You Can Bet Romney Doesn't Stash Millions of Dollars in Cayman Islands to Work on Its Tan

01/27/2012 02:40 pm ET | Updated Mar 28, 2012

Mitt Romney's tax returns and financial disclosures reveal that Romney has millions of dollars stashed in Cayman Islands funds. According to ABC News, Romney has as much as $8 million invested in at least 12 Cayman Islands funds, and another investment worth between $5 million-$25 million domiciled in the Caymans.

There are many places in the world -- including the United States -- to safely park millions of dollars in assets. People don't seek out a P.O. Box in the Caymans to stash their cash to help their money get a deeper tan. The generally do so to lower their taxes, to take advantage of bank secrecy, or both. This is almost certainly true of Romney.

According to the Wall Street Journal, Romney has tax-deferred IRA retirement accounts valued at between $20.7 million and $101.6 million which hold stakes in 13 investment entities run by Bain Capital.

The most likely reason for Romney investing substantial amounts in Cayman Island funds is to legally launder millions of dollars in Romney's IRA retirement money to avoid or defer paying an obscure 35% US tax called the Unrelated Business Income Tax (UBIT).

Taxes can be pretty boring, but stay with me a minute. Although income from IRAs are generally tax deferred, the 35% UBIT tax is an exception. A 35% UBIT tax is assessed on retirement accounts which invest in an unrelated trade or business, and/or which uses debt. Since the Bain funds in which Romney's IRA put much of their money often invest in ongoing businesses, and since to increase returns they are likely highly leveraged through the use of debt, a substantial amount of Romney's IRA income could be in danger of losing its tax deferred status and being taxed at 35%.

But smart, highly-paid tax lawyers and accountants have come up with a neat trick to shelter to 0.01% individuals like Romney who invest their IRAs in Bain-type hedge funds and private equity funds from paying this 35% American tax.

Romney's IRA may, as his trustee claims, be set up in the US. But Romney's filings suggest that many of the Bain entities in which it invests are likely set up offshore in the Caymans. The Cayman entities (called offshore blocker corporations by tax experts) may invest in ongoing businesses and use leverage without owing US taxes. When the earnings on the Cayman-based funds are repatriated to Romney's US IRA as dividends, they're no longer treated as taxable Unrelated Business Income.

The US IRA investment may be legally laundered through the Bain funds in the Caymans and the 35% US UBIT tax avoided. Presto Chango!

Oh, and then there's the question of Romney's Swiss bank account, which his trustee closed in 2010 as Romney was preparing to run for the presidency. Was Romney's money parked in Switzerland to work on its skiing? Or is it that you wouldn't want to have money in a Swiss bank account when you're running for President, for Pete's sake?

The deeper you drop down the rabbit hole of Romney's fortune, the "curiouser and curiouser" things become, as Alice in Wonderland famously said.

POSTSCRIPT: An interesting question for further investigation by an enterprising reporter is how Romney accumulated $20.7 million-$101.6 million in his tax-deferred IRA account in the first place. The annual IRA contribution limit for ordinary Americans is $4,000-$5,000, and , if part of Romney's IRA was rolled over from a 401(k) account when he left Bain Capital, the annual limit on 401(k) employee and employer contributions, depending on the year, is $30,000-$35,000 plus some potential further matches for "highly compensated" individuals. Even with the deferred income in Romney's IRA compounded at extremely high rates, it's hard to imagine how the IRA grew to tens or hundreds of millions of dollars... Curiouser and curiouser.