Vanguard, a Champion of Low Fees, Faces Tax Challenge

David Danon, a former Vanguard tax lawyer, says in whistle-blower claim that Vanguard could owe billions of dollars in taxes on uncollected revenue. The lawsuit is just crazy as millions of shareholders could end up paying somewhat higher fees if Mr. Danon wins in court against Vanguard. Since Vanguard’s funds are owned by its shareholders, Vanguard’s overall fees are the lowest in the industry. While not taking in more profits are good for investors, Vanguard runs into a peculiar tax challenge. The New York Times shows Mr. Danon’s reason: “Because the Vanguard Group was set up as a C corporation, and not a partnership, it has potential tax liabilities, even if it does not actually earn a profit. And because it is owned by its mutual funds, for tax purposes, it is required to account for the profits that it could have earned if it had charged the higher fees that the marketplace would have borne.” While Mr. Danon is waiting for a big pay day to collect up to 30% Vanguard’s penalty, a New York judge dismissed Mr. Danon’s suit in November. For now there’s no reason for Vanguard shareholders to transfer their money to another company. (nytimes.com)