As tax experts scrutinize the Bain Capital documents released by Gawker on Thursday, two dubious tax avoidance tactics are emerging that may mean Mitt Romney will have to pay more taxes, and one might even be illegal, according to a report titled. Mitt Romney Tax Returns May Have Employed Legally Dubious Maneuvers, Tax Experts Say.
The first dodgy tactic, called a "total return equity swap," is for investors to set up overseas funds that are invested in exactly the same risk free holdings, such as treasury bills, that they would have to pay dividend taxes on in the US, but not if they appear to be some other kind of investment overseas. The second, is illegal if proven, is when investment fund managers convert their management fees taxable at income tax rats, into "additional carried interest income that is taxed at capital gains rates rather than the income tax rate." From what I gather, tax experts see risk for Mitt Romney on both fronts.
The first scheme involves owning U.S. dividend-paying stocks in an offshore account and pretending, for accounting purposes, not to own the stock. Instead, the taxpayer tells the Internal Revenue Service that he owns a derivative product that is identical in every way to the stock -- except it isn't the stock, so therefore no U.S. taxes are owed. It's called a "total return equity swap," because the buyer still gets the benefit -- the "total return" -- of owning the stock, or equity.Daniel Shaviro, the Wayne Perry Professor of Taxation at New York University School of Law, writes
"But taxpayers who engaged in it to avoid the dividend withholding tax were coming perilously close to committing tax fraud, in cases where the economic equivalence to direct ownership was too great."
The second technique is "not legal," according to Victor Fleischer, a tax expert and professor of law at the University of Colorado. A taxpayer saves substantial amounts of money by pretending that regular income received as a management fee for running a private equity firm is not income, but is instead a capital gain. That drops the tax rate on that income from 35 percent to 15 percent.The Romney's campaign has released its standard boilerplate comment that Romney is not responsible for whatever tax strategy employed, as his assets are in a blind trust.
Citing the Gawker documents, Fleischer notes that Bain engaged in the management-fee maneuver to reduce the tax bill of its investors. "Unlike carried interest, which is unseemly but perfectly legal, Bain’s management fee conversions are not legal. 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," he writes.
Shaviro, meanwhile, notes that Bain employed a version of the total return equity swap ... "[T]he only leg that taxpayers had to stand on in some of these cases was common practice and the apparent lack of IRS enforcement (not a very strong leg if the correct application of the law was clear)," he writes.
But, Romneys swamp of tax questions, contradictory SEC filings, and other evasive behavior continues to grow. This excellent long article will tell you more than you ever wanted to know about US tax code loop holes that wealthy people and corporations have been doing to not pay the ordinary taxes the rest of us do.
If you go over to read this article, bring your waders because it is an ugly swamp, and reveals even more evidence of the kinds of things Mitt Romney does not want us to see in his past tax returns.