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View Diary: NYT: Bain’s tax “dodging” is "not legal," “subject to serious I.R.S. challenge” (128 comments)

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  •  Unfortunately, the IRS has not challenged... (62+ / 0-)

    the yearly tax returns of the super-rich Bain executives or Bain itself.  

    Possibly because these tax cheats ultra-rich people have enough money to get the very best legal defense, including guys who have made a career of protecting tax cheats--while the IRS is limited to govt. lawyers who often just work for the govt. for a few years, before leaving the IRS to become the guys who make a career of protecting tax cheats.  

    •  kurious - how could you possibly know that? (12+ / 0-)

      I think it is highly unlikely that the IRS has not audited a single fund, or the returns of any of the Bain partners, where this specific issue (converting management fees to equity) has not already been audited and ruled on by the IRS. That ruling would be private and there would be no way for the public to know about it.

      How could you know who has been audited?

      "let's talk about that"

      by VClib on Fri Aug 24, 2012 at 08:08:08 AM PDT

      [ Parent ]

      •  Was Romney audited? Did he have to pay penalties (10+ / 0-)

        and interest because of questionable/illegal tax schemes? That's why we need to continue to insist on seeing his tax returns.

        •  Yes he was audited. (19+ / 0-)
          From time to time, I’ve been audited as happens, I think, to other citizens as well. And the accounting firm which prepares my taxes has done a very thorough and complete job,” Romney said, adding: “I don’t pay more [taxes] than are legally due, and frankly, if I had paid more than are legally due, I don't think I'd be qualified to become president. I'd think people would want me to follow the law and pay only what the tax code requires.”
                                                                     Mitt Romney
          From his wording I would guess that he has been audited several times.

          One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors." -- Plato

          by Jane Lew on Fri Aug 24, 2012 at 08:53:45 AM PDT

          [ Parent ]

          •  I'm no lawyer, but what about a class action suit? (4+ / 0-)
            Recommended by:
            Chi, dna2rna, caul, docb

            Romney's statement assumes that Bain was legally reporting, which is what the NYT story questions.

            I'm wondering a very large group of law-abiding taxpayers might sue Bain for tax evasion, on the grounds that infrastructure suffers when all parties don't contribute their fair share.

            If the IRS goes after Bain now, it will be viewed as a political move, but a class action suit might have an impact.

            •  pj - the puplic has no standing (9+ / 0-)

              that's why we have an IRS and a Tax Court.

              It's important to remember that what the NYT's has is two experts who think that exchanging management fees into equity would not be allowable. However I could find two experts who would opine that it is a very reasonable position, and highly defensible. The only opinion that really counts is the IRS and the Tax Court. My guess is that this issue has already been audited by the IRS and they have accepted the treatment. If they didn't the accountants and tax lawyers for Bain Capital would have filed a lawsuit to defend this practice and that lawsuit would be public.  

              "let's talk about that"

              by VClib on Fri Aug 24, 2012 at 09:36:24 AM PDT

              [ Parent ]

              •  yes, for a "small" fee, you could. (20+ / 0-)
                However I could find two experts who would opine that it is a very reasonable position, and highly defensible.
                and they would still be wrong. let me explain. there is no such thing as a "tax magic wand", that you wave over one type of income, and magically convert it to another, more favorably taxed type. trust me, if there was such a thing, it would have been referrenced in 1,000's of tax court filings. having read 1000's of those filings myself (on a variety of tax issues), i've never seen mention of it.

                the overall problem with this whole scheme is simple: the management company does not, itself, own the underlying, interest/dividend generating assets, the investors do. in fact, were the whole "carried interest" scheme not embedded in the Internal Revenue Code, at the behest of lobbyists, that would be most assuredly taxed at ordinary rates to begin with, because it is nothing more than additional personal service income.

                the simple question to be asked, regarding a scheme such as this is: what legitimate business purpose does it serve, beyond simply reducing one's tax liability? if that is the only purpose served, the courts have consistently held that it is to be ignored, for tax purposes.

                clearly, the only purpose served by this sceme, business or otherwise, is the reduction of the manager's tax liability. since they are the one's controlling their own risk (the mgmt. decides whether or not to exchange their normal mgmt. fee for additional carried interest, not the investors), they have no risk, for all intents and purposes.

                this is pretty much black letter tax law, with many, many USSC rulings in the IRS's/Govt's favor. were it pressed, by the service, they would be successful. of course, no one knows if, in fact, one of these funds isn't, at this very moment, being examined, because that information isn't available to the general public.

                bear in mind, as these schemes come into play, the IRS is, by definition, going to be at least a few years behind the curve, because they have to wait until those returns are filed, before they can then challenge them. unlike Law & Order, everything doesn't happen in an hour, with 15 minutes for commercial breaks. it takes years to get to court.

