The party's over! Back to Mitt Romney's taxes. "Under Investigation" and "Presidential Candidacy" - just doesn't sound that good together, does it? Well, not if you're Mitt Romney, anyway.
Since July, New York Attorney General Eric Schneiderman has been issuing subpoenas to private equity firms including Bain, which he believes intentionally changed management fees into capital gains as a way of hanging onto millions of dollars that would have otherwise been taxed at a higher rate. Bain alone is estimated to have saved “more than $200 million in federal income taxes and more than $20 million in Medicare taxes.”Think Progress is reporting a story from today's New York Times with the headline I used. The Times' (that liberal rag) sanitizes it for Bain: Inquiry on Tax Strategy Adds to Scrutiny of Finance Firms.
New York Attorney General Eric Schneiderman has issued subpoenas to a dozen private equity firms seeking information about a specific tax strategy that converts
certain management fees collected from their investors into fund investments, which are taxed at a far lower rate than ordinary income.It enables these firms to avoid millions in taxes including payment of Medicare taxes.
I am fairly certain this issue of 'management fee waivers' in connection with Romney's taxes has been diaried here before though I couldn't find a specific diary on the subject. And the NYT's article is dated today, so undoubtedly the investigation by the AG is news.
The attorney general, Eric T. Schneiderman, has in recent weeks subpoenaed more than a dozen firms seeking documents that would reveal whether they converted certain management fees collected from their investors into fund investments, which are taxed at a far lower rate than ordinary income.Executives from the companies being investigated are speculating about motives that the AG might have:
Some executives at the firms said they feared that Mr. Schneiderman, a first-term Democrat with ties to the Obama administration, was seeking to embarrass the industry because of Mr. Romney’s roots at Bain. Others suggested that the subpoenas, which were issued by the attorney general’s Taxpayer Protection Bureau, might be part of an effort to recover more revenue for New York under state tax law. The attorney general’s office does not have the power to enforce federal tax laws.The tax strategy came to light with the Gawker document dump, (Inside Mitt Romney's Tax-dodging Cayman Schemes) though the subpoenas were already issued in July. Curious how this story was published immediately after the convention, they must have been holding off until it was over. They reveal at least a billion dollars in fees that were converted using this strategy. The strategy is known as a 'management fee waiver'.
The tax strategy — which is viewed as perfectly legal by some tax experts, aggressive by others and potentially illegal by some — came to light last month when hundreds of pages of Bain’s internal financial documents were made available online. The financial statements show that at least $1 billion in accumulated fees that otherwise would have been taxed as ordinary income for Bain executives had been converted into investments producing capital gains, which are subject to a federal tax of 15 percent, versus a top rate of 35 percent for ordinary income. That means the Bain partners saved more than $200 million in federal income taxes and more than $20 million in Medicare taxes.The blind trust says Romney is not doing this and did not benefit in this way. Ha ha ha ha. "We are not crooks". Somehow I have my doubts, and the only way to find out is to release the taxes, Mr. Romney.
The subpoenas, which executives said were issued in July, predated the leak of the Bain documents by several weeks and do not appear to be connected with them. Mr. Schneiderman, who is also co-chairman of a mortgage fraud task force appointed by Mr. Obama, has made cracking down on large-scale tax evasion a priority of his first term.
As a retired partner, Mr. Romney continues to receive profits from Bain Capital and has had investments in some of the funds that documents show used the tax strategy.So Romney's blind trust executor says what they're doing is perfectly legal. But tax expert Victor Fleischer says their use of the management fee conversion is not legal, and if challenged in court, Bain would lose (see update below).
The campaign issued a statement saying that Mr. Romney did not, however, benefit from the practice. “Investing fee income is a common, accepted and totally legal practice,” said R. Bradford Malt, a lawyer for Mr. Romney who manages his family’s investments and trusts. “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.”
House Majority leader Eric Cantor was interviewed by Fortune magazine in conjuction with the RNC convention and came out strongly in favor of fund managers being taxed at a lower rate than income or wages:
Cantor himself is forcefully on record in support of preserving the current treatment. "All I know is my position on carried interest is if you have actual risk at play, if you actually have capital at work, then there is an ownership interest in the underlying asset. It should be treated as such," he said. "Now it's a debate that we're having with the other side. The difference is with the President."The Obama campaign's "Makes You Wonder Ad" from July 17th. It may just be revived now.
Reminded that Romney hasn't spelled out his own view, Cantor said, "You'd have to ask him. I don't know what his position is on that." He said he expects a discussion of those kinds of specifics to unfold "over the next couple months."
9:46 PM PT: Two people have commented that Romney is on (video) record that he supports the 'carried interest' tax loophole, which made me look up President Obama's position on it. He campaigned on taxing carried interest as regular income, and this is stalled in Congress according to Politifact. http://www.politifact.com/...
They also say that the Obama campaign's July 17th ad "Makes You Wonder", said that Romney took advantage of the carried interest tax loophole. Unless this is evident in the one incomplete return Romney has revealed, the Obama campaign knows something about Romney's taxes they haven't revealed yet - and the subject of this investigation could be it.
Sun Sep 02, 2012 at 10:38 AM PT: Tax professor Victor Fleischer has already weighed in on Bain's use of the management fee conversion based on the Gawker documents, in a post on his blog from August 23rd.
According to him - and contrary to the statement released by the Romney campaign, Bain has used this technique, and their use of it is illegal.
Fund VII. Gawker today posted some Bain documents today showing that Bain, like many other PE firms, had engaged in this practice of converting management fees into capital gain. 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.