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I’ve worked around minor league financial tycoons for most of my adult life, and the one common objective among them (from the honest progressive ones to the straight up rogues) is a quest to defer (not evade) income taxes. The reason is obvious. For every dollar I don’t have to pay this year in taxes is two dollars (using only 50% leverage) I can invest in my next deal. I have two dollars working, courtesy of Uncle Sam, instead of none.  I will happily pay the tax years from now when I cash out the investment.  So here, below,  is how I read the letter from Price Waterhouse about Romney’s taxes.

I begin with  the assumption that a partner at PWS would not lie, and that their letter does not contain an untrue  statement.

The methods of tax deferrals for professional investors are everywhere in the tax code. Buying stock in a company that appreciates every year for 20 years is the most obvious.  If you are a real estate investor,  the Section 1031 deferral technique is available (more about that later for any one who cares.)  The ones many of you out there use is the IRA.  Invest pre-tax dollars today in your higher-income years and pay the taxes  many years from now when you retire and start drawing out those  dollars in your lower-income retirement years.

For every year that your investment appreciates, or that you contributed to your IRA, from an accounting standpoint, you owed taxes on the increase or the contributions, but you didn’t have to pay it.  If an accountant prepared your financial statements for your banker, for example, you would not be allowed to claim the value of your investments without an offsetting liability for deferred income taxes, because to do otherwise would be deceptive. Is that what  is going on with Mitt and PWC?

The whole “sworn letter from my accountant” is of course peculiar  (unless you are merely trying to assure your potential partners in an investment that you have the weight to make the investment required) but the wording is far more peculiar.  Why owed, not paid?

I think I know how Mitt jacked the value of his IRA from zero to over $100 million on 20 years or so, but the exact technique is not necessary to understand the attempted slight of hand he is trying here. Every year that the value of my IRA increases in value, I owed taxes on that increase, but I didn’t have to pay it.  That is, the tax is deferred until I start cashing out of the IRA.  Mitt could owe over $20 million on that IRA in federal income taxes and if you average that back over 20 years, you can say he owed at least $ 1 million a year in income taxes.  Is that what the PWC letter says? I have no idea, but it could be saying that.  This analysis also makes truthful the PWC representation that Romney has paid all taxes due.

 The exact calculation of the percentage of taxes owed could  be performed only by someone with full access to Mitt’s returns, so my analysis is largely speculation, approaching a theory.  

I wake up every morning thinking  “all of what I know could be wrong”, so I will not feel bad if a reader destroys this theory with a better understanding of the tax laws, so have at it.

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Comment Preferences

  •  So let me get this straight. You are saying he (9+ / 0-)

    slid some investment into his IRA valued at a price so that it met maximum contributions rules. PWC is saying he owes taxes on the humongous increase for every year it has increased in value but that those taxes are unpaid and payable only when withdrawn... SO maybe he wants to become president so he can get laws changed so that he doesn't have to pay taxes on those withdrawals... Maybe that is why he wants to privatize sociall security insurance because then all those seniors would suddenly need to be tax free on the withdrawals from 401 Ks (those who have them)and so would sympathize with him.

    I also thought that the % age they say he pays in taxes does not refer to only federal taxes. He owns so major property which even his tax lawyers get tax breaks on them would be a big tax bill... And if he has servants he has to pay some taxes for them too... so maybe that is part of what he adds together to get to 13% which by the way is lower rate then my sister earning 15,000 a year pays as a single woman (which includes paying social security and medicare for over 40 years which he wants to give himself and the 1% a tax cut).

    It is all in the parsing and careful word choices... There is something he is hiding, I don't care what PWC says.... I know how lawyers and accountants can  make a client look like a saint. My brother is a CPA and he laughs at the shennagins as he calls it.

    How can you tell when Rmoney is lying? His lips are moving. Fear is the Mind Killer

    by boophus on Fri Sep 21, 2012 at 04:47:09 PM PDT

  •  I noticed a comment somewhere else that also (8+ / 0-)

    focused on the owed vs. paid question.

    So those, like you,  in the know are starting to recognize unusual terminology when they see it

    Oh well, I'm sure Mitt and his accountants will be more than happy to clear that up . . . soon . . . very . . . . very . . . . . .soon.

    “Human kindness has never weakened the stamina or softened the fiber of a free people. A nation does not have to be cruel to be tough.” FDR

    by Phoebe Loosinhouse on Fri Sep 21, 2012 at 04:55:20 PM PDT

  •  Parsing is always a red flag. (7+ / 0-)

    They chose the words very carefully and that means something. Unless they are all incompetent and just threw that word, owed, out there carelessly.

