Eric Schneiderman, the New York attorney general, is investigating abusive tax strategies at some of the nation’s largest private equity firms. As part of these efforts, last week, he subpoenaed documents from more than a dozen firms hoping to uncover conversion of certain management fees collected from their investors into fund investments, which are taxed at a far lower rate than ordinary income.

Questions:
1. Based on this article, do you think the practice is legal or illegal and why or why not?
2. The article talked about some firms that could have chosen to implement this strategy but decided against it. Explain the quote of one lawyer who said: “Other [firms] may not have the operational capabilities to handle the complex transactions.”
3. Explain Mr. Fleisher’s statement at the end of the article: “There is a tension between economic risk and tax risk that is supposed to be inversely proportional.” How does it pertain to the legality of the issue?

Source:
Confessore, N., J. Creswell, and D. Kocieniewski (2012). Inquiry on Tax Strategy Adds Scrutiny of Finance Firm. The New York Times, Sep. 1 (Retrievable online at http://www.nytimes.com/2012/09/02/business/inquiry-on-tax-strategy-adds-to-scrutiny-of-finance-firms.html?_r=1&hp)