                •  cpinva - don't you think that this has already (1+ / 0-)
                  Recommended by:

                  been audited? They have been taking this treatment for a decade or more and surely some of the actual funds, as well as the Bain Capital partners, have been audited. Romney has noted that he has been audited several times. This would be a very big carrot for the IRS and I think it is highly unlikely that they haven't already ruled on it. I have a good understanding of partnership tax law, and how carried interest is treated, but I am not a CPA or tax lawyer. However, the tax firm that BC uses thinks they have a reasonable basis for their treatment, although it may be very aggressive.

                  I would question your view that the partners have no risk. By not taking an annual cash management fee the partners of BC are paying all of the expenses normally covered by the management fees such as employee salaries and benefits, rent, utilities, due diligence costs, travel, and all the other expenses any normal service business would have to pay. What I also don't know is if the annual election has to be approved by the investors, although I would imagine if it helps their tax treatment they just baked in into the partnership agreement that there would be a vote. From an investors' perspective it benefits them so why wouldn't they vote for it?

                  "let's talk about that"

                  by VClib on Fri Aug 24, 2012 at 11:55:05 AM PDT

                  [ Parent ]

                  •  I would question your guess (1+ / 0-)
                    Recommended by:
                    My guess is that this issue has already been audited by the IRS and they have accepted the treatment.
                    but I do give you credit for at least acknowledging it (guess) as such......

                    "No man is rich enough to buy back his past." ~ Oscar Wilde

                    by ozsea1 on Fri Aug 24, 2012 at 11:11:23 PM PDT

                    [ Parent ]

                  •  let me repeat myself, for those of you on drugs: (4+ / 0-)
                    Recommended by:
                    caul, Bluehawk, rivamer, kurt
                    cpinva - don't you think that this has already
                    been audited?
                    IT TAKES YEARS TO GET TO COURT!

                    until such time as it's actually docketed, it is not a matter of public record. i have no idea whether or not one of these returns has been audited, since i'm not privy to that information. what i do know is that there is a formal administrative process, with regards to IRS audits. how long this process takes is dependent on the complexity of the issues involved. let me provide a hypothetical example:

                    10-15-01: 1040 for 2000 is filed (with a 6 mth extension)
                    10-15-02: taxpayer notified of audit.
                    10-15-03: audit is closed, unagreed. goes to administrative appeals. First step in formal process.
                    4-15-04: first administrative appeals hearing is held.
                    6-15-04: return is sent back to exam, for reconsideration.
                    10-15-04: sent back to appeals. Examining Agent maintains his/her original position.
                    12-15-04: IRS recognizes a major issue is involved, opens up a nationwide project on it. all returns are scoured, those with that issue identified are pulled at the service center, and sent to respective IRS offices, for field exam. first return determination held in abeyance, pending the outcome of audits of other returns.
                    2-15-06: IRS atty's meet with atty's representing trade group, in attempt to agree on proper treatment, for tax purposes, of the issue.
                    2-15-07: IRS and trade group unable to resolve issue outside of court. original case, plus all others, are batched, and docketed for tax court. first hearing scheduled for 8-15-07. The case is only now a matter of public record.
                    8-15-07: Tax Court hearing.
                    12-15-07: Tax Court issues opinion, upholds IRS determination. Taxpayers decide to appeal.
                    2-15-08: Appeal filed with Federal Circuit Court of Appeals.
                    8-15-08: Federal Circuit Court of Appeals sustains Tax Court's decision. Taxpayers and atty's vow to appeal to USSC.
                    10-15-08: USSC grants certiori to taxpayers, case scheduled for oral arguments on 1-15-09.
                    1-15-09: Case argued before the USSC, many questions by all justices, except thomas, who looks bored.
                    6-15-09: USSC publishes opinion, sustaining Federal Circuit Court of Appeals, thomas looks even more bored.

                    this is roughly 7.5 years, from the date the return was originally filed, until the final decision is made. some of this is due to specific time frames required by law, much of which is done to try and reach an agreement, without going to court, which is expensive and time/asset consuming, for all parties involved.

                    as i noted in my earlier post, this is not a tv show, it is how things happen in real life. i know this is true, because i have been involved in cases that were actually docketed, years after the return was filed and audited, and they didn't reach this level of tax dollars involved. if you go and read tax court cases, this is a fairly consistent pattern, very similar to criminal dockets really.

                    i have yet to meet a cpa/attorney, from a major firm, that didn't think they had a compelling argument, for whatever position they've taken. that's kind of their job, and why their billable rates are so high.

