A whistleblower law suit brought under the New York State’s False Claims Act has resulted in a settlement of $40 million against a financial investment firm Harbert Management Corp of Alabama. The case alleged that Harbert earned hundreds of millions of dollars through an office in New York for which it paid no income tax to New York, while Harbert paid all Alabama taxes for all of its income. The case raises the question as to why New York is one of only a few states that allows for whistleblower cases to recover unpaid income and excise taxes. The other states should follow New York’s lead.
According to court papers, Harbert organized Harbinger Capital Partners Offshore Managers, LLC, a $26 billion hedge fund which operated out of an office at 555 Madison Avenue in Manhattan. Even though substantial earnings came in through Harbinger, it allocated zero percentage of earnings to New York and it filed no state tax return. The company asserted a position that it had no “nexus” to New York state because it had no income deriving from New York sources. However, Harbinger made hundreds of millions by shorting the subprime mortgage market in 2007.
When business operate both inside and out of New York City and State, they are required to apportion for taxes that part of their income coming from or connected to New York.