How Romney's Millions Went Tax-Free Overseas
New documents show dubious tax shelters
While nobody has asked to see the Republican candidate's birth certificate, as he said at a recent Michigan rally, everybody has a renewed interest in examining the tax returns he continues to withhold.
The complex and tricky tax shelters used by Bain Capital continued to emerge as lawyers and other experts examined the hundreds of pages of previously confidential company documents uncovered by the Gawker website in an exclusive series this week. The authenticity of the documents was confirmed by a Bain representative, who said that the company deplores the public posting of its proprietary materials.
In a sense, the latest revelations about how Bain protected its vast income from taxation are scarcely surprising to anyone familiar with the world of private equity where Romney made his fortune, estimated at $250 million or more. Avoiding taxes is among the most important attractions of that industry for the wealthy clients it aims to attract.
But several experts who have looked over the new Bain documents have warned that dubious legal tactics may have been employed by some of the company's investment vehicles, including several that are listed on the partial returns that Romney has already released. Those experts, such as Victor Fleischer, a law professor at the University of Colorado, and Daniel Shaviro, who teaches tax law at New York University's law school, have raised questions about both the equity "swap" and fee-conversion maneuvers.
Companies like Bain make money both from investment income, which is taxed at the lower capital gains rate, and from management fees, which are taxed as ordinary income like wages. If the firm can somehow transform its management fees into capital investments, then it can avoid the 35% top federal income tax rate and pay the 15% capital gains rate, instead.
That is what Bain evidently does to keep its partners' taxes low—around the 13% rate that Romney admits to paying. But critics like Fleischer say this is an abusive tactic that cannot be justified by law, even though the IRS has never attempted to stop companies that use it.
"Unlike carried interest, which is unseemly but perfectly legal, Bain's management fee conversions are not legal," the Colorado professor wrote on his blog. "If challenged in court, Bain would lose. The Bain partners, in my opinion, misreported their income if they reported these converted fees as capital gain instead of ordinary income."
Offshore Accounts to Avoid Taxes
Equally troubling is the use of offshore accounts to avoid taxation on stock holdings. This tactic is called a "total return equity swap," because it involves swapping real equities for derivative paper investments that provide all the same dividends as the stock itself—but aren't subject to federal taxes. According to Shaviro, this practice was sufficiently blatant to elicit a warning from the IRS two years ago. He wrote recently that those who used it over the past decade "were coming perilously close to committing tax fraud, in cases where the economic equivalence to direct (stock) ownership was too great."
In the complex territory of tax law, precise boundaries aren't always clear. What makes the "total return equity swap" potentially perilous for Romney, however, is the use of foreign accounts to avoid taxes, which is what many Americans suspect him of doing. Despite the accounts that he has maintained in Switzerland, the Cayman Islands, Luxembourg, Bermuda and other tax havens, Romney's campaign has repeatedly denied, with little credibility, that his wealth was invested abroad to evade taxes.
The proof may well lie within the tax returns that he is so determined to conceal. And wisecracks about the president's alleged foreign birthplace may not distract concerned voters from the overseas accounts where Romney's money has been hidden.
Joe Conason is the editor in chief of NationalMemo.com. To find out more about Joe Conason, visit the Creators Syndicate website at www.creators.com.
© 2012 Creators.com
Romney is doing is what most other Americans do. He hires a good accountant to legally take every possible tax break Obama has given him. I know very few, if any, wealthy people who just go buy Turbo Tax at Walmart and then pay whatever to the IRS. Stupid unwashed people have no idea how hard it is to manage $250 million. Every investment decision takes into account tax consequenses. Even a simplton like myself has learned to AVOID the cruel 35% rate and shift income to the 15% rate using perfectly legal and acceptable accounting practices. Hell, I hardly pay any income tax at all. Well on an income of about $1.5 million its about 7%. Believe me, the IRS looks at everything I do and I have their blessing.
For example... the law (per JS-8/19/12) that allows a corporation to pay a CEO and other top execs huge bonuses, and write it all off. Pay off enough to the CEO each year to reduce the "record profits" to Zero, and there are no taxes owed! It's no wonder that the plan is to make it so these multi-millions are taxed like a "lower half" working class person. Rather than pay these excess profits out to the working class members of the company, where taxed at less than 15% makes sense, give it all to the CEO in true supply-side fashion, let it be taxed at the same rate as giving it to the lower classes.
What's wrong with a corporation keeping that cash for a rainy day? What's wrong with saving it up for a big capital purchase? Then they will not need to take out a loan that must be paid back in 2 years, requiring that each and every "project" be able to stand alone and pay for itself with the profit that the project will need to generate, no help from other efficiency gains. Why?
Simple. Let any publicly owned, stock exchange traded corporation build up a cash reserve, and the investment sharks buy it up in a hostile takeover and then "take" the saved up cash!
There are 2 things at work here why companies must pay out all their profits. One is the tax saving... can fix that by not taxing corporations, tax only income they pay out. But, the corporations will still pay it out, even if no taxes on keeping the profits. Got to remain cash-poor to protect the corporation from a buy-out. This is another reform that is needed.
We don't run our homes that way. While a mortgage can be sold to another bank without our permission, we still maintain control of our own household cash. Let it be so in a business, no matter how small or how large. Stockholders should buy or sell based on the value of the company due to how well it is run, they should not be able to tell the company how to run itself. When the company runs poorly, sell the damn stock!