Harbert Management Tax Settlement: New York Work Allocated to Alabama

In the Harbert Management tax settlement, Harbert Management Corporation and the other settling parties agreed to pay $40,073,823 over allegations involving the allocation of New York investment income to Alabama. The agreement included an $8.8 million whistleblower share. For someone who knows the trading operation or the tax files, the story connects the work that earned the fees to the decisions that kept New York off the returns.

A whistleblower brought the case under the New York False Claims Act, and the New York Attorney General investigated. This page follows the management group’s agreement and the internal decisions behind the allocation. The later Harbinger Offshore Manager settlement covers the investment manager’s separate payment and admissions.

The New York Work That Earned the Fees

The State’s account in the Harbert agreement places the revenue-producing investment work in Manhattan and the administrative support in Alabama. Harbert Management Corporation, headquartered in Birmingham, sponsored and organized the Harbinger Fund. The fund focused on distressed investments, including companies in financial trouble or bankruptcy, and had separate feeder funds for onshore and offshore investors.

Harbinger Capital Partners Offshore Manager managed the fund and its offshore feeder, with authority to buy and sell securities for them. The offshore feeder paid it an annual performance fee equal to 20% of the net profits allocated to each common share, subject to prior high-water marks.

According to the agreement’s account, the senior portfolio manager and New York investment team generated ideas, developed strategies, investigated potential investments, executed trades and planned exits. Alabama members and officers supplied executive oversight and handled operational, accounting, fundraising, legal, compliance and risk-management functions. Confidential offering memoranda described Harbert’s infrastructure and support as freeing the investment team to concentrate on creating value.

The State’s tax theory followed that work through the income distributions. Offshore Manager passed the fees through to its members, and the agreement describes New York’s tax on their shares of income derived from New York sources. The State alleged that allocating everything to Alabama let the Alabama members avoid New York tax on the fees, while New York members reduced their State taxes through credits for taxes paid to Alabama. The State also alleged that Offshore Manager failed to pay New York City unincorporated business tax.

Internal Advice Before the All-Alabama Return

The agreement describes internal tax warnings before the decision to allocate no performance-fee income to New York. In March 2005, Offshore Manager’s chief administrative officer reported that an accounting firm’s initial reaction was that State and City taxes were owed. He then prepared a worksheet comparing different allocations and called the all-Alabama position “unsupportable.”

The warning was followed by a search for support for that same position. The agreement recounts an email, sent hours after the worksheet, in which the chief administrative officer explored treating the performance-fee income as entirely Alabama income based on the LLC agreement. The State and City’s later superseding complaint alleged that the material sent to accountants emphasized Alabama connections while failing to explain that the core investment work took place in New York.

The controller signed the State partnership return for tax year 2004 with no performance-fee income allocated to New York, according to the Harbert agreement. Where the form asked for every place the partnership did business, the return listed Birmingham and omitted Manhattan. The return also denied having any income, gain, loss or deduction from New York sources.

The agreement says the next year’s return repeated those answers. Both returns stated that Offshore Manager “has no nexus in New York State and has no income derived from New York sources.” The State alleged that Offshore Manager filed no State returns for tax years 2006 and 2007.

The agreement also describes renewed advice during the ownership separation in 2009 that New York State and City taxes were due. Yet the Alabama members paid Alabama tax on their shares for 2008 and 2009 without paying New York State tax, according to the State’s account. Offshore Manager secured written assurances that the Alabama members would remain responsible for unpaid New York State taxes if their tax position was reviewed, even after the separation. We see the tax position moving south while the work stays put.

The Audit Got a New Office Address

The later complaint alleges that Offshore Manager changed its principal-office address during an audit and supplied the revised agreement to the auditor. The New York State Department of Taxation and Finance was examining the senior managing director’s personal returns, including credits claimed for taxes paid to Alabama. The auditor wanted to understand the business activity that generated Offshore Manager’s income.

According to the complaint, Harbert’s tax manager drafted a response emphasizing Alabama connections and leaving out the New York work. Offshore Manager’s controller prepared a similar response that reached the auditor through the senior managing director’s tax preparer. An amendment then changed the LLC agreement’s principal office from New York to Birmingham, and a restated agreement incorporated that address into its text.

The complaint quotes the controller’s memo about which records to supply. She proposed sending the restated agreement and the investment-management agreement, but recommended withholding payment records that pointed back to New York:

The complaint says the auditor noticed that the agreements supplied were not in effect during the years under review and requested the earlier versions. It alleges that neither Offshore Manager nor the senior managing director supplied them. An insider familiar with the tax and business records may recognize what changed between versions. In the complaint’s account, the auditor got the new address, but never the old agreements.

Who the Harbert Agreement Covered

The Harbert agreement named Harbert Management Corporation, HMC Investors LLC and HMC-New York, Inc., along with individual officers and investors and trusts. It assigned $31,257,582 of the settlement to the State.

The agreement expressly left the State’s claims against Offshore Manager outside its release. In its separate 2018 agreement, Offshore Manager agreed to pay $30 million and admitted specified findings about the unpaid taxes and its New York investment activity.

The whistleblower’s award came through the New York case. A whistleblower case under the New York False Claims Act can pay 15% to 30% of what the government recovers. The broader state tax whistleblower framework concerns which claims that route can reach.

What an Insider Adds to the Tax Return

An insider can explain the choices behind a return and the information left out of an audit response. The 2014 Villanova Law Review article Not Just Whistling Dixie: The Case for Tax Whistleblowers in the States argues that even an auditor examining a transaction may not understand it beyond what the taxpayer has chosen to disclose. It identifies insider knowledge as a way to close that information gap.

The Harbert documents make that problem concrete: the investment work, the allocation worksheet, the filed return and the versions of the LLC agreement tell different parts of the story. Someone in fund operations or tax accounting may know which work earned the fee, who questioned the allocation and which documents reached the auditor. We connect that knowledge to the tax money left unpaid and the decisions behind it.

You Know Where the Investment Work Happened

If you know why a fund’s tax returns point to a different state from its investment operation, speak to one of our whistleblower experts about how the income left New York. We work beside you to build your strongest tax whistleblower case around the fees, the warnings and the account given to tax authorities, and bring in tax fraud whistleblower lawyers who understand state income-allocation cases.