Corporation fellow’s firm investigated for tax fraud

By
Senior Staff Writer
Thursday, September 6, 2012

Providence Equity Partners, the international private equity firm founded and run by Brown Corporation Fellow Jonathan Nelson ’77, is one of the 12 firms that received subpoenas from New York Attorney General Eric Schneiderman in connection with an investigation into a tax strategy used to evade high income taxes. 

The strategy – which could save firms like Providence Equity Partners and Bain Capital hundreds of millions of dollars – involves transferring management fees gathered from investors into fund investments, which are taxed at 15 percent. These fees could be taxed at a rate of up to 35 percent if reported as income.

Investigations into the firms’ financial records began last month, when the presidential election cast a spotlight on the financial dealings of  Bain Capital – the private equity firm that Republican nominee Mitt Romney founded in 1984. Leaked records from Bain show that executives saved more than $200 million in federal income taxes through this evasive tax strategy.

While some industry executives claim the practice is legal, the Internal Revenue Service released a statement in 2007 following its investigation into tax evasion and manipulation that suggested these management fee conversions and similar strategies were “areas of possible noncompliance.”

In 2004, Nelson, Providence Equity Partners’ chief executive officer, donated $10 million for the construction of the new Jonathan Nelson ’77 Fitness Center and funded the creation of two new professorships in 2011. His private equity firm focuses on investments in media, communications, information and education.

Subpoenas to the 12 firms were issued in July, according to a recent article in the New York Times. Schneiderman’s investigation into the financial practices of the firms is ongoing.

A representative from Providence Equity Partners could not be reached for comment.