Sandell Asset Management Tax Settlement: Deferred Fees, a London Move and a Florida Office

New York State and New York City announced a $105 million recovery in the Sandell Asset Management tax settlement over allegations that its hedge fund manager avoided taxes on deferred fees for New York investment work. The Attorney General and New York City Law Department alleged that a London move and a Florida office concealed the continuing New York operation. If you know the fee calculations, office expenses or advice behind a fund’s tax return, this case follows the decisions those records can expose.

The case concerned Sandell Asset Management Corporation, SAMC Partners LP and the hedge fund manager. This tax case involving business location follows where the work behind the deferred fees took place. Our nearby page on claimed personal residence follows the different question of where an executive actually lived.

Deferred Fees for New York Investment Services

The Attorney General alleged that the disputed income came from management and performance fees for investment services performed in New York City. According to the New York Attorney General’s announcement, a change in deferred-fee income recognition rules in 2008 required the manager to recognize approximately $450 million in deferred income in 2017.

The Attorney General’s Office said its investigation found that the manager had performed the investment services generating those fees exclusively in New York City. The Attorney General and New York City Law Department therefore asserted that the income remained taxable there. In their account, a later move was central to the effort to avoid taxes on that New York work.

For someone inside a fund, that distinction connects the fee records to the people doing the investment work. The Attorney General’s Office followed the deferred fees back to the New York services that earned them.

A Florida Back Office for a New York Business

The Attorney General and New York City Law Department alleged that the manager moved to London while Sandell Asset Management continued operating in New York City. They said the manager opened a shell office in Boca Raton, Florida, with three back-office employees. The manager and the firm presented it to New York tax authorities as the firm’s sole U.S. operation.

That description conflicted with another official account of the same business. According to the Attorney General, the manager and the firm had already agreed to a Securities and Exchange Commission finding that the firm’s principal place of business remained in New York City. The alleged Florida-only position survived that finding.

The Attorney General also alleged that the manager routed the firm’s payroll and property expenses through another entity he owned to conceal its New York presence. The office alleged that Sandell Asset Management had incurred those expenses, remained responsible for them and continued paying them.

An employee who knows those expenses can connect the operation that incurred them to the entity appearing in the payment records. In this case, the alleged concealment depended on separating the visible payer from the business that remained responsible for the cost.

The Tax Warning Before the Return

The manager’s long-standing tax preparer warned that he could not claim to owe no New York taxes on the deferred fees, according to the Attorney General. The preparer specifically pointed to the Securities and Exchange Commission’s conclusion about the firm’s New York location. Other advisers also warned that the tax position was problematic.

The Attorney General alleged that the manager replaced that preparer with an international accounting firm that had assisted the effort to make the business appear to have left New York. He did so without further diligence into the replacement firm’s tax position, then filed returns claiming no New York tax on the fee income for the year at issue. The preparer changed. The position stayed.

For a tax or finance insider, the sequence gives substance to a warning that management chose to disregard. It connects the advice received, the decision to replace the adviser and the position ultimately taken on the return. We examine those connections with you, including what the people making the reporting decision already knew about the business.

What Did the Sandell Asset Management Tax Settlement Pay?

The settlement agreement allocated $57.03 million to New York State, $25.92 million to New York City and $22.05 million to the whistleblower. In announcing the outcome, the Attorney General and the City’s Corporation Counsel said the manager had already transmitted the full payment in back taxes and damages.

A qui tam case brought by a whistleblower under the New York False Claims Act started the investigation. The Attorney General’s Office credited the whistleblower’s information with bringing to light conduct that might otherwise have gone undiscovered. It also credited assistance from the New York State Department of Taxation and Finance and the New York City Department of Finance.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We assess the tax involved and the supporting records with you, including whether a state tax case or the separate federal IRS award process fits what you know.

Where the Fund Worked and What the Tax Return Said

Harbinger Capital Partners Offshore Manager supplies a close comparison: New York investment work, income attributed elsewhere and internal advice challenging that choice. In its complaint against the company, New York alleged that investment decisions and trading occurred in Manhattan while incentive-fee income went to Alabama for tax purposes. It also alleged that an LLC agreement was amended during an audit to replace its New York principal-office address with Birmingham, without disclosing the change.

The Attorney General’s Harbinger settlement announcement reported the company’s admission that it had failed to allocate income to New York and pay City tax as required. The comparison makes the location of income-producing work concrete. In the Sandell Asset Management allegations, the continuing New York expenses and the deferred-fee services supplied that connection.

The Villanova Law Review’s 2014 paper, Not Just Whistling Dixie: The Case for Tax Whistleblowers in the States, argues that insiders can help close the information gap between taxpayers and state tax agencies. It explains how whistleblowers can expose hidden tax positions for officials to investigate. The New York settlement announcement illustrates that argument directly: the Attorney General credited information from outside the agency with setting the investigation in motion.

You Know Which Office Earned the Fees

If the fund’s tax position contradicts the work, expenses or advice you know, talk with our whistleblower experts about the deferred-fee records. We build your strongest case around your knowledge of the business, bring in tax fraud whistleblower lawyers who understand income-sourcing disputes and stay beside you through the case.