A prominent tax professor recently released a report alleging that Vanguard, an investment management company that oversees approximately $3 trillion in assets, owes approximately $34 billion in taxes, penalties and interest as a result of running afoul of IRS transfer pricing rules.
Vanguard (a C-corporation) owes tax on its taxable income, and the funds, which are registered investment companies, are not subject to tax at the fund level so long as they meet certain requirements. Vanguard charges its related funds “at cost” for its management services, thereby eliminating taxable profit for its services.
However, David Danon, the former tax counsel for Vanguard, raised concerns about the company’s transfer pricing policies and was fired shortly before filing a whistleblower action in New York state court. In a recently released report prepared by Professor Reuven Avi-Yonah, an expert retained by Danon, the report states that Vanguard does not have a legal basis for its transfer pricing policies and owes the IRS approximately $34 billion in taxes, penalties and interest from 2007 through 2014. In the report, Professor Avi-Yonah pointed specifically to Treas. Reg. 1.482-9(b), which provides that controlled taxpayers must provide services for a profit unless they meet certain requirements, which the report contends Vanguard did not meet in this instance. Accordingly, Vanguard’s practice of charging for its services “at cost” does not comply with Treasury regulations.
“If the IRS were to pursue this matter, it will prevail in court,” wrote Avi-Yonah.
In response, Vanguard executives have denied the allegations per the Philadelphia Inquirer.
“As we’ve stated previously, we believe the case is without merit and decline to comment further,” company spokesman John Woerth wrote.
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