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USD105m recovered from hedge fund manager who evaded taxes

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New York Attorney General Letitia James and New York City Corporation Counsel James E Johnson have announced the recovery of USD105 million in back taxes and damages from a hedge fund manager who defrauded New York state and New York City out of taxes on deferred-compensation income in 2017. 

Thomas E Sandell through his firm, Sandell Asset Management Corporation (SAMC), recognised over USD450 million in management and performance fees in 2017 from investment management services performed in New York City, but instead of paying the state and city proper taxes on those fees, Sandell tried to dodge liability for tens of millions of dollars.

“The greed that allowed one man to try to avoid paying his fair share of taxes is astonishing,” says Attorney General James. “Thomas Sandell and his company bilked New York taxpayers out of tens of millions of dollars in a single year – placing a tremendous burden on our system and forcing ordinary New Yorkers to bear that cost. My office remains committed to ensuring that those who knowingly commit tax fraud – and those who facilitate their misconduct – pay a steep price for doing so.”

“Tax revenues pay for vital city services. When a deadly pandemic has eviscerated the economy and severely strained our city’s budget, every dollar counts,” said Corporation Counsel Johnson. “Hedge funds are obligated to pay taxes just like everybody else, and when they don’t, we’ll use our legal tools and strategies to hold them accountable. Period.”

As the result of a 2008 change in deferred fee income recognition rules, Sandell was required to recognise approximately USD450 million in deferred fee income in 2017 and pay taxes on that income in New York state and New York City. But, to avoid this liability, Sandell left New York to live in London from August 2016 until mid-2019, and, even though SAMC continued operating in New York City, Sandell and SAMC took steps to make it appear as though SAMC’s operations were no longer in New York City, often with the assistance of an international accounting firm (Accounting Firm A).

As part of this deception, Sandell opened a shell office with three back-office employees in Boca Raton, Florida, which Sandell and SAMC held out to New York’s tax authorities as SAMC’s sole US operation — even after agreeing to a finding by the US Securities and Exchange Commission (SEC) that SAMC’s principal place of business continued to be in New York City. To further conceal SAMC’s New York presence, Sandell also funneled SAMC’s payroll and property expenses through a third-party entity — which he owned — even though SAMC had incurred, remained responsible for, and, in fact, continued paying those expenses.

Despite being put on notice that his tax position was problematic by multiple advisors, including his long-time tax preparer (Accounting Firm B), Sandell nonetheless claimed that he owed no New York taxes on the fee income he recognised in 2017. Accounting Firm B made clear to Sandell that he could not claim to owe no New York taxes on his deferred-fee income — particularly in light of the SEC’s conclusion that SAMC’s principal place of business continued to be in New York City. In response, Sandell replaced Accounting Firm B with Accounting Firm A without conducting any further diligence into Accounting Firm A’s tax position, and wrongfully claimed no New York tax was due on returns filed for the 2017 year, depriving the state and city of tens of millions of dollars in tax revenues.

Sandell has already transmitted the full USD105 million agreed upon in back taxes and damages.

Sandell and SAMC neither admit nor deny the allegations made by the Office of the Attorney General (OAG) and by the New York City Department of Law.

The investigation leading to today’s agreement began with a whistleblower lawsuit filed in October 2018 under the New York False Claims Act. The investigation found that Sandell performed the investment services that generated the deferred fees at issue exclusively in New York City and that his deferred fees were therefore taxable in New York state and New York City. 

The OAG expresses its appreciation to the whistleblower, without whose information the misconduct might not have been discovered, and to the whistleblower’s attorneys. Under the New York False Claims Act, whistleblowers are entitled to receive a percentage of settlement proceeds for bringing this misconduct to light. 

New Yorkers can learn more about filing a New York False Claims Act on the OAG website and can file an anonymous, secure transmission through the OAG’s whistleblower portal.

The OAG also thanks the New York state Department of Taxation and Finance and the New York City Department of Finance for their invaluable assistance in this matter. 

This matter was handled for the OAG by Senior Trial Counsel David N. Ellenhorn and Assistant Attorney General Joshua B Dugan of the Taxpayer Protection Bureau, with assistance from Senior Legal Support Analyst Bianca M LaVeglia. The Taxpayer Protection Bureau is led by Bureau Chief Thomas Teige Carroll and Deputy Bureau Chief Scott Spiegelman, and is a part of the Division for Economic Justice, led by Chief Deputy Attorney General Chris D’Angelo and First Deputy Attorney General Jennifer Levy.

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