WASHINGTON -- Mitt Romney has repeatedly insisted during the presidential campaign that layoffs and other controversy surrounding Bain Capital companies for the past decade are not his responsibility, because he retired in 1999. When tax experts charged that he benefited from legally dubious tax avoidance strategies employed by Bain, his campaign noted that the investments are kept in a blind trust completely out of his control.
"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," spokeswoman Michele Davis said.
But according to his 2010 tax return, when the Internal Revenue Service comes calling in April, Romney has a different answer: The presumptive GOP nominee reaps lucrative tax breaks for "active" participation in the private equity firm he founded, as well as a host of other investments.
As David Kautter, a tax expert at American University, explains, the concept of active investment has different meanings for the IRS and for regular people. "When you say you're actively involved in all these businesses, people do think, OK, you're actively involved. But the tax law has its own definition," he said.
The IRS advises that "[f]actors that indicate active participation include making decisions involving the operation or management of the activity, performing services for the activity, and hiring and discharging employees. Factors that indicate a lack of active participation include lack of control in managing and operating the activity, having authority only to discharge the manager of the activity, and having a manager of the activity who is an independent contractor rather than an employee."
Even if Romney could persuade the IRS his involvement was legitimately active, that still leaves him in a rhetorical jam: For tax purposes, he claims an active status; for political purposes, he claims to have zero to do with the investments.
The distinction is valuable, for the IRS treats passive and active income and losses differently. If a passive investment loses money, the taxpayer can only write off that loss if passive gains have also been made. But active losses can be written off at a 35 percent rate and deducted from the taxpayer's ordinary income. In other words, a taxpayer wants active losses, not passive losses. So by describing many of his investments as active, Romney saves himself millions of dollars in taxes.
With those active investments, he is also securing a tax break few Americans enjoy: When he wins, he's paying a 15 percent rate on the gain. When he loses, he's writing it off at 35 percent, meaning that tax policy is subsidizing Romney's risk in his Bain investments.
In other words, Romney didn't build that, at least not without taxpayer backing.
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Federal rules allow many of these tax loopholes. But under the technical terms of the retirement package that Romney negotiated for himself, he has borne a lighter tax load than most other retired financial professionals. And the unusually large scope of his deductions and the generous rate at which they are recognized have some tax experts questioning their validity.
Romney's 2010 tax return lists $301,630 in "trade or business interest" deductions and $503,737 in "trade or business expense" deductions -- all of it described as expenses from his business partnerships, including Bain. Specifically from his various Bain-related activities, Romney scored a total of $547,525 in such deductions.
These kinds of deductions are only available to "active" participants in business partnerships. While Romney filed as an active participant for tax purposes, there is no evidence that he took part in Bain management decisions in 2010, and he has denied doing so.
The sophistication with which Romney used Bain's later efforts to boost his own income could serve as fodder for political campaign advertisements. Since Romney has been willing to profit from Bain's later activity, the Obama campaign may well argue that such practices are fair game for attack ads. Some Democrats are already on the attack.
"Governor Romney appears to be saying one thing to the American people and one thing to the Internal Revenue Service," Rep. Brad Miller (D-N.C.) said to The Huffington Post. "Right now we are just seeing inconsistent statements. The American people are entitled to know more than that. If there's a legalistic distinction, we are entitled to know what that is. ... Has he played too close to the line or over the line?"
It is also possible that these deductions are all legitimate expenses for Bain and the handful of Goldman Sachs subsidiaries in which Romney is a partner. But listing personal expenses as business expenses is not allowed.
In addition, some tax experts are surprised by the size of the deductions he takes as business expenses and the aggressive nature of the deductions.
"One question is just the amount of the expenses," said Rebecca Wilkins, senior tax policy counsel at Citizens for Tax Justice. "At half a million dollars, you have to wonder what all of that is."
Romney's income can basically be divided into two parts. His "ordinary" income triggers the top 35 percent tax rate to which America's wealthiest earners are subject. But most of his income comes in the form of capital gains, which are taxed at only 15 percent. According to the Washington Post, 50 percent of all capital gains in the United States flow to the top 0.1 percent of taxpayers.
These two different tax rates present a tempting opportunity: By applying deductions to the pool of money taxed at 35 percent, rather than the pool of money taxed at 15 percent, Romney can reduce his overall tax bill. The $805,367 in deductions from his partnerships all receive exactly this useful treatment -- which may or may not be appropriate, depending on the nature of the expenses incurred.
"What's problematic is that these expenses are being deducted at the ordinary income tax rate of 35 percent, while the related income is mostly subject to the preferential long-term capital gain tax rate of 15 percent," Wilkins said.
Whether these expenses rightly apply to the pool of money taxed at 35 percent can only be determined by accessing the tax returns of Romney's Bain partnerships, which are not public documents. But many investment partnerships recognize stock losses that could not receive this favorable treatment.
In the years after Romney insists that he ended any active role at the firm, Bain Capital companies suffered huge job losses, plant closures and bankruptcies. KB Toys may be the saddest example. The New York Times has reported that after Bain bought the toy company in 2000, KB Toys filed for bankruptcy, laying off more than 3,000 workers. Bain's aggressive financial maneuvering, however, scored a 370 percent return on its investment.
Romney's own testimony and Securities and Exchange Commission filings demonstrate that he might not have been as hands off decision-making during those later years as he's suggested. Either way, his sophisticated tax practices show that he continued to benefit not only from Bain's profits but, at least in his tax bill, from Bain's losses.
This story was updated to include IRS guidance on active investment, and to correct a reference to Schedule E.
