(Bloomberg) Bain Capital LLC and Apollo Global Management LLC are among the private equity firms subpoenaed by New York’s attorney general in an investigation into whether they are depriving the state of tax revenue, according to two people familiar with the matter.

New York Attorney General Eric Schneiderman is probing a practice that reduces the tax liability of the buyout firms by converting management fees paid by their investors into fund investments, which are taxed at a lower rate, said the people, who asked not to be identified because the investigation hasn’t been disclosed publicly.

At least a dozen firms were subpoenaed in July, one of the people said. Other firms that received subpoenas include KKR & Co., TPG Capital, Silver Lake and Providence Equity Partners Inc.

The investigation is being conducted by Schneiderman’s taxpayer protection bureau, the New York Times reported Saturday. Michelle Duffy, a spokeswoman for Schneiderman, declined to comment on the investigation.

Charles Zehren, a spokesman for Apollo at Howard J. Rubenstein Associates; Kristi Huller, a spokeswoman for KKR; Owen Blicksilver, a spokesman for TPG at Owen Blicksilver Public Relations Inc.; Gemma Hart, a spokeswoman for Silver Lake at Brunswick Group Inc.; and Jonathan Doorley, a spokesman for Providence Equity at Sard Verbinnen & Co., declined to comment. Alex Stanton, a spokesman for Bain at Stanton Public Relations & Marketing, didn’t immediately respond to an email Saturday seeking comment.

Carried Interest
Private equity firms raise money from investors such as pension funds and endowments and combine it with loans to acquire companies. Their goal is to improve performance, sometimes by cutting jobs, and sell the companies for a profit within about five years.

The firms collect management fees from investors, usually about 2 percent of assets, and take a cut of investment profits, known as carried interest, that averages about 20 percent.

At issue in the New York investigation is that some firms convert the fees, which are taxed as ordinary income at rates as high as 35 percent, into a stake in a fund whose carried interest is taxed as capital gains at 15 percent, said the person.

By deferring the receipt of fees, buyout firms get a second benefit by deferring the tax. While the partners are well-positioned to know what investments may be winners, the waiver is irrevocable, meaning the fees disappear if the deals don’t generate profit.

The tactic hasn’t been deemed a violation of federal tax laws.

Bain Fund
Bain Capital Fund VII LP disclosed in a 2009 report that the general partner in the fund had in the past waived management fees and converted those fees into an interest in the fund called a “priority profit share.”

Mitt Romney, the Republican presidential candidate, invested in some Bain funds that employed the fee-conversion strategy. Romney, who co-founded Bain in 1984, was able to put money into the funds after he left in 1999 to oversee the Salt Lake City Olympics and later serve as governor of Massachusetts.

“Investing fee income is a common, accepted and totally legal practice,” Brad Malt, a partner at Ropes & Gray LLP in Boston who manages Romney’s investments and oversees his family trust, said in an emailed statement. “However, Governor Romney’s retirement agreement did not give the blind trust or him the right to do this, and I can confirm that neither he nor the trust has ever done this, whether before or after he retired from Bain Capital.”