Posted by AzBlueMeanie:
On Thursday, Gawker published The Bain Files: Inside Mitt Romney's Tax-Dodging Cayman Schemes:
Mitt Romney's $250 million fortune is largely a black hole: Aside from the meager and vague disclosures he has filed under federal and Massachusetts laws, and the two years of partial tax returns (one filed and another provisional) he has released, there is almost no data on precisely what his vast holdings consist of, or what vehicles he has used to escape taxes on his income.
Gawker has obtained a massive cache of confidential financial documents that shed a great deal of light on those finances, and on the tax-dodging tricks available to the hyper-rich that he has used to keep his effective tax rate at roughly 13% over the last decade.
Today, we are publishing more than 950 pages of internal audits, financial statements, and private investor letters for 21 cryptically named entities in which Romney had invested—at minimum—more than $10 million as of 2011 (that number is based on the low end of ranges he has disclosed—the true number is almost certainly significantly higher).
Almost all of them are affiliated with Bain Capital, the secretive private equity firm Romney co-founded in 1984 and ran until his departure in 1999 (or 2002, depending on whom you ask). Many of them are offshore funds based in the Cayman Islands. Together, they reveal the mind-numbing, maze-like, and deeply opaque complexity with which Romney has handled his wealth, the exotic tax-avoidance schemes available only to the preposterously wealthy that benefit him, the unlikely (for a right-wing religious Mormon) places that his money has ended up, and the deeply hypocritical distance between his own criticisms of Obama's fiscal approach and his money managers' embrace of those same policies. They also show that some of the investments that Romney has always described as part of his retirement package at Bain weren't made until years after he left the company.
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When Romney left in 1999, he and his wife retained significant investments in many of those Bain vehicles—he claims they are "passive investments" and that they are managed in a blind trust (though the trustee isn't blind enough to meet federal standards of independence). But aside from disparate snippets of information contained in his federal and Massachusetts financial disclosure forms, his 2010 tax returns, and SEC filings, the nature of those investments has been obfuscated by design.
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That information—for Sankaty and 20 other funds—is now available here, in the form of 48 documents totaling more than 950 pages. They consist predominantly of confidential internal audited financial statements from 2008, 2009, and 2010, as well as investor letters from the same period, for Bain entities that Romney has previously disclosed owning an interest it. Owing to the timeframe—during and after the catastrophic economic meltdown of 2008—some of the investments show substantial losses. One limited partnership had even entered into liquidation as of October 2008 after failing to meet certain payments owed to partners. Others show astronomical gains.
The documents are exceedingly complicated. We don't pretend to be qualified to decode them in full, which is why we are posting them here for readers to help evaluate—please leave your thoughts in the discussion below.
The New York Times has taken a quick look at the document dump and reports Documents Show Details on Romney Family Trusts (excerpts):
As part of his retirement agreement with Bain, Mr. Romney has remained a passive investor in the company’s ventures and continues to receive a share of the firm’s investment profits on some deals undertaken after his departure.
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Many documents disclose information that, while routinely provided to Bain’s investors, is not typically disclosed to the public: the dollar value of Bain investments in specific companies, fees charged by Bain and other investment managers, and the value of different Bain funds in some years.
The documents also reveal that Bain held stakes in highly complex Wall Street financial instruments, including equity swaps, credit default swaps and collateralized loan obligations.
“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.”
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Bain private equity funds in which the Romney family’s trusts are invested appear to have used an aggressive tax approach, which some tax lawyers believe is not legal, to save Bain partners more than $200 million in income taxes and more than $20 million in Medicare taxes.
Annual reports for four Bain Capital funds indicate that the funds converted $1.05 billion in accumulated fees that otherwise would have been ordinary income for Bain partners into capital gains, which are taxed at a much lower rate.
Although some tax experts have criticized the approach, the Internal Revenue Service is not known to have challenged any such arrangements.
In a blog post Thursday, Victor Fleischer, a law professor at the University of Colorado, said that there was some disagreement among lawyers, but that he believed: “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.”
A typical private equity or hedge fund pays its managers in part with a management fee based on the size of the fund, and in part with a share of the profits earned by the fund. Those profits are considered “carried interest” and taxed at capital gains rates, which in recent years have been 15 percent, assuming that the underlying investment profits qualified for that treatment.
The tax strategy Bain appears to have used is intended to convert the remaining management fee — the part not based on investment profits — into capital gains. Mr. Romney appears to benefit from the carried interest structure in these funds, but it is not clear from the documents made public whether he also benefits from the fee waiver. The Romney campaign declined to comment.
In an article that appeared in the journal Tax Notes in 2009, Gregg D. Polsky, a tax law professor at the University of North Carolina School of Law, called the tax strategy “extremely aggressive” and said it was “subject to serious challenge by the I.R.S.”
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Blocker corporations, typically set up in tax havens like the Cayman Islands, can help investors avoid a levy known as the unrelated business income tax, which was created to prevent nonprofit groups from undertaking profit-making ventures that compete with taxpaying companies.
The documents also showed that some of the funds owned equity swaps, which have been used to avoid taxes that would otherwise be owed on dividends paid by American companies to foreign-based investors, like funds based in the Caymans.
The major purpose of such “swaps,” a Senate committee report stated in 2008, “is to enable non-U.S. persons to dodge payment of U.S. taxes on U.S. stock dividends.” Congress later adopted a provision intended to prevent that tactic. Parts of that provision took effect in 2010 and other parts this year. It is not clear how effective the provision will be, and final I.R.S. regulations have yet to be released.
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The 2009 financial statements of Absolute Return Capital Partners LP, a fund that maintains Cayman Island subsidiaries, reported $17.7 million in realized and unrealized profits from “equity contracts.” It was not clear if all of those profits related to total return swaps, but it is likely that at least some of them did.
That tactic is also used to avoid taxes in some other countries and to avoid restrictions on share ownership by noncitizens of some countries. In its 2010 annual report, released by Gawker, Viking Global Strategies, a hedge fund, reported using such swaps in Europe, Asia and Latin America. Romney family trusts have indirect stakes in that fund through a Goldman Sachs fund.
Like many other private equity and hedge funds, Bain and its affiliates operate several offshore funds that are domiciled in the Caymans for a variety of tax and regulatory reasons. For the most part, these Cayman-based funds are completely routine and legal, tax experts say.
Alright tax attorneys, take a look at the documents and post your comments.
UPDATE: The Washington Post also reports Bain documents reveal tax and offshore details - The Washington Post. This report seems to rely on the New York Times report.