The hedge fund titan that dominates American capitalism, Guggenheim Partners, is being accused of taking advantage of a tax loophole that lets it avoid paying nearly a third of its annual corporate income tax, according to an investigative report from the New York Times.
The paper’s investigation found that Gugge’s firm, GQ Capital Management, has earned $1.9 billion in the last two years from a loophole that allows its hedge fund clients to deduct their income taxes from their income, effectively giving the firm a tax rate of 15 percent.
According to the Times report, Goggenheim has been using a complicated system to reduce its tax bill, but that the hedge fund giant was “very much aware of its tax status.”
Guggent’s loophole is designed to avoid a federal corporate income taxes.
The loophole is a tax break for hedge funds that are not registered with the Securities and Exchange Commission.
Guggerhans clients can use the loophole to avoid paying their taxes.
“Guggenhain’s use of the tax loophole, called a deferred tax credit, has allowed it to reduce the income taxes it pays to the U.S. Treasury by more than 15 percent, which it has used to pay its share of taxes on $1 billion in profits that it has received from its clients, according the Securities & Exchange Commission,” the Times reported.
“But the company said it has not received any compensation from the government for the deductions.”
In other words, GUGG has been paying taxes that it would have otherwise paid, but the hedge funds have been able to deduct it.
The Times said it obtained the records through a Freedom of Information Act request, which the hedge-fund firm confirmed.
GUGGENHANS DEBT REDUCTION: ‘A PROPOSED PROBLEM’ GUGGE’S DEBT-REDUCTION PROGRAM, which allows hedge funds to defer payments to the federal government, was developed in 2003, according Guggens website.
The program allows clients to defer taxes by making payments to a “federal credit fund,” the New Yorker reported.
It is called a “deferred tax credit” because it allows the funds to deduct a portion of their tax bills.
But the hedge firms own the credit fund, and they can deduct only the money they owe to the government.
The hedge funds can claim the funds were “qualified for” the tax credit and that the tax break was “valid.”
The hedge firms also are allowed to deduct “interest and penalties,” which would typically be paid by the hedge firm.
But that is not always the case, according a Gugglen website description.
“Many hedge funds are unable to pay all or a portion” of their taxes because of other liabilities, the website states.
The tax breaks, which were developed by Guggers lawyers, are now in the process of being eliminated.
In 2012, the company announced that it was changing the rules to prevent a “reversal of the process.”
The Times reported that it “received emails and phone calls from hedge fund managers who complained about the change, which could result in a new set of tax benefits being revoked.”
“The change would be an unintended consequence of a policy that has been in place for a long time, and that is likely to cause a significant disruption in our tax affairs,” a GUG-GQ spokesperson told the Times.
“There is nothing to suggest that this would be a ‘reversed’ policy change.”
The company has not commented on the Times article, but has previously said it “takes the tax issue very seriously.”
The article also says that the company has “received a number of complaints about the deferral program” and has taken “appropriate steps to address the concerns.”
GUGGLEN SAYS THAT THE FUNDS HELD ARE LIEUTENANT AND THAT THEY ARE NOT MADE TO PAY FOR THEIR COSTS “While the tax benefits we offer our clients are valid, we believe it is inappropriate for a hedge fund to make tax-deferred payments to federal programs,” Guggin’s website states, according with an image of the statement.
Goggin is not alone in its use of a hedge- fund tax-credit program.
A number of hedge funds use it, according that the New Jersey Public Interest Research Group, a tax advocacy group, that was founded in 1999, says it “has a long history of using tax credits to help hedge funds reduce their tax liabilities.”
But the group also said the “generally agreed-upon guidelines and procedures for tax credits do not apply to hedge funds,” adding that the “tax credit program does not apply when hedge funds receive federal funds.”
Tax credits have historically been a tax shelter for hedge fund firms and have been used to avoid taxes for years,” the group said.
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