Also on HuffPost:
SEC Filings List Romney As 'Chief Executive Officer'
According to the <em><a href="http://www.boston.com/news/politics/articles/2012/07/12/government_documents_indicate_mitt_romney_continued_at_bain_after_date_when_he_says_he_left/" target="_hplink"><em>Boston Globe</em></a></em>, Securites and Exchange Commission documents filed by Bain Capital after February 1999 list Romney as the private equity firm's "stole stockholder, chairman of the board, chief executive officer, and president."
The <em><a href="http://www.boston.com/news/politics/articles/2012/07/12/government_documents_indicate_mitt_romney_continued_at_bain_after_date_when_he_says_he_left/" target="_hplink">Globe</a></em> also found financial disclosure forms filed by Romney that indicate he still owned 100 percent of Bain in 2002, and earned at least $100,000 as an "executive" for the firm in 2001 and 2002.
As <a href="http://www.huffingtonpost.com/2012/07/12/mitt-romney-bain-departure_n_1669006.html?utm_hp_ref=politics" target="_hplink">The Huffington Post</a> reported, sworn testimony given by Romney in 2002 undermined his claims that he left Bain in 1999. In that testimony, given as part of a hearing to determine if he had sufficient Massachusetts residency to run for governor, Romney said that he "remained on the board" of the LifeLike Co., which Bain held a stake in at the time. LifeLike's 2000 <a href="http://www.sos.state.co.us/biz/ViewImage.do?fileId=20001165127&masterFileId=19961077091" target="_hplink">corporate filing</a>, filed with the state of Colorado, lists Romney as a director.
More SEC Filings
HuffPost's Jason Cherkis and Ryan Grim identified at least <a href="http://www.huffingtonpost.com/2012/07/13/mitt-romney-bain-sec_n_1671819.html" target="_hplink">six documents</a> filed by Bain Capital with the SEC from 1999 to 2001 that were signed by Mitt Romney. Most of the documents refer to Romney as the "reporting person."
'Managing Member' In 2002
HuffPost <a href="http://www.huffingtonpost.com/2012/07/15/mitt-romney-bain-capital_n_1674209.html?utm_hp_ref=politics" target="_hplink">reported</a> on a 2002 corporate document filed with the state of Massachusetts that shows Romney listed as one of two managing members of Bain Capital Investors, an entity of the private equity firm.
Signed Documents After 1999
Romney signed an SEC filing in November 1999 pursuant to Bain's partial acquisition of medical-waste firm Stericycle, <em><a href="http://www.motherjones.com/politics/2012/07/mitt-romney-bain-financial-disclosure" target="_hplink">Mother Jones</a></em> reported. The filing noted that he was the "sole shareholder, Chairman, Chief Executive Officer and President" of the Bain entities involved in the $75 million deal.
2001 & 2002 SEC Filings
<a href="http://talkingpointsmemo.com/archives/2012/07/no_romney_didnt_leave_bain_in_1999.php" target="_hplink">Talking Points Memo</a> uncovered two SEC filings from July 2000 and February 2001. In both, Romney lists his "principal occupation" as "Managing Director of Bain Capital, Inc."
1999 News Reports
As Slate's <a href="http://www.slate.com/blogs/weigel/2012/07/13/did_the_romney_campaign_create_the_swift_yachting_story_.html" target="_hplink">Dave Weigel</a> pointed out, Romney's campaign has cited news reports from 1999 that clearly state that Romney left Bain in 1999. However, those same news reports state that Romney would still be involved with the company. "Romney said he will stay on as a part-timer with Bain, providing input on investment and key personnel decisions," read one such report from the <em>Boston Herald</em>
Former Partner Speaks Out
A former Bain Capital partner, Ed Conard, said during an appearance on MSNBC's "<a href="http://upwithchrishayes.msnbc.msn.com/_news/2012/07/15/12751962-former-bain-capital-partner-says-romney-was-legally-ceo-of-bain-capital-until-2002" target="_hplink">Up W/Chris Hayes</a>" that Romney was "legally" the CEO and sole owner of Bain Capital until 2002, as an ownership battle dragged on after Romney left to take over the Salt Lake City Olympics. "We had a very complicated set of negotiations that took us about two years for us to unwind. During that time a management committee ran the firm, and we could hardly get Mitt to come back to negotiate the terms of his departure because he was working so hard on the Olympics," Conard said.
Relationships With Problematic Companies
HuffPost's Sam Stein <a href="http://www.huffingtonpost.com/2012/07/16/mitt-romney-bain-capital_n_1677133.html" target="_hplink">reported</a> that SEC filings link Romney to politically problematic companies after his alleged 1999 departure from Bain: <blockquote>A Huffington Post review of SEC files unearthed six separate occasions in which Romney was listed as a member of "the Management Committee" of both Bain Capital Investment Partners and BCIP Trust, "deemed to share voting and dispositive power with respect to" shares held of DDi. In one of those filings, Romney is listed as president and managing director of Bain Capital, Inc. The dates of those filings range from April 14, 2000 to May 10, 2001 -- all after Romney had left for Salt Lake City. In one March 2001 filing, Romney signed the document as the "reporting person."</blockquote>
According at a <a href="http://www.huffingtonpost.com/2012/07/16/mitt-romney-bain_n_1677259.html" target="_hplink">document</a> filed with the California Secretary of State's office in July 1999, Romney was listed as a "general partner" at Bain Capital Partners. Romney's signature appears on the document. Romney remained on record as a general partner until California was notified of his resignation in June 2003.