FYI: (This is a follow-up article)
If you are among the 20 million Americans saving for retirement through Vanguard, you may be in for an expensive shock. The nation’s largest mutual fund company is under fire for not taking more of your money. That sounds ridiculous, but based on arcane provisions of the endlessly complex U.S. tax code, the Pennsylvania-based company may soon be forced to pay a staggering amount of back taxes because of the famously low fees it charges to manage your nest egg
Regards,
Ted
http://www.newsweek.com/vanguard-whistleblower-tax-dodge-complaint-400901
Comments
I've given some thought to the reporter's comment following the piece that in theory an investor could come out ahead tax-wise if Vanguard had to pay taxes. (We're coming up on tax season, what else is one going to think about ... Christmas?) It's unlikely that an investor could benefit, but that is not impossible.
If the Vanguard Group (management company) is required to make a profit, suppose a fund now has to pay the Vanguard Group an extra $100 for profit. The fund will pay expense this out of nonqualified income (if any) that would otherwise have been distributed to investors. (That's the way all fund expenses are handled by all fund companies.)
Say that the Vanguard Group's blended tax rate (for all the profits it now makes) comes out to 20%. (Marginal corporate tax rate is 35%, but few companies actually pay that.)
Say that the investor pays 40% on ordinary income, and 20% on cap gains.
The investor would have paid 40% on that $100 in nonqualified dividends, leaving $60. Instead, the $100 now gets paid to the Vanguard Group. The Vanguard Group pays $20 in taxes and distributes $80 as a qualified dividend to the fund. The fund then distributes the $80 in qualified income to the investor, who pays 20%, and is left with $64. A win!
I had to make a lot of questionable assumptions, especially about tax rates, and I could still barely thread the needle to make the investor come out ahead. But it is theoretically possible.