                    However, the tax firm that BC uses thinks they have a reasonable basis for their treatment, although it may be very aggressive.
                    make no mistake, i'm sure the firm that prepared the romney's return is very, very good, and their lawyers are very, very smart. they also lose with about the same frequency that they prevail, specifically because of those aggressive positions. in cases like this, what they're really banking on is the gov't not wanting to take it to trial, what's referred to as "Hazards of Litigation", and being willing to negotiate a settlement, that all of them can live with.
                •  Thanks for a light in dark places (4+ / 0-)

                  the spider haunted catacombs of tax law are fearful places to most of us and you've provided a brief glimpse of the tangled webs that dangle in its dank tunnels. it would seem that hope still lives that lord mitt's evil ring may yet get melted in the fires of mt. taxcourt then. you are perhaps a no-caps galadriel.

                  Just getting a handle on the knobs and dials.... Hey, don't touch that!

                  by Old Lefty on Fri Aug 24, 2012 at 12:10:25 PM PDT

                  [ Parent ]

          •  Sorry Mr. Rmoney (6+ / 0-)

            I don't think that paying so little taxes to the country you want to run makes you qualified to be president.  I would appreciate your wanting to help the people of this country and its infrastructure.  I think you are the worst of the robber barons.

            You can fool "some" of the people all of the time. Abe Lincoln was right.

            by regis on Fri Aug 24, 2012 at 09:40:05 AM PDT

            [ Parent ]

          •  from his wording? the man doesn't know the truth (9+ / 0-)

            from a lie.  he just says anything.

            From his wording - I would guess that he is lying as always!

            •  All ducks are purple (2+ / 0-)
              Recommended by:
              ET3117, caul

              Lets perform eine kleine Gedankenexperiment, shall we? Imagine telling your children every day of their lives that you know the biggest secret ever, and that when they grow up you will tell it to them but they must accept it and can never tell anybody else that secret, ever, or they will first be expelled from the family then be burned alive. You and all the adults around you constantly reinforce this until the kids turn seventeen and the great big secret is revealed; the kids learn that despite what their eyes tell them, what other people say, All Ducks Are Purple.

              The kids have two choices; go along to get along or leave the family forever.

              Those who choose the former option must internalize the profound cognitive dissonance of denying the evidence of their senses. One way to do that is to rationalize that there are invisible inner truths and visible outer truths and that only the invisible ones count. I see that as one of the two continuous threads in RMoney's thinking; my inner truth  trumps any and all evidence to the contrary.

              Just getting a handle on the knobs and dials.... Hey, don't touch that!

              by Old Lefty on Fri Aug 24, 2012 at 12:40:05 PM PDT

              [ Parent ]

          •  No (2+ / 0-)
            Recommended by:
            shaharazade, ET3117

            He has never been audited by IRS. This has been verified by a Bain insider. It has been suggested he may be referring to some sort internal audits.

            •  That could be anyone. (0+ / 0-)
              "a Bain insider"
              The folks at Bain have reason to obfiscate the issue as PR about having IRS audits does reflect well on Bain and its ability to manage money.

              Imagine you are at Bain and the media is trashing your brand. From your point of view negative information about Bain IRS audits drives away business from Bain and costs you money.

              If Romney says he has been audited, I will believe him (this time) because most people think that an audit is a negative given that it is assumed that "where there is smoke there is also fire."

              One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors." -- Plato

              by Jane Lew on Fri Aug 24, 2012 at 03:21:43 PM PDT

              [ Parent ]

              •  Wasn't he audited (1+ / 0-)
                Recommended by:
                Jane Lew

                in MA and had to file amended state tax forms? Just wondering...

