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NYAG Schneiderman Announces Largest Tax Whistleblower Recovery In Office’s History

Posted  April 18, 2017

By the C|C Whistleblower Lawyer Team

NY Attorney General Eric T. Schneiderman announced a $40 million settlement with Alabama-based Harbert Management Corporation, fund sponsor for Harbinger Capital Partners, a $26 billion hedge fund in NYC, for violations of the tax provisions of the New York False Claims Act. The settlement resolves whistleblower allegations that members of Harbinger’s investment manager failed to pay millions in New York State tax on performance income for several years.

When businesses operate both inside and out of New York City and State, they must apportion for tax purposes that part of their income derived from or connected with New York. Harbinger Capital Partners Offshore Manager LLC served as the investment manager for the Harbinger Fund from 2002 through 2009. As investment manager, Offshore Manager earned performance fee income in an amount equal to 20 percent of the Harbinger Fund’s net profits. Offshore Manager’s members, which included several senior executives at Harbert Management Corporation, were required to pay New York State income tax on this performance fee income earned by trading activity in New York.

The first year that Offshore Manager had taxable income of this kind was 2004. In early 2005, during the preparation of tax returns for the 2004 year, the CAO of Offshore received advice from outside accounting professionals that New York tax would be due on the fee income. Just one week after receiving this advice, the CAO described the position that no New York tax was due on performance fee income as “unsupportable,” in a document sent to outside accountants seeking a recommendation on the question. The same day, however, the CAO sent an email indicating that Offshore Manager “may get aggressive” in taking the position that all of its relevant income was from Alabama.

One week later, Offshore Manager’s controller signed a tax return that apportioned zero percent of its performance fee income to New York State, even though there is no indication that the accountants changed their initial assessment of the about the tax liability, or that there was any written endorsement by other outside professionals. Instead, Offshore Manager apportioned all performance fee income to the lower-tax state of Alabama, where Harbert Management’s headquarters were located and where back office and support functions for the Harbinger Fund were conducted. Offshore Manager did not file any New York State tax return for the 2006 and 2007 tax years. In its tax returns for the 2008 and 2009 years, Offshore Manager again apportioned zero percent of the performance fee income to New York State.

Attorney General Schneiderman characterized the scheme as “a brazen and deliberate decision to avoid paying millions in taxes owed to New York State.” NYAG

Tagged in: FCA State, Tax Fraud, Whistleblower Rewards,