* NY AG subpoenas at least 12 private equity firms

* AG probing conversion of fees into fund investments

* Bain, Romney's former firm, among those subpoenaed

* KKR, Apollo, Silver Lake, TPG also get subpoenas

By Karen Freifeld and Greg Roumeliotis

Sept 1 (Reuters) - At least a dozen U.S. private equity firms have been subpoenaed by the New York state attorney general as part of a probe into whether a widely used tax strategy that saved these firms hundreds of millions of dollars is proper, a source familiar with the situation said on Saturday.

Among the firms that were subpoenaed are Bain Capital LLC, KKR & Co LP, TPG Capital LP, Apollo Global Management LLC and Silver Lake Partners LP, the source said.

Bain was once headed by Mitt Romney, the Republican candidate who hopes to unseat President Barack Obama in the Nov. 6 election.

The subpoenas, which were sent out in July, seek documents related to the conversion of fees these private equity firms charge for managing investors' assets into fund investments, the source said. This means the investigation predates the release last month of confidential Bain fund documents by Gawker that revealed such a practice.

The practice is known as a "management fee waiver." As fund investments, the income would be taxed as capital gains, which attract rates around 15 percent. Without the conversion, the fees would be ordinary income, taxed at rates around 35 percent.

Other firms that received subpoenas include Sun Capital Partners; Clayton, Dubilier & Rice; Crestview Partners; H.I.G. Capital; Vestar Capital Partners; and Providence Equity Partners.

Jennifer Givner, a spokeswoman for New York Attorney General Eric Schneiderman's office, declined to comment. The firms were not immediately available for comment.

The investigation comes in the midst of a heated U.S. presidential election campaign. Romney has been scrutinized for his tenure as head of Bain, through which he amassed much of his estimated $250 million fortune.

The timing of the probe and Schneiderman's credentials as a Democrat could raise eyebrows in political circles.

Romney's record at Bain is already a target of attack by President Barack Obama's campaign and has put an uncomfortable spotlight on the industry. A probe into a potential tax dodge by the industry could further play into the Democrats' hands.

Romney earned about $13 million in income over the past two years from carried interest, or the portion of a private equity fund's profits that goes to its managers, according to his campaign, which has issued a statement denying that he ever profited from using a management fee waiver.

With the latest probe, Schneiderman, who has been in office for less than two years, follows in the footsteps of predecessors Andrew Cuomo and Eliot Spitzer, who played the role of sheriff of Wall Street.

Schneiderman, who is co-chair of a mortgage crisis unit under Obama, has looked into mortgage practices at banks. Other high-profile cases involving financial institutions include an investigation of possible manipulation of the Libor benchmark international lending rates by banks.

The tax probe is being conducted out of the New York Attorney General's Taxpayer Protection Bureau, which was set up in early 2011. The agency was established "to root out fraud and return money illegally stolen from New York taxpayers at no additional cost to the state," according to the AG's website.

In April, the AG's office also sued Sprint Nextel Corp for more than $300 million, accusing the company of tax fraud by deliberately not collecting or paying millions of dollars of taxes for its cell phone service.

ALIGNMENT OF INTEREST

Private equity firms sometimes grant investors a waiver of their management fee - typically charged at 1-2 percent of investments - in exchange for being able to use that capital as their own investment income in the fund.

The benefit for the investor is recouping its fee, while the fund manager gets extra incentive to make the fund perform well but is also taxed less on this money.

The Internal Revenue Service has so far not banned such a practice, which some private equity fund managers argue is done to align their interests more with those of their investors rather than to reduce taxes.

They point out that money that is secure for the fund manager as a management fee is being converted into carried interest, which is far from guaranteed.

The New York Times first reported news about the Attorney General's probe.

Can you guess the real GOP proposals?

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  • Eliminating Federal Income Taxes?

    Does the GOP platform propose repealing the 16th Amendment, which allows the government to collect federal income taxes?

  • YES

    From the GOP platform: "In any restructuring of federal taxation, to guard against hypertaxation of the American people, any value added tax or national sales tax must be tied to the simultaneous repeal of the Sixteenth Amendment, which established the federal income tax."

  • Eliminating The Federal Reserve?

    Does the GOP platform propose eliminating the Federal Reserve, citing what Republicans consider overly high inflation?

  • NO

    The GOP platform still calls for an annual audit of the Federal Reserve's activities. <a href="http://www.amazon.com/End-Fed-Ron-Paul/dp/0446549193" target="_hplink">Rep. Ron Paul (R-Tex.)</a> has been a longtime proponent of dismantling the Federal Reserve, and <a href="http://www.nytimes.com/2012/08/26/us/politics/ron-paul-passing-torch-to-a-libertarian-legion.html?pagewanted=all" target="_hplink">his influence within the Republican Party</a> has grown over the past several years.