                •  I'm not sure. (0+ / 0-)

                  He did file an amended return there, but I am not sure whether it was a result of an audit or not. I believe it was to "clarify"  (so to speak) his residency so he could run for governor.

                  I am speaking off the top of my head...will gladly accept guidance from those with superior knowledge of Mitt History.

                  One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors." -- Plato

                  by Jane Lew on Sat Aug 25, 2012 at 07:44:44 PM PDT

                  [ Parent ]

          •  That's Mitt Romney's word (0+ / 0-)

            which, unlike his financial assets, is not worth jack shit.

            "All governments lie, but disaster lies in wait for countries whose officials smoke the same hashish they give out." --I.F. Stone

            by Alice in Florida on Wed Aug 29, 2012 at 10:27:58 AM PDT

            [ Parent ]

        •  cocinero - being audited and having to pay (3+ / 0-)
          Recommended by:
          thestructureguy, kurious, cocinero

          back taxes and interest is no big deal. It has happened to me several time. It's highly unlikely that Romney, represented by PriceWaterhouseCoopers, would ever have to pay penalties. If you file on time (by Oct 15th each year) and pay all the taxes owed according to your return, take defensible positions, and have good documentation, all you ever have to pay is interest. If you take aggressive positions, and PWC does, the IRS may not agree but they won't charge you penalties.

          "let's talk about that"

          by VClib on Fri Aug 24, 2012 at 09:29:32 AM PDT

          [ Parent ]

          •  Unless they Charge You with Tax Evasion (1+ / 0-)
            Recommended by:

            Granted, that doesn't happen very often. Most of the time they  assume that you just didn't understand the tax laws correctly. However in some cases, where very large amounts of money are involved it is determined that the person was actually attempting to cheat the government and they are charged with the crime of Tax Evasions which can lead to many years in jail.

            •  dfe - no one who has PriceWaterhouseCoopers (2+ / 0-)
              Recommended by:
              cocinero, nextstep

              sign their timely return is ever charged with tax evasion. These top CPA and tax law firms never have clients who are charged with tax evasion, unless they are representing them after the fact. One of the things you buy when you have a firm the stature of PWC prepare your return is an insurance polity that all you will every be liable for is back taxes and interest. None of the current or former partners of Bain Capital partners is in any jeopardy of any criminal prosecution.

              "let's talk about that"

              by VClib on Fri Aug 24, 2012 at 12:40:45 PM PDT

              [ Parent ]

              •  I Didn't Say They Would (0+ / 0-)

                You indicated it wasn't a crime to cheat on taxes and I pointed out that it was if the IRS decided to charge you in criminal court. Only about 2000 people are convicted of tax evasion a year, so it certainly isn't a big risk. Insurance policy's are meaningless in the event of fraud the same way a fire insurance policy is worthless if you deliberately set fire to your house.

                •  dfe - "cheat on your taxes" (0+ / 0-)

                  There is lots of gray in the IRS code. Taking an aggressive, but defensible, position on a tax issue is NOT "cheating on your taxes". Cheating on your taxes is listing deductions for items that you never actually spent any money on. Depending on what business or profession you practice how much of an expense can be allocated to income producing business activity and how much is personal is soft gray line.

                  "let's talk about that"

                  by VClib on Sat Aug 25, 2012 at 09:58:32 PM PDT

                  [ Parent ]

          •  It happened to Steve King several years ago, (2+ / 0-)
            Recommended by:
            shaharazade, elwior

            and it was a big deal to him. He still resents it. He wants to abolish the IRS.

        •  Following the Dem convention (1+ / 0-)
          Recommended by:

          Team Obama needs to hit Romney repeatedly over three things all the way up until election day:

          1) Romney's Tax Returns

          2) Bain

          3) Romney's Record as Governor of MA

          Chicago--Proud Home of the 1907-08 World Series Champion Chicago Cubs

          by Jeff Y on Sat Aug 25, 2012 at 12:52:05 AM PDT

          [ Parent ]

        •  Willard got caught lying (0+ / 0-)

          on his residency and taxes!   Amended them and had to pay penalties! So he has established he is a liar and cheat ..we just need to know how far he went to avoid Fed taxes!

          Seems that the evidence is that romney has MORE INVESTED IN FOREIGN COUNTRIES THAN IN AMERICA!

          Where are those 7 years of returns willard????  ..Complete this time  with FBAR forms attached!!

