Last week, after the Todd Akin flurry died down, news outlets realized that a hot Romney story almost got lost in the midst of that firestorm. As you may already know, Gawker published over 950 pages of confidential Romney and Bain Capital financial activity. The Stew has spent the past few days examining those documents. This is the first of our reports on what we found. Close examination yields a few troubling facts that demand the release of Mitt Romney’s tax forms to clarify hints of illegal financial activity and possibly tax fraud.
Before we continue, we must first make it known that a Bain spokesperson confirms the authenticity of the Gawker documents:
“The unauthorized disclosure of a number of confidential fund financial statements is unfortunate,” said Alex Stanton, a Bain spokesman. “Our fund financials are routinely prepared by auditors and demonstrate a commitment to transparency with our investors and regulators, and compliance with all laws.”
However, this stockpile of data shows that Mitt Romney has some serious explaining to do, and that word-of-mouth explanations and deflections have now become grossly insufficient. Mitt Romney owes the American public much, much more than he has given us so far.
Mitt and Anne Romney have consistently maintained that he “has always paid the legal amount of taxes and not a penny more.” However, findings from the Gawker documents reveal that Mittens might have been playing a game of Three-Card Monty with the IRS, and a semantics game with the public at large. For if there is a crafty redefinition of what is “legally taxable”, one might safely assume that all required taxes may not have been paid. Bain Capital, as the Gawker documents explain, “is an intricate suite of inter-related holding companies and limited partnerships some based in Delaware and others in the Cayman Islands, Luxembourg, and elsewhere, designed to collectively house roughly $66 billion in wealth in its many crevices and chambers.” Earnings and dividends are shifted around in this maze in such a way that taxable income becomes either totally un-taxable or is redefined in such a way that qualifies it for a much lower tax rate. Outlined below are two practices revealed in the Gawker documents that tax experts now say are potentially illegal or even downright fraudulent
Potentially Illegal Tax Dodging
Management fees for running a private equity firm are classified as earned income, and are taxable at a rate of 35%. However, if that money is then shifted offshore through the Bain maze, it can be disguised as “carried interest” and the earner pays a much lower 15% Capital Gains tax rate. Does the reader now see why Mitt Romney’s Budget Plan proposes the elimination of taxes on Dividends and Capital Gains? As Victor Fleischer – Professor of Law, University of Colorado explains:
Because the management fees for a large private equity fund can be ten or twenty million per year, the tax dodge can literally save millions in taxes every year.
The problem is that it is not legal.
Fund VII. Gawker 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.
We know by his own account, that from 1984 to 1999 Romney earned management fees for running Bain Capital. We also know that Bain routinely practiced the conversion of management fees to “carried interest”, a practice that tax experts like Victor Fleischer deem illegal.
Potentially Fraudulent Tax Dodging
Equally disturbing is the use of offshore accounts to avoid taxation on US dividend-paying stock. This tactic is called a “total return equity swap,” because it involves swapping real stock equity for derivative paper investments that provide all the same dividends as the stock itself. The stock derivatives, however, are totally tax free. In this scheme, dividends taxable at 15% are shunted to an offshore account and redefined in such a way that no taxes are owed. Daniel Shaviro explains how this process works:
This use of total return equity swaps, such as to avoid the U.S. dividend withholding tax, was very widespread for more than a decade, and may not be dead yet, although the IRS issued a shot-across-the-bow Notice concerning the practice in 2010. 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. (For example, in a lot of these deals even the exact timing of dividend payments had to be replicated in the swap.) Given that considerations of economic substance are relevant to ownership determinations for U.S. federal income tax purposes (i.e., “tax ownership”), the 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).
In other words, those who continued to employ the use of total equity return swaps after the IRS made its public announcement in 2010 could still be charged with fraud, since the intent of the law was then made patently clear. Perpetrators cannot now claim that they “paid all the legally required taxes” simply because the IRS failed to enforce. The tact itself was deceptive, and employed with the intent to pay zero taxes on otherwise taxable income. Gawker documents reveal that four of the equity and hedge funds Mitt Romney invests in engage in equity swaps. Further, Viking Global Equities LP and Taconic Capital Partners 1.5 LP, two hedge funds that the Romneys are invested in via a Goldman Sachs so-called “fund of funds,” also reported equity swaps in statements Gawker obtained. According to the New York Times report, banks benefit hugely because equity swap transactions allow them to dodge the federal 30% tax rate on dividends involved in such a deal. Is it now clear, reader, why Wall Street is investing so heavily in the Romney campaign? Under Mitt Romney, such practices – through the proposed elimination of Dividend and Capital Gains taxes – will become legal. Romney clearly believes in evolution, because corporate raiding will devolve into full scale raiding of the federal coffers, and the country will run through increased taxation of working-class Americans.
The above revelations bring us to another current issue. Considering the evidence in the Gawker documents that Romney is heavily invested in “total return equity swaps”, and that through this practice US dividend-paying income receives a 0% tax rate, these findings give credence to Harry Reid’s claim that a Bain investor tipped him off that Romney paid zero taxes in ten years. We also know from tax experts that such a practice is potentially fraudulent.
Full-time Partnership With Bain
The Romneys admit to receiving money in 2010 and 2012 from Bain Capital Find VIII LP. According to Gawker [emphasis added]:
The audited financial statements we’ve obtained from those offshore funds are refreshingly clear on the tax consequences of not being located in the United States. Here’s how the 2009 audited financial statement for Bain Capital Fund VIII LP, a $3.7 billion fund in which the Romneys had invested more than $1 million as of 2011, put it:
The Partnership is a qualified intermediary and intends to conduct it operations so that it will not be engaged in a United States trade or business and, therefore, will not be subject to United States federal income or withholding tax on its income from United States sources…. Under the current laws of the Cayman Islands, there are no income, estate, transfer, sales, or other Cayman Islands taxes payable by the Partnership.
Gawker further points out that:
Bain Capital Fund VIII LP recorded a $643 million net increase in capital for the nine months ended September 2010 from its investments in Burlington Coat Factory, FleetCor, and other American (and international) firms, and distributed $572 million of that to its partners. The fund’s manager, Bain Capital Partners LLC, is a Delaware corporation located at Bain Capital’s Boston headquarters.
So the idea that Bain’s funds aren’t “engaged in United States trade or business” is a laughable fiction; earnings through the fund should indeed be subject to US taxes.
On the heels of Gawker document drop, Mitt Romney sought to change the subject. After seeing how prodigiously effective Akin’s “legitimate rape” comments were at distracting the news media, Romney decided to prolong the hijacking of the public consciousness with elements of the absurd. In a patently obvious rendition of “watch the birdie”, Romney chose to issue his very first “birther” comment loudly and on the national stage. To this the Obama campaign rightly shot back – that the comment was a distraction from real issues. It certainly was an attempt to distract from all the above issues raised by the revelation of these documents.
May we now see those Tax Returns, Mr. Romney? Ten years’ worth would suffice.
Read PART TWO of our analysis on the Gawker Files HERE