  • Making It Harder To Raise Taxes?

    Does the GOP platform propose enacting a constitutional amendment requiring a congressional super-majority for any tax increase, with exceptions only for war and national emergencies?

  • YES

    From the GOP platform: "We call for a Constitutional amendment requiring a super-majority for any tax increase, with exceptions for only war and national emergencies."

  • Bringing Back The Gold Standard?

    Does the GOP platform propose establishing a commission exploring a return to the gold standard?

  • YES

    <a href="http://www.huffingtonpost.com/2012/08/27/paul-krugman-gold-standard_n_1832767.html" target="_hplink">Most economists</a> <a href="http://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/" target="_hplink">agree</a> that bringing back the gold standard would be a disaster for the economy. But here's the GOP platform: "President Reagan, shortly after his inauguration, established a commission to consider the feasibility of a metallic basis for U.S. currency. The commission advised against such a move. Now, three decades later, as we face the task of cleaning up the wreckage of the current Administration's policies, we propose a similar commission to investigate possible ways to set a fixed value for the dollar."

  • Letting Banks Regulate Themselves?

    Does the GOP platform propose disbanding the United States' financial regulatory agencies and requiring banks to regulate themselves?

  • NO

    However, <a href="http://www.mittromney.com/issues/regulation" target="_hplink">Mitt Romney has vowed to repeal the Dodd-Frank Act</a> of 2010 if elected president. Dodd-Frank reformed financial regulation in the aftermath of the financial crisis.

  • Celebrating Small Businesses?

    Does the GOP platform call for establishing Small Business Day as a federal holiday?

  • NO

    Nonetheless, <a href="http://www.huffingtonpost.com/2012/08/29/you-didnt-build-that_n_1839866.html" target="_hplink">the Republican Party made "We Built It"</a> the official theme of the first night of the Republican National Convention, as part of a campaign against a comment made by President Obama, taken out of context, that small business owners "didn't build that."

  • Making It Harder To Raise The Debt Ceiling?

    Does the GOP platform propose enacting a constitutional amendment requiring a congressional super-majority for any debt-ceiling increase?

  • NO

    However, congressional Republicans <a href="http://money.cnn.com/2011/08/02/news/economy/debt_ceiling_senate_vote/index.htm" target="_hplink">refused to raise the debt ceiling until the last minute</a> last year in order to extract debt-reduction concessions from the Obama administration. Economists say that these concessions, or the "fiscal cliff," <a href="http://money.cnn.com/2012/08/22/news/economy/fiscal-cliff/index.html" target="_hplink">may very well cause a recession</a> if enacted at the end of this year.

  • Giving Corporations More Rights?

    Does the GOP platform propose enacting a constitutional amendment ensuring that corporations are given equal protection under the law?

  • NO

    However, the Supreme Court recognizes corporations as "people," and to that end <a href="http://www.huffingtonpost.com/2010/01/21/supreme-court-rolls-back_n_431227.html" target="_hplink">allows corporations</a> to spend unlimited amounts of money on elections through super PACs.

  • Eliminating Federal Agencies?

    Does the GOP platform propose reviewing whether federal agencies' jobs could be done better by states?

  • YES

    From the GOP platform: "We support the review and examination of all federal agencies to eliminate wasteful spending, operational inefficiencies, or abuse of power to determine whether they are performing functions that are better performed by the States."

  • Capping Government Spending?

    Does the GOP platform propose setting a limit to the amount of money that the government can spend?

  • YES.

    From the GOP platform: "We call for a Constitutional amendment [...] imposing a cap limiting spending to the historical average percentage of GDP so that future Congresses cannot balance the budget by raising taxes."

  • Ending Medicare As We Know It?

    Does the GOP platform propose voucherizing Medicare for Americans under age 55?

  • YES

    From the GOP platform: "While retaining the option of traditional Medicare in competition with private plans, we call for a transition to a premium-support model for Medicare, with an income-adjusted contribution toward a health plan of the enrollee's choice."

  • Leaving Medicaid To The States?

    Does the GOP platform propose leaving Medicaid spending up to the states?

  • YES

    From the GOP platform: "Republican Governors and State legislatures are ready to do the hard work of modernizing Medicaid for the twenty-first century. We propose to let them do all that and more by block-granting the program to the States, providing the States with the flexibility to design programs that meet the needs of their low income citizens."

  • Making It Harder To Vote?

    Does the GOP platform propose requiring each voter registrant to produce a photo ID, a birth certificate, a Social Security card and a reference letter from an employer?

  • NO

    Nonetheless, <a href="http://www.huffingtonpost.com/2012/08/18/republican-voter-suppression-early-voting_n_1766172.html" target="_hplink">the Republican Party has been enacting voter ID laws that make it harder to vote</a> in a number of states, The Huffington Post's Dan Froomkin reports.