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Wednesday, August 8, 2012

Kleinbard & Canellos: Romney's Role in Tax Shelter Raises Questions

CNN op-ed:  Romney's Role in Tax Shelter Raises Questions, by Edward D. Kleinbard (USC) & Peter C. Canellos (Wachtell, Lipton, Rosen & Katz, New York):

A key troubling public manifestation of Romney's apparent insensitivity to tax obligations is his role in Marriott International's abusive tax shelter activity.

Romney has had a close, long-standing, personal and business connection with Marriott International and its founders. He served as a member of the Marriott board of directors for many years. From 1993 to 1998, Romney was the head of the audit committee of the Marriott board.

During that period, Marriott engaged in a series of complex and high-profile maneuvers, including "Son of Boss," a notoriously abusive prepackaged tax shelter that investment banks and accounting firms marketed to corporations such as Marriott. In this respect, Marriott was in the vanguard of a then-emerging corporate tax shelter bubble that substantially undermined the entire corporate tax system.

Son of Boss and its related shelters represented perhaps the largest tax avoidance scheme in history, costing the U.S. many billions in lost corporate tax revenues. In response, the government initiated legal challenges that resulted in complete disallowance of the losses claimed by Marriott and other corporations.

In addition, the Son of Boss transaction was listed by the Internal Revenue Service as an abusive transaction, requiring specific disclosure and subject to heavy penalties. Statutory penalties were also made more stringent to deter future tax shelter activity. Finally, the government brought successful criminal prosecutions against a number of individuals involved in Son of Boss and related transactions, including principals at major law and accounting firms.

In his key role as chairman of the Marriott board's audit committee, Romney approved the firm's reporting of fictional tax losses exceeding $70 million generated by its Son of Boss transaction. His endorsement of this stratagem provides insight into Romney's professional ethics and attitude toward tax compliance obligations. ...

What emerges from this window into corporate tax compliance behavior is the picture of an executive who was willing to go to the edge, if not beyond, to bend the rules to seek an unfair advantage, and then hide behind the advice of so-called experts to deflect criticism when a scheme backfires.

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"apparent insensitivity to tax obligations"

i would argue he is exquisitely sensitive to tax obligations, which is why he did things (as everyone does) to reduce those obligations

Posted by: xxx | Aug 8, 2012 12:00:50 PM

CNN: From 1993 to 1998, Romney was the head of the audit committee of the Marriott board. ...Romney's campaign staff has attempted to deflect responsibility, arguing that he relied on Marriott's tax department and advisers. This claim is disingenuous.

This attack is so pathetic. It's no wonder that CNN has only two or three viewers remaining.

Do they think that any board member has the time and expertise to sign off on every audit and tax schedule and should personally research all applicable tax laws and court cases? Do they think that CEO's review every workpaper in a financial audit when he approves it? No, they rely on experts to do the diligence work. What a bunch of Obamamedia idiots.

But, then you have to like this: What the picture of an executive who was willing to go to the edge, if not beyond, to bend the rules to seek an unfair advantage, and then hide behind the advice of so-called experts to deflect criticism when a scheme backfires.

You would think that this better describes Obama.

Running a business is a lot more complicated than being a community organizer, and Obama couldn't even do that right with all the vote and financial fraud committed by his ACORN associates. Oh, it's Bush's fault.

Posted by: Woody | Aug 8, 2012 12:33:08 PM

Odd that Tax Cheat Tim of the Obama Treasury was not asked to comment.

Posted by: DonM | Aug 8, 2012 1:56:01 PM

Most tax shelter sold to corporations are not favored by tax directors. They are usually pushed by the CFO who wants to stay tight with his auditors or is pushed by some friend of the promoter. Most Corporations like Koch Industries and a number of conservative corporations would not touch these shams. What this does show is that the Board pretty much just rubber stamps what management wants without asking questions. Romney was only following suit. Is that good or bad? Do you want a president who does this? Obviously Woody has never dealt with "Son of Boss" or ever run a corporate tax department. His comments are made by one who does not know he doesn't know as we would say at Koch.

Posted by: Sid | Aug 8, 2012 2:38:16 PM

Sid, the "offenses" for which Romney is accused date back to 1993, a period before board members and audit committees became as accountable as they are today. There was nothing unusual in Romney's role and reliance on professionals at that time.

Unless someone knows of a specific instance in which Romney personally directed an illegal tax scheme, then there is nothing here. The authors revealed that there were criminal convictions, but they conveniently left out that Romney wasn't even charged.

Your speculation about who knows how much about the subject should be directed to the CNN article authors. All they know about taxes is that when someone says "Romney and taxes," they wet their pants and slobber all over themselves to cover it.

Now, can we get off of speculative lies about Romney's taxes and worry about the fact that 15% of workers cannot find work, have given up, or applied for disability. Do you want to keep the current occupant of the White House, who is responsible for that and is clueless when it comes to managing our nation and econony, or do you want to whine about baseless speculation over Romney?

