Author Topic: Vanguard not paying their taxes?  (Read 5165 times)

sieben

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Vanguard not paying their taxes?
« on: December 03, 2015, 05:49:40 PM »
Hey everyone,

I just read this article: http://www.newsweek.com/vanguard-whistleblower-tax-dodge-complaint-400901

Long story short, it sounds like Vanguard may have a hefty tax bill coming up.

Currently almost my entire portfolio is with Vanguard and I was curious what the opinions about this may be on the forum. Does this matter, will this affect your investment decisions, should it?

Thanks!

MDM

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Re: Vanguard not paying their taxes?
« Reply #1 on: December 03, 2015, 11:42:27 PM »
~600 posts with various opinions at https://www.bogleheads.org/forum/viewtopic.php?f=10&t=143686.

First post in that Bogleheads thread has this update:
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[UPDATE - 11/18/2015. Danon's whistleblower lawsuit dismissed with prejudice due to his breach of attorney ethical requirements. There are no court cases currently pending. However, the underlying tax issues were not adjudicated and may still be under investigation by state and federal tax authorities. Jump ahead to viewtopic.php?f=10&t=143686&start=500#p2692155 for more info - admin alex]

Cathy

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Re: Vanguard not paying their taxes?
« Reply #2 on: December 03, 2015, 11:58:51 PM »
For those interested in the primary source, the opinion of the Court dismissing Danon's complaint is available at New York ex rel Danon v. Vanguard Group, No 100711/13, 2015 NY Slip Op 32213(U), 2015 NY Misc LEXIS 4239 (Supreme Court, New York County, November 13, 2015) (Madden, J).

jfer_rose

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Re: Vanguard not paying their taxes?
« Reply #3 on: December 04, 2015, 06:34:33 AM »
The Lawsuit was dismissed in New York state. As far as I can understand from the Newsweek article, there are proceedings in more than one state. It looks like things ended badly in Texas and are still unresolved in California and it also appears that the IRS has not made any decision.

I find this absolutely maddening-- the worst sirt of bureaucratic bs. Seems like letters to Congress could be warranted.

JinBoston

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Re: Vanguard not paying their taxes?
« Reply #4 on: December 09, 2015, 10:51:10 AM »

LordSquidworth

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Re: Vanguard not paying their taxes?
« Reply #5 on: December 09, 2015, 01:52:51 PM »
The Lawsuit was dismissed in New York state. As far as I can understand from the Newsweek article, there are proceedings in more than one state. It looks like things ended badly in Texas and are still unresolved in California and it also appears that the IRS has not made any decision.

I find this absolutely maddening-- the worst sirt of bureaucratic bs. Seems like letters to Congress could be warranted.

Maddening? Why? Vanguard might be breaking tax laws?

They should be prosecuted then and have to pay the taxes and fines.

dragoncar

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Re: Vanguard not paying their taxes?
« Reply #6 on: December 10, 2015, 12:34:39 AM »
The Lawsuit was dismissed in New York state. As far as I can understand from the Newsweek article, there are proceedings in more than one state. It looks like things ended badly in Texas and are still unresolved in California and it also appears that the IRS has not made any decision.

I find this absolutely maddening-- the worst sirt of bureaucratic bs. Seems like letters to Congress could be warranted.

Maddening? Why? Vanguard might be breaking tax laws?

They should be prosecuted then and have to pay the taxes and fines.

It's maddening because those of us who have Vanguard funds are therefore Vanguard shareholders.  We put our trust in this company and either they messed up or are being forced to defend against BS claims.  Either way, we lose.

marty998

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Re: Vanguard not paying their taxes?
« Reply #7 on: December 10, 2015, 05:42:08 AM »
This is ridiculous.

The 'whistleblower' is essentially saying that because Vanguard is only charging 5bps to the Funds it is apparently not in line with "industry norms" and therefore is breaking the law by not charging an appropriate transfer price.

The fundamental flaw in the argument is that this actually has nothing to do with transfer pricing.

Capitalism is partly built on the principle of competition. It is not Vanguard's fault that other firms cannot compete with it.

If Vanguard can survive in the marketplace at 5bps, then it is up to other firms to match it or die. Simple as that. Vanguard is under no obligation to charge its Funds the grossly inflated industry norm just because everyone else does.

protostache

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Re: Vanguard not paying their taxes?
« Reply #8 on: December 10, 2015, 06:23:54 AM »
This is ridiculous.

The 'whistleblower' is essentially saying that because Vanguard is only charging 5bps to the Funds it is apparently not in line with "industry norms" and therefore is breaking the law by not charging an appropriate transfer price.

The fundamental flaw in the argument is that this actually has nothing to do with transfer pricing.

Capitalism is partly built on the principle of competition. It is not Vanguard's fault that other firms cannot compete with it.