      •  Mitt Romney admitted that he had been audited (9+ / 0-)

        "from time to time I've been audited "
        David Muir/ABC Interview transcript
        So the IRS is obviously aware of this strategy and he's thus far gotten away with it.  Which is doubly sickening.

        America is a COUNTRY, not a CORPORATION. She doesn't need a CEO. Vote Obama.

        by manneckdesign on Fri Aug 24, 2012 at 08:39:24 AM PDT

        [ Parent ]

      •  Generally (2+ / 0-)
        Recommended by:
        VClib, elwior

        The higher the income, the greater likelihood of a tax audit.  IMHO, a tax audit is simply the IRS looking for further information to verify that the claims in the returns are valid.  It does not necessarily mean that there was any wrong doing on the part of the person or business being audited.  There are certain red flags that might trigger an audit and high income is one, another is a lot of charitable deductions, but none of these necessarily mean that the tax payer has committed a crime.

        "Growing up is for those who don't have the guts not to. Grow wise, grow loving, grow compassionate, but why grow up?" - Fiddlegirl

        by gulfgal98 on Fri Aug 24, 2012 at 11:25:40 AM PDT

        [ Parent ]

        •  Technically now, "the higher the income, the... (1+ / 0-)
          Recommended by:

          greater the likelihood of audit".  Today, a little more than a year since the (IRS) high-wealth group was put into serious motion and two and a half years since the group was announced... (emphasis mine)

 has completed 36 audits of around 12 to 18 high-wealth individuals...

          ...Audits on 12.5 percent of all millionaires pulled in $5.1 billion for fiscal year 2011, according to the IRS...

          A better barometer for us is not the number of cases closed, it’s the number of open cases,” IRS spokesman Terry Lemons told The Daily Beast. The group has cases open on 100 individuals involving 500 returns, with audits on another 200 individuals in the pipeline, Lemons said.

          Tax-return complexity is a significant hurdle...

          The returns’ complexity can mean that open cases on high-wealth individuals may take years to close, Lemons said.

          Another issue has been...What exactly does “high wealth” mean? The agency won’t give a precise number, but...(in a) speech, Shulman defined “high wealth” as referring to individuals with tens of millions of dollars or more in assets or income.

          ...more than 8,000 Americans reported income greater than $10 million....Out of a likely pool of more than 8,000 taxpayers, then, only one to two dozen high-wealth individuals have been audited.

          Of those one to two dozen "high wealth" taxpayers, whose returns were audited, "one third were..compliant" and the cases were closed.  The other two-thirds apparently either were found not to be compliant, or those cases are still open.
    •  Your point about the level of expertise of the IRS (7+ / 0-)

      is correct. When I worked at a large corporation that was under IRS scrutiny, the IRS attorneys struggled to understand the complex tax 'dodge' being used. The IRS has to commit to long proceedings with highly paid attorneys on the other side to contest these tax strategies. In the case I was familiar with, the corporation settled with a no-fault decision. Still it was at least 2 or 3 years of investigation.

      Everybody knows it already

      by redstella on Fri Aug 24, 2012 at 09:35:23 AM PDT

      [ Parent ]

    •  They Don't Have the Staff (1+ / 0-)
      Recommended by:

      The IRS is purposely kept grossly understaffed in order to shield wealthy individuals and corporations from scrutiny. There are also laws that force the staff they do have to spread the audits about so they are forced to waste taxpayer money going after somebody who at most has cheated the government out of a few hundred dollars instead of going after those who could owe hundreds of millions.

      Good auditors are a profit center for the IRS, bringing in far more then they are paid. Obama wants to add IRS workers while the Republicans, as usual, want to cut staff.

    •  IRS agents need to be awarded performance bonuses (2+ / 0-)
      Recommended by:
      elwior, Larsstephens

      Since Wall Street is so keen on making sure that bonuses are essential tools to reward top performers, we should start awarding them to government agents to incentivize such odd governmental programs like, you know, enforcing the law equally.  

      I think that awarding agents who bring successful enforcement actions should get a percentage of the take.  Another substantial chunk of fees and penalties should be used to pay for more enforcement.

      Break up a fraudulent scheme?  You get 1% of the value of the amount of the fraud as a bonus; if it results in prison terms, it doubles to 2%.  Lets see how many agents would be willing to turn a blind eye to Bernie Madoff's $50 Billion pyramid schemes when there's a multimillion payday for breaking it up.

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