Real US unemployment: More than 15%

Posted by: Woody | Aug 8, 2012 4:35:32 PM

Kleinbard and Canellos's argument typifies the uninformed view of armchair tax lawyers who have never actually tried a complex tax shelter case. Their baseless contention is that Romney, as a director and audit committee member, allowed Marriott to engage in a Son of BOSS tax shelter despite his knowledge that the transaction was risky and abusive.

False. As true students of Son of BOSS case law know, the Marriott transaction in 1994 was an early outlier that predated the later flood of widely promoted Son of BOSS shelters by roughly five years. In their eagerness to tar Romney, Kleinbard and Canellos raise the fact that the IRS named the Son of BOSS a listed transaction. But Kleinbard and Canellos neglect to mention that the IRS did not list the Son of BOSS shelter until 2000 (IRS Notice 2000-44), six years after Marriott entered into its Son of BOSS transaction. The omission is surely intentional on Kleinbard's part, given his service on the Joint Committee on Taxation. Kleinbard should, and does, know better.

In short, whatever the merits of the Marriott transaction, it is a gross distortion of history to claim, as Kleinbard and Canellos do, that Marriott and Romney should have foreseen, in 1994, the disapprobation that Son of BOSS transactions earned years later.

Posted by: Jake | Aug 8, 2012 5:43:27 PM

Is there any topic on which Woody is not willing to display his ignorance? You just simply have to admire the single-minded simplicity he can bring to anything.

Posted by: Anonymous | Aug 8, 2012 8:46:57 PM

I'm getting tired of reading Kleinbard's partisan attacks masked as law professor commentary.

Posted by: Anonymous2 | Aug 9, 2012 6:26:01 AM

Woody is quite correct about audit committees. In 2002 Sarbanes-Oxley imposed greater oversight duties on audit committees. Those duties do not relate back to 1993. Whether or not audit committees in 1993 should have conducted their business under post-SarbOx standards is beside the point. What matters is that, by trying to tar Romney with the audit committee brush, Kleinbard and Canellos again distort history and miss the mark. Don't they have competent editors at CNN?

Posted by: Jake | Aug 9, 2012 7:05:32 AM

Anonymous, perhaps, in your perceived superior wisdom, you would be willing to address all of my points and reveal, rationally, why you believe them to be wrong, and then allow me to destroy your claims. Otherwise, you're simply engaging in emotional, non-substantive personal name-calling, which only shows your ignorance.

There are few things more frustrating than listening to someone in academics (of which the chances are substantial that you are) who smugly claims to know everything but whose positions turn out to be theoretical with a left-wing bias and little application to reality.

Posted by: Woody | Aug 9, 2012 8:02:33 AM

This is really rich coming from these two. Why do such otherwise intelligent people think they can get away with an appearance of objectivity in such a context? Perhaps Mr. Kleinbard forgot that part of his testimony to the Senate Finance Committee in 1999 when he said: “It is not easy (indeed it may be impossible) to define "tax avoidance transaction" in a way which effectively catches strictly tax-motivated transactions without catching the tax-motivated aspects of legitimate business transactions. . . . We note, moreover, that efforts to define "tax avoidance transaction" using such concepts as whether a transaction "improperly eliminates tax on economic income" or "creates a tax benefit which is not clearly contemplated by the applicable provision" introduces a "normative" concept which cannot be found in objective rules.” And perhaps Mr. Cannellos forgot his firm's role in Valero Energy's tax shelter activity. Of course, the teenagers who run CNN's website would have no clue.

Posted by: TexEcon | Aug 9, 2012 8:28:08 AM

As usual Woody, you pop off without reading the article. Kleinbard and Canellos do not suggest that "any board member has the time and expertise to sign off on every audit and tax schedule and should personally research all applicable tax laws and court cases." Marriott's purchase and use of the "Son of Boss" tax shelter was a major corporate action that required board approval. Romney, rightly or wrongly, was looked to by the Marriott board as an expert on such matters. Romney signed off on the purchase of the tax shelter and that action required appropriate due diligence on his part. He failed miserably on that point, with Marrott taking a major financial hit on paying the taxes due with interest, plus penalties, not to mention the inflated purchase price of the shelter.

Your second post attempts to make the point that Romney is not a criminal because he was not prosecuted along with others who were. Either you don't know or don't understand that only the "inventors" and purveyors of "Son of Boss" and similar shelters were prosecuted criminally. No purchasers of the shelters were prosecuted. Thus, Romney, like all other purchasers of SoB, was not prosecuted.

Last Woody, I agree with you that running a business is complicated. It is difficult and challenging to run a complex organization efficiently, with the challenging and singular goal of maximizing shareholder value over the short and long term. But I suggest that it is infinitely more difficult to run a government that was purposely designed to be inefficient (I'm sure that even you have heard of "checks and balances" and "separation of powers"), with multifaceted and contradictory goals of ensuring security and freedom, prosperity and general welfare, and justice along with the blessings of liberty. Corporate executives have a lot of experience in the former, but none at all in the latter.

Posted by: Publius Novus | Aug 9, 2012 9:05:29 AM