If Vanguard can survive in the marketplace at 5bps, then it is up to other firms to match it or die. Simple as that. Vanguard is under no obligation to charge its Funds the grossly inflated industry norm just because everyone else does.

My interpretation of the argument is that, in this world where transfer pricing laws exist to foster fair competition, the Vanguard funds agreed amongst themselves that they just weren't going to abide by the law.

In order to have a society where everyone gets a fair shake, capitalism has to have reset mechanisms. The Sherman Antitrust Act is one of them, transfer pricing regulation is another. Read up on the history of Standard Oil sometime and you'll see that what Rockefeller was able to do with the railroads looks an awful lot like what Vanguard does between VGI and the funds. At least at the time Rockefeller hid his machinations, while Vanguard just operates in the open.

I think what the whole thing hinges on is, has IRS given VGI special private dispensation to operate like they do? We know the SEC has issued a series of orders that gives VGI limited exceptions to certain rules, but so far as anyone knows the IRS has not, and it's the IRS (and the states) that would go after VGI for taxes owed.

CientoUno

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Re: Vanguard not paying their taxes?
« Reply #9 on: December 10, 2015, 11:04:50 PM »
What pisses me off about all of this is this all gets brought up right as I'm starting to educate myself on investing, and every reputable source I read advises to go with Vanguard. Now what?

iamlindoro

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Re: Vanguard not paying their taxes?
« Reply #10 on: December 10, 2015, 11:09:26 PM »
What pisses me off about all of this is this all gets brought up right as I'm starting to educate myself on investing, and every reputable source I read advises to go with Vanguard. Now what?

Still go with Vanguard.  This shouldn't give you a moment's pause, but if it does, you could also go with someplace like Fidelity, which also has comparable very low cost index funds.

Seriously.  Do not let this derail your drive to invest.  This is sensational reporting, and there's little so far to indicate that investors will be affected *at all*.

CientoUno

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Re: Vanguard not paying their taxes?
« Reply #11 on: December 14, 2015, 12:22:54 AM »
Sorry for dragging up a few-days old thread, but I noticed today that jlcollinsnh weighed in on the situation on his site. Maybe I put too much faith into him, but he's the one that got me started on this journey and it's good to hear established voices telling folks to remain calm.

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jlcollinsnh
Posted December 8, 2015 at 12:49 pm | Permalink
Hi Chris…

Thanks for bring this to my attention.

So everyone else is up to speed, here is the article:

http://www.newsweek.com/vanguard-whistleblower-tax-dodge-complaint-400901

I reached out to my Vanguard contact and here is her response:

“Hi James.

“I understand why your readers are concerned about the highly speculative Newsweek article. We have not issued a public statement on the article, but let me give you some background so that you can get your arms around the issue.

“First, the New York Supreme Court dismissed the suit in question last month. The Court agreed with Vanguard’s position that the former employee violated attorney-client privilege and New York state ethics rules in bringing the claim. We are not aware of any other lawsuits on these issues.

“Second, there have been many inaccuracies in news accounts on this matter and pure conjecture about payments and the potential for rising expense ratios. The tax payment we have paid to Texas—the result of a routine, unrelated audit—will not change any fund’s expense ratio or performance, nor the account balance or tax obligation of any client.

“The Newsweek article also speculates about the potential for higher fees for Vanguard clients. Given our strong cash inflows and solid financial markets, we expect to continue to lower the cost of investing for our clients.

“Finally, we remain confident in our approach to paying our fair and appropriate amount of taxes.

“Let me know if you or your readers have further questions.”

Here’s my take:

This sounds to me like a despicable money grab on the part of this “whistleblower” and the idea of punishing a company (Vanguard) for doing right by their customers is outrageous. I would have been stunned if this suit had been successful.

But even if it had, the worst outcome I can imagine is that Vanguard would be forced to raise their expense ratios to the level of the rest of the other fund companies. Initially this cash flow would be used to pay any back taxes and penalties. After that it would flow back to us shareholders as thru our funds we are the owners of Vanguard.
http://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/

This might then be taxable income to us which, while not ideal, is hardly the end of the world. 😉

In short, even in the worst case scenario (which is not happening), there is nothing here that would cause me to sell.

Hope this helps!

JetBlast

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Re: Vanguard not paying their taxes?
« Reply #12 on: December 14, 2015, 09:48:15 AM »
That statement from the Vanguard representative is actually pretty underwhelming. What are the inaccuracies in the reporting? Why is Vanguard confident in their position on the income tax issue being raised? It reads like typical corporate boilerplate crisis management language. The best piece of information is that the Texas settlement was unrelated to the allegations from the whistleblower.

I agree with jlcollinsnh on the likely outcome if Vanguard is found to have violated tax laws. Given that they have more than 20 million investors, the idea of shutting Vanguard down is politically a non-starter. I have no plans to sell any of my Vanguard funds.