Skip to main content

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

Comment Preferences

  •  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:
      caul

      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:
        caul
        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 ]

Subscribe or Donate to support Daily Kos.

  • Recommended (173)
  • Baltimore (88)
  • Community (84)
  • Bernie Sanders (66)
  • Freddie Gray (60)
  • Civil Rights (58)
  • Elections (41)
  • Culture (38)
  • Hillary Clinton (36)
  • Media (36)
  • Racism (33)
  • Law (32)
  • 2016 (31)
  • Labor (27)
  • Education (26)
  • Environment (25)
  • Republicans (23)
  • Politics (23)
  • Barack Obama (22)
  • Economy (21)
  • Click here for the mobile view of the site