay on Mon Nov 30, 2015 8:27 am, edited 1 time in total.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by in_reality » Mon Nov 30, 2015 8:26 am

teacher wrote:Is there conjecture, or has it been determined what Danon's motivations are? Why is he going after Vanguard? What's in it for him?
He has a big warm heart and gets a nice feeling from, in his opinion, making the world a better place by ensuring the rules, as he interprets them, are followed.

Oh, and there are incentives for whistleblowers to report things. He may not be eligible though having been Vanguard's lawyer.

Probably more of the latter than the former but people can truly be misguided sometimes, you know!

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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Doc » Mon Nov 30, 2015 10:00 am

Seattlenative wrote:Although the sites "vanguardlawsuits.com" and "whyileftvanguard.com" are primarily about other lawsuits filed against The Vanguard Group and its subsidiary entities ...
From the first of Seattlenative's links:
3. 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.
So at least we get from this an indication of the dollars involved.

Someone please check my sums but $1 billion divided by $3 trillion AUM is about 3 bps. Even with a 10x penalty it wouldn't break the bank.
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Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

Post by Barry Barnitz » Thu Dec 03, 2015 5:17 pm

Hi:
News article and blog commentary regarding California tax probe against Vanguard:
Calif. agency reviews allegations against VanguardJoseph N. DiStefano Posted: Wednesday, December 2, 2015, 1:08 AM
The criminal investigations arm of a California tax agency has been reviewing allegations that the Vanguard Group may have underpaid its income taxes in the most populous state.
A Vanguard spokesperson also said, in today's Inquirer story, that Vanguard was unaware of the California investigation; Danon's lawyer, Sorenson, told me today that the company was informed of California's review in November.
Blog entry --->States tax Vanguard: Texas deal (link); Calif. criminal probe
California initiated just 32 criminal tax investigations last year, prosecuted 21, and secured 18 convictions sending tax defendants to prison for a total of more than 50 years..."Most tax disputes are handled as civil cases. The Criminal Investigations Bureau gets involved only in a 'relatively small' number of cases, such as when a tax board auditor finds 'something suspicious' indicating possible fraud."
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Might Vanguard owe $35 BILLION in back taxes?

Post by CFM300 » Thu Dec 03, 2015 8:16 pm

[merged to existing thread - admin alex]

I know this case has been discussed before, but this is a new article (published a few hours ago) speculating that the whistleblower has already collected some money because Vanguard paid back taxes in Texas.

Also: "One of the most widely read tax scholars in America, professor Reuven Avi-Yonah of the University of Michigan Law School, says the case against Vanguard is clear-cut. “The IRS will win in court if it challenges Vanguard’s” policy of not earning profits, he tells Newsweek."

http://www.newsweek.com/vanguard-whistl ... int-400901

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