    Also, a notarized letter is a freaky thing to do. It just means the guy wrote it. They could have upped the authenticity, gravitas level on that if they chose to. As it is it means little more than "trust me".

    "Mitt Romney seems like the kind of man who immediately rushes off to wash his hands after sex. Really. Don't you think so?" My mother in law!

    by lexalou on Fri Sep 21, 2012 at 05:20:57 PM PDT

  •  Your tags are not quite correct. (1+ / 0-)
    Recommended by:

    I can't comment on the substance, I know zilch about tax law. Tip & Rec for the obvious effort. :)

  •  no, I don't think that's what's going on. (0+ / 0-)
  •  This diary would be more useful with some links (0+ / 0-)

    back to what your specific points refer to.

    I'm reading gallons of this stuff daily now, and I really don't have the time/energy to go back to refresh (reacquaint) myself or learn for the first time what your taking off points were.

    But I appreciate your writing and I also look forward to whatever it is that johnny wurster is going to add.

    Thanks for posting.

  •  There's a contradiction between Harry Reid and (1+ / 0-)
    Recommended by:

    the PWC statement.

    Could it have to do with the often-suggested  IRS offshore bank account voluntary disclosure program (aka 2009 tax amnesty)?

    I spent some time tonight reading about it on the IRS website.

    Link for others who want to study the lengthy FAQ:

    Perhaps Harry Reid's informant was correct and Rmoney managed to arrange his financial affairs for some years so that no taxes were due. Not perhaps attractive for a potential Presidential candidate, and may be something he wouldn't wish to disclose, but not technically illegal gven the state of our current tax code and the passion that some high-earners have for tax avoidance schemes.

    Perhaps, too, an offshore account existed and financial increases in it were not reported, since it was formerly believed that the existence of these accounts would never be disclosed.

    Times changed and that assumption became false, so holders of these accounts were forced to disclose them voluntarily, or risk serious criminal penalties (as opposed to just monetary penalities.)

    It appears from my reading of the IRS' FAQ that one of the key components to successfuly completing the voluntary disclosure and getting it accepted (aka receive tax amnesty) is to file amended annual tax returns that included income contained (or from) the previously undisclosed accounts for the years covered by the program.  The look-back period extends eight years.  Couple that with the consequent need to pay the taxes owed on the income in the accounts (which could not be retroactively reduced by tax-avoidance strategies at that point), along with the 20% (in)accuracy penalty and interest  for each year and you might have the basis for truthfully (though tardily and only semi-voluntarily) asserting that Federal taxes were owed and paid on more years than they might have been when originally filed.

    Plus - and here's the stick that goes with the carrot of avoiding criminal penalties and potentially an even more onerous penalty for failing to voluntarily disclose the accounts -  there's an additional  penalty of 27.5% of the highest balance on the account(s) for any of the years covered by the disclosure.  

    So it seems to me this scenario could resolve the Reid/PWC contradiction about whether taxes were due and paid every year. Reid's informant was correct as far as the original tax filings being without taxes due; but subsequent amended filings for these same years, perhaps driven by something like the offshore account tax amnesty program changed that.

    And at the same time it might have offered some useful fodder for the peculiar PWC tax rate calculations and statement. These amended tax years might have had peculiarly high tax rates on this fraction of Rmoney's income because it couldn't be massaged into non-taxable places. Since for these years the bulk of his income might already - and perhaps irrevocably  - have been strategically tax-protected  (Reid's thesis)  these newly-revealed components of his income might have had outsized tax-rate consequences. And remember the PWC statement was only about the average of the tax rates for the years covered, not the average rate of taxes paid on the reported income itself.   Big difference! I don't know whether or not PWC would blush to include any penalties or interest that arose from a voluntary disclosure in the tax rate computations in order to boost the average rate.

    Of course, without the actual tax returns this is all speculation.  

    I would be most interested to read a more informed commentary on this. I am definitely not a tax expert, nor an accountant.


    •  Thanks for this insightful analysis... (0+ / 0-)

      ... The letter is too cleverly written!  While some in the media have said "case closed,"  I cannot understand how anyone could come to this conclusion.  The conclusions reached in the letter could have been reached from any number of possible circumstances, and many of those circumstances do not reflect well on Mr. Romney.  

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