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Pepperdine University School of Law

Saturday, August 25, 2012

WSJ: A Clue Emerges to Romney’s Gift-Tax Mystery

Wall Street Journal:  A Clue Emerges to Romney’s Gift-Tax Mystery, by Mark Maremont:

One of the mysteries surrounding Mitt Romney’s taxes is how the former private-equity executive managed to get $100 million into a family trust for his children without incurring federal gift taxes.

A potential clue may be found in a previously unreported 2008 presentation made by a partner at law firm Ropes & Gray LLP, which represents the GOP presidential nominee. It focuses on how private-equity executives could minimize gift and estate taxes by giving family members some of their “carried interest” rights, a major form of compensation that entitles private-equity executives to a slice of the firm’s future investment profits. ...

The attorney at Ropes & Gray wrote that in the 1990s and early 2000s estate-planning lawyers “commonly advised” that executives could claim a value of zero on these transfers of carried-interest rights for federal gift-tax purposes. He said the practice ended by 2005.

Gifts of carried-interest rights are common, but several estate-planning attorneys at major New York firms said they are puzzled by the claim that the rights ever could have been valued at zero, particularly at an established private-equity firm. They said long-standing rules require taxpayers to value all gifts at fair-market value, or what a willing buyer would pay a willing seller.

In response to a reporter’s questions, a Romney adviser said the presentation by the Ropes & Gray lawyer was aimed at educating other attorneys about industry practices, not a description of Ropes & Gray’s advice to clients. Based on the presentation, the adviser said, “you should not assume” that was the firm’s advice to clients or that Mr. Romney’s gift-tax returns ever valued carried-interest rights at zero. ...

Jay Waxenberg, an estate-planning attorney at Proskauer Rose LLP in New York who advises private-equity executives, said valuations “tend to be very low,” but he has never known anybody at an established firm claim a zero value. ...

In his 2008 presentation, the law firm partner, Marc J. Bloostein, said the basis for believing that carried-interest rights could have a zero gift-tax value stemmed partly from a 1993 IRS ruling related to income tax treatment of the rights. [Rev. Proc. 93-27, 1993-2 C.B. 343,] The IRS said taxpayers could claim the rights had no immediate value when they were received, but would have to pay capital-gains tax on any income that later flowed from them.

Mr. Bloostein indicated that gift-tax valuation practices changed by 2005, saying that although there was once “reason to think” that a zero valuation could be claimed, “it has become clear” that fair-market value is the correct standard and “it is advisable to engage a professional appraiser.”

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Romney would lose on this in court. Rev. Proc. 93-27, 1993-2 C.B. 343,] makes sense only because the IRS was trying to prevent the double tax of a law partner from paying tax on his compensation //both// when his share is accrued and when it is distributed. It has not applicable to contributions to a qualifed plan (where Romney has a $100 million by reports) nor to gifts to kids (where Romney has another $100 million). The carried interest that will mature into $100 million is not worthless when given - at our current under 1% discount rates, its value is closer to the ultimate $100 million than to zero. This would be found by a competent knowing all the facts to be an gross overvaluation abuse subject to a very hefty penalty.
There is a reason why Romney has to be so secretive about his tax return. He has dark secrets he needs to hide.

Posted by: Calvin H Johnson | Aug 25, 2012 12:24:16 PM

Calvin: That is a possible reason why Romney is "so secretive." Can you not think of any others? Perhaps one of those reasons is the same as the reason people don't announce on facebook how much they make. Perhaps not. But your statement "He has dark secrets he needs to hide" is your opinion which you should have prefaced with "I believe" and not presented as a fact.

Posted by: daniel | Aug 26, 2012 8:06:28 AM

This is the silliest article ever. Grantor trusts are disregarded entities for federal income tax purposes. There is no gift tax on transfers to grantor trusts because there is no completed gift. It has nothing to do with valuation.

Posted by: Stephanie Villasenor | Aug 28, 2012 6:13:17 AM