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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, September 3, 2012

WaPo: Mitt Romney Exited Bain Capital With Rare Tax Benefits in Retirement

Washington Post, Mitt Romney Exited Bain Capital With Rare Tax Benefits in Retirement:

Before Mitt Romney retired from Bain Capital, the enormously profitable investment firm he founded, he made sure to lock in his gains, both realized and expected, for years to come.

He did so, in part, the way millions of other Americans do — with the tax benefits of an individual retirement account. But he was able to turbocharge the impact of those advantages and other tax breaks in his severance package from Bain in a way that few but the country’s super-rich can ever hope to do.

As a result, his IRA could be worth as much as $87 million, according to his estimates, and he can continue to earn tax-advantaged income from Bain more than a decade after he formally left the firm. ...

Romney’s former colleagues say his retirement package is a well-justified reward for a chief executive who built Bain from scratch in 1984 into a financial powerhouse that backed business successes such as Staples and the Sports Authority.

The structure and tax treatment of his retirement, including the IRA, was legally sound and appropriate, they say, adding that he has earned less money over his career than some other top private-equity executives, who earned billions of dollars during the same period.

Details of Romney’s retirement assets are somewhat vague because he has released only one year of full tax returns and declined to provide additional specifics about his personal finances. But interviews with Bain executives and accounting professionals show that he was able to take advantage of tax benefits in innovative ways open only to a narrow slice of extremely affluent people — mostly those who work in private-equity firms and other investment partnerships.

His severance package, for instance, allowed him to continue sharing in the profits of the company as if he were still a partner managing it, according to his 2010 tax return and interviews with present and former Bain executives. And because he benefited from the firm’s investments as if he were an active Bain partner, he paid taxes at a lower rate on these earnings than if they were treated as ordinary retirement income. Romney negotiated the package when he was leaving the firm, Bain executives said, while he set up his IRA long before. ...

Michael Graetz, who served in the Treasury Department under President George H.W. Bush, said massive IRAs such as Romney’s do not reflect the intent of the laws that created the accounts as a way to help working Americans reach financial security. “One need not have $100 million in an IRA in order to accomplish retirement security,” said Graetz, who teaches tax and retirement policy at Columbia Law School. “The law deliberately set limits in order to restrict the revenue losses to the Treasury.”

Another tax expert, Edward Kleinbard of the University of Southern California, who reviewed the prices of some A- and L-shares, said Bain may have undervalued the A-shares, providing a benefit to insiders. Kleinbard, a Democrat and former chief of staff of the Congressional Joint Tax Committee, said the valuation of such shares should reflect real market prices.

But Jack Levin, a tax lawyer who has represented Bain, said the share prices at Bain were worked out “by all the investors at arm’s length based on the company’s prospects and economic condition at the time of the investment.” He said the increase in the value of Romney’s IRA reflected business smarts, not questionable investment practices. “There is nothing magical about it,” Levin said. In the years that Romney ran Bain, the company earned more than a 50% return on investment on average each year. Even a lower rate of return, 26% a year, combined with a regular investment of new funds in the account would give Romney “more than $100 million in his IRA account today,” according to Levin, a lawyer at Kirkland & