UPDATE - 9/1/12: Bain Capital is now under investigation by the New York Attorney General's office for the dubious management fee conversion described below, The New York Times reports.
WASHINGTON -- Tax experts who have begun to examine the Bain Capital documents released Thursday by Gawker are raising questions as to whether presumptive GOP presidential nominee Mitt Romney has paid all the taxes he owed.
At issue are two tax-avoidance techniques employed by Bain Capital, the firm founded by Romney, which have been commonly used in the private equity world but have come under increasing legal scrutiny.
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.
"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," writes Daniel Shaviro, the Wayne Perry Professor of Taxation at New York University School of Law. "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.
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 and says that taxpayers who engage in the practice have little legal justification for doing so. "[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. "How far out on the limb were Bain-affiliated foreign entities that were making money through total return equity swaps, and claiming not to owe U.S. withholding tax? And what should we make of this, for purposes of the presidential campaign, if what they were doing, while legally dubious, was common practice?"
"The unauthorized disclosure of a number of confidential fund financial statements is unfortunate," said Charlyn Lusk, a spokeswoman for Bain Capital. "Our fund financials are routinely prepared by auditors and demonstrate a commitment to transparency with our investors and regulators, and compliance with all laws."
Michele Davis, a spokeswoman for the Romney campaign, said that Romney is not responsible for whatever tax strategy employed. "As we have said many times before, Governor and Mrs. Romney's assets are managed on a blind basis. They do not control the investment of these assets, the investment decisions are made by a trustee," he said.
But if Bain used improper tax-avoidance techniques, the Romneys would be required to amend their returns regardless of the blind nature of the investments.
Private equity managers already get the vast majority of their income from capital gains, which are taxed a lower rate, but also take a fee -- typically 2 percent -- off the top. That management fee is income. But some private equity managers have claimed to "waive" that fee in exchange for future capital gains.
"In exchange for a minimal amount of economic risk, the tax benefit is enormous: the compensation is transformed from ordinary income (taxed at 35%) into capital gain (taxed at 15%). 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," writes Fleischer. "The problem is that it is not legal."
The IRS says the fee cannot be waived in exchange for capital gains if the income "relates to a substantially certain and predictable stream of income from partnership assets." In other words, Bain investors would need to convince a judge that their revenue stream was risky and not "substantially certain and predictable."
Fleischer says he doesn't think the tactic would hold up in court. "Because the deals vary in their aggressiveness, there is some disagreement among practitioners about when it works and when it doesn’t," he writes. "But in my opinion, and the opinion of many tax practitioners, the practices that were common in the private equity industry in the 2000s became very, very questionable, and it’s unlikely that they would have stood up in court."
But did Romney himself benefit from these maneuvers? And is Romney responsible for the legally dubious tax avoidance strategies Bain employed? Yes, Fleischer concludes:
Yes, Romney left Bain in 1999 or 2002. But as part of his severance agreement, he continues to receive interests in these funds, which he has reported on his financial disclosures. In the usual case, a departing partner would receive an economic stake in the GP (Bain Capital Partners X, LP), rather than an economic stake in the LP (Bain Capital Fund X, LP) — representing a payment for the management services he provided in the past. Indeed, because he filed an 83(b) election, we can be sure that he received GP interests as part of his severance agreement, and that he therefore benefited personally from management fee conversions.
Romney here is not like a passive mutual fund investor. He helped engineer the funds in the first place. For at least some of the funds, the fee conversion was set in place at the time of the fund’s formation — in the case of Fund VII, when Romney was the sole shareholder of the management company that actually waived the fees (2000). It seems reasonable to infer that fee conversions were in place for earlier vintages of Bain Capital funds as well. I haven’t yet reviewed all of the Gawker documents, but we are talking hundreds of millions of dollars in tax liability on these funds — one hundred million in Fund IX alone (20% of the $500 million converted), another $70 million in fund X. It is unthinkable that in the 1990s through 2002, when Romney was putting together funds, that he was unaware of the fee conversion strategy, or that he was unaware that he continued to benefit from it today.
"The Bain documents posted yesterday show that Bain Capital will go to great lengths to help its partners and its investors avoid tax," said Rebecca Wilkins, senior counsel at Citizens for Tax Justice. "Beyond simply putting their funds offshore, the Bain private equity funds are using aggressive tax-planning techniques such as blocker corporations, equity swaps, alternative investment vehicles, and management fee conversions."
Rep. Sandy Levin of Michigan, the top Democrat on the tax-writing House Ways and Means Committee, questioned the fee conversion strategy in a statement.
“[R]eports today indicating that Bain managers converted even their regular management fees into additional carried interest income that is taxed at capital gains rates is a particularly egregious example of how wealthy fund managers are able to avoid paying the same tax rates on their compensation as other Americans," he said. "This is a stark reminder of why Congress needs to act to close this loophole."
This article was updated to include comment from Wilkins, Levin and a Bain Capital spokeswoman.
King Tut's Penis
Seriously, we know more about a 3,300-year-old teen pharaoh mummy penis than we do about what lies carefully preserved in Romney's tax returns before 2010. That's either because we <a href="http://www.newscientist.com/blogs/culturelab/2010/06/on-the-trail-of-tutankhamens-penis.html" target="_hplink">know a fair amount about King Tut's mummified member</a> -- like the fact that it broke off and went missing for a while -- or because we know absolutely nothing about the pre-2010 presidential candidate's tax returns.
Coca-Cola's Secret Formula
Despite the presence of a number of <a href="http://en.wikipedia.org/wiki/Coca-Cola_formula#Purported_secret_recipes" target="_hplink">purported recipes</a> for Coca-Cola, the company has long maintained that there is only a single copy of the actual formula, kept stashed away in a safe place. Last year, however, Coke <a href="http://www.thecoca-colacompany.com/dynamic/press_center/2011/12/coca-cola-secret-formula-moves-to-the-world-of-coca-cola.html" target="_hplink">moved its secret formula</a> to a vault housed at the World of Coca-Cola in Atlanta. Sure, it was only a token step toward disclosure -- and probably more about making money -- but at least it was something. Your move, Mr. Romney.
The Bermuda Triangle
This region may be great for <a href="http://www.vanityfair.com/politics/2012/08/investigating-mitt-romney-offshore-accounts" target="_hplink">stashing tons of Romney's money</a>, but it isn't some sort of <a href="http://en.wikipedia.org/wiki/Bermuda_Triangle" target="_hplink">isosceles zone</a> of supernatural trickery. Detailed reports of notorious shipwrecks in this area have led most experts to conclude they were caused by bad weather, rogue waves or simply human error.
How To Speak Prairie Dog
<a href="http://www.youtube.com/watch?v=y1kXCh496U0" target="_hplink">Those noises</a> might sound like just a bunch of annoying, high-pitched chirps, but <a href="http://news.bbc.co.uk/earth/hi/earth_news/newsid_8493000/8493089.stm" target="_hplink">Professor Con Slobodchikoff of Northern Arizona University has more discerning ears than you</a> -- and probably a cooler name, too. Slobodchikoff says the language of the prairie dog is the most complex of any animal decoded so far. The varmints (which Romney <a href="http://www.youtube.com/watch?v=w-iRlBH3G6A" target="_hplink">may or may not enjoy hunting</a>) even have different calls for different predators. According to Slobodchikoff's studies, prairie dogs can alter their pitch and frequency to specify the size and distance of whatever is approaching.
Donald Trump's Mystery Hair
Trump and Romney might have a lot of things in common -- their mutual <a href="http://abcnews.go.com/blogs/politics/2011/04/since-president-obama-released-his-birth-certificate-will-donald-trump-release-his-tax-returns/" target="_hplink">fear of releasing tax returns</a> comes to mind. But when it comes to coiffure, they are worlds apart. There have long been questions about Trump's hair. Mainly, "What is that thing on Donald Trump's head?" Well, according to him, it's just hair, carefully manicured and positioned every morning so as to make sure that no mortal can ever catch a glimpse of his forehead. From what we know, there's actually only been <a href="http://www.youtube.com/watch?v=ezz1BkuE1Qg" target="_hplink">one known sighting</a> of that part of his body. Here's what Trump <a href="http://www.rollingstone.com/culture/news/donald-trump-lets-his-hair-down-20110511" target="_hplink">told <em>Rolling Stone</em></a> about his hair: <blockquote>"OK, what I do is, wash it with Head and Shoulders. I don't dry it, though. I let it dry by itself. It takes about an hour. Then I read papers and things. This morning I read in the <em>New York Post</em> ... I also watch TV. I love Fox, I like Morning Joe, I like that the Today show did a beautiful piece on me yesterday -- I mean, relatively speaking. OK, so I've done all that. I then comb my hair. Yes, I do use a comb ... Do I comb it forward? No, I don't comb it forward ... I actually don't have a bad hairline. When you think about it, it's not bad. I mean, I get a lot of credit for comb-overs. But it's not really a comb-over. It's sort of a little bit forward and back. I've combed it the same way for years. Same thing, every time."</blockquote>
Like Mitt Romney's tax returns, this Nevada military base is shrouded in a thick veil of secrecy. While there is undoubtedly a lot of stuff going on in there -- most of it likely far more interesting than Romney's tax history -- Americans aren't completely in the dark about the base. Since acknowledging the existence of the Air Force base, the government has predictably been hush-hush about projects at the facility. Historians have, however, have <a href="http://books.google.com/books/about/Shadow_Flights.html?id=cmMBAAAACAAJhttp://books.google.com/books/about/Shadow_Flights.html?id=cmMBAAAACAAJ" target="_hplink">written books</a> about Area 51's less juicy past. No aliens or UFOs, just some <a href="http://www.latimes.com/entertainment/la-mag-april052009-backstory,0,5104077.story" target="_hplink">advanced flight technology</a> and military procedures that have gone awry at times. But that doesn't rule out the possibility that there's a lot more going on there now. Alien spacecraft? Energy weapons? A time travel project? Your imagination's the limit. In a way, the government's approach to releasing information about Area 51 seems a lot like Romney's strategy for releasing his tax returns. Release a few boring details -- like your 2010 and 2011 forms -- only to keep everything else, presumably the most interesting stuff -- under wraps. When people ask what's going on back there, just tell them to pipe down and mind their own business. As with Area 51, Romney's method is proving an awful way to quiet speculation.
What Space Smells Like
Do Mitt Romney's tax returns smell like "seared steak, hot metal and welding fumes"? If they did, they'd smell just like <a href="http://www.huffingtonpost.com/2012/07/22/what-does-space-smell-like_n_1691642.html" target="_hplink">space</a>, according to astronaut spacewalk veterans.
The God Particle
<a href="http://www.huffingtonpost.com/2012/07/03/higgs-boson-explained-god-particle_n_1645732.html" target="_hplink">The God particle</a>. <a href="http://en.wikipedia.org/wiki/Higgs_boson" target="_hplink">The Higgs boson</a>. You say "potato," I say "potah ... Whaaa, come again?" To make a very long and nerdy story over-simplistically short, a bunch of really smart theoretical physicists have used a multi-billion dollar piece of equipment to prove the existence of the particle that gives mass to other elementary particles. They did this by blasting things at each other at near-light speed around a 17-mile tube track of death (or life?) located in a subterranean bunker in Europe. Is it possible that a mini hadron collider is listed as an expense on Romney's tax returns?
Why Sloths Are Bad At Balance And Stuff
If the captains of the animal kingdom were picking species to partake in what Mitt Romney might call "sport," three-toed sloths might get picked dead-last -- unless that sport somehow hinged entirely upon being incredibly cute. Not only are these sloths lethargic, but they're clumsy, which is actually not a problem because they pretty much only come down from trees to poop. Because their slow-motion lifestyles afford them the luxury of being able to survive without a good sense of balance, the semi-circular ear canals that control their equilibrium <a href="http://www.huffingtonpost.com/2012/08/01/sloth-balance-bradypus-variegatus_n_1728811.html" target="_hplink">have never been honed by the evolutionary process</a>.
What Dinosaur Sex Looked Like
So <em>that's</em> what it looked like, at least according to <a href="http://www.huffingtonpost.com/2012/07/09/dinosaur-sex_n_1659391.html" target="_hplink">Beverly Halstead, an Englishman </a>known for his candid talk about dinosaur mating before his death in 1991. Figuring out the "cloacal kiss" based on fossils from the Cretaceous Period must have been difficult. But it was still easier than guessing what Romney's tax returns might look like.
How To Survive The Zombie Apocalypse
While <a href="http://www.huffingtonpost.com/2012/06/01/cdc-denies-zombies-existence_n_1562141.html" target="_hplink">they tell us</a> zombies aren't real ... <em>yet</em> ... that doesn't mean people aren't preparing like there's a brain-starved horde headed straight for their front door. Countless books, movies, TV shows, comics and websites provide entertainment and ideas about the best way to make it through Apocalypse Z without becoming a zombie. The Centers for Disease Control and Prevention has <a href="http://www.cdc.gov/phpr/zombies.htm" target="_hplink">hopped on board as a joke</a>, but the government's <a href="http://blogs.cdc.gov/publichealthmatters/2011/05/preparedness-101-zombie-apocalypse/" target="_hplink">preparedness guide</a> appears to be taking it pretty seriously. Too bad the CDC is only serving up a barebones list of recommendations. Wait, why do we care about a presidential wannabe's tax returns again? I'm going to draw up a contingency plan.
What Ryan Lochte's Mom Knows About His Sex Life
Ike Lochte seems to know too much about her swimmer son's "<a href="http://www.huffingtonpost.com/2012/08/02/ike-lochte-ryans-mom-talks-one-night-stands-single-girlfriend-today-show_n_1733433.html" target="_hplink">one-night stands</a>." Way too much. Like "the opposite of how much we know about Romney's tax returns" too much.
Mitt Romney's Car Elevator
Romney reportedly shelled out $55,000 to install a top-of-the-line "Phantom Park" car elevator in his California beachfront mansion, which will allow him to "<a href="http://abcnews.go.com/blogs/politics/2012/05/mitt-romney-ordered-55000-phantom-park-car-elevator-designer-says/" target="_hplink">maintain a hands-on relationship</a> with his machines," according to the maker. Sounds kinky. Kinky enough to make me want to read more tax returns. Oh Romney -- you <em>tease</em>.
President Obama's Annoying Stoner Habit
Barack Obama was a cheeky kid who refused to observe proper stoner decorum, but author David Maraniss writes in Obama's biography that he pretty much got away with it. Here's <a href="http://www.huffingtonpost.com/2012/05/25/obama-pot-smoking-details_n_1545904.html" target="_hplink">a passage that describes</a> the future president's behavior while a member of the "Choom Gang" at his Hawaii high school. <blockquote>"When a joint was making the rounds, he often elbowed his way in, out of turn, shouted 'Intercepted!' and took an extra hit."</blockquote> We also know a little bit about Romney's adolescence. Primarily that he was kind of <a href="http://www.washingtonpost.com/politics/mitt-romneys-prep-school-classmates-recall-pranks-but-also-troubling-incidents/2012/05/10/gIQA3WOKFU_story.html" target="_hplink">a jerk</a>. More tax returns might be able to prove to the nation that he's changed a lot since then, though it's hard to think that he isn't scared they'd actually do the opposite.
<a href="http://knowyourmeme.com/memes/fcking-magnets-how-do-they-work" target="_hplink">Sorry juggalos</a>, we're pretty sure the scientists <a href="http://en.wikipedia.org/wiki/Magnetism" target="_hplink">are right</a> about this one. It's all about the magnetic fields.
Easter Island's Moai
These monoliths are frequently touted as some of earth's greatest mysteries. That's because people are lazy. Researchers actually know a lot about these gargantuan rock statues. National Geographic did a <a href="http://video.nationalgeographic.com/video/national-geographic-channel/full-episodes/explorer/ngc-easter-island-underworld/" target="_hplink">lengthy series</a> on the studies of ancient Easter Island culture, and recently announced that it may have explained one of the biggest remaining unknowns: How the moai were transported. According to a <a href="http://news.nationalgeographic.com/news/2012/06/120622-easter-island-statues-moved-hunt-lipo-science-rocked/" target="_hplink">new theory</a>, they were carved so they could be rocked back and forth, or "walked," to their destination. It would have required a lot of man power, but no trees, which the island lacked for a number of years. At least that's what the archaeology suggests. The visual comparison to the left, however, makes a compelling argument that Romney could have more direct knowledge about the mighty moai.
How Alicia Silverstone Feeds Her Baby
She "<a href="http://www.huffingtonpost.com/2012/03/29/alicia-silverstone-premastication-pre-chew-food_n_1389544.html" target="_hplink">premasticates</a>." That means she chews her food and spits it into the mouth of her son, who's named "Bear Blu," for some reason. Just like a bird. Thirty years of Romney's tax returns couldn't make you un-know that.
Amelia Earhart's Final Resting Place
The answer to this one may be as boring as Mitt Romney wants you to believe his tax returns are. While it's exciting to concoct theories about Earhart being captured, executed, or actually <a href="http://tighar.org/Projects/Earhart/Archives/Books/BookReviews/earhartsurvive.html" target="_hplink">surviving to assume another identity</a> and live out her life in the great state of New Jersey, the far more likely scenario is that she perished on a remote tropical island in the southwest Pacific. Discovery <a href="http://news.discovery.com/history/amelia-earhart-resting-place.html" target="_hplink">reports</a> that researchers believe evidence found on the island of Nikumaroro suggests Earhart and her navigator, Fred Noonan, died there after an emergency landing. In 1940, a British Colonial Service found skeletal remains on the island consistent with a woman of European descent. Near those bones lay a woman's shoe, an empty bottle and a sextant box for a piece of equipment similar to the one Noonan had used. According to Discovery, they "likely eventually succumbed to any number of causes, including injury and infection, food poisoning from toxic fish, or simply dehydration," at which point their bones may have been picked clean and carried off by enormous coconut crabs.
John Boehner's Tan
If you believe House Speaker John Boehner (R-Ohio), his tan is natural, thanks entirely to genetics, <a href="http://www.politicsdaily.com/2010/09/08/john-boehner-defends-his-famous-tan/" target="_hplink">lawn-mowing</a>, mountain biking and a heavy dose of golf. "I have never been in a tanning bed or used a tanning product," he <a href="http://www.huffingtonpost.com/2010/09/23/john-boehner-tanning-bed_n_736897.html" target="_hplink">said in a 2010 interview</a>. In the absence of any other evidence, we'll have to take his word for it. In this case, it doesn't bother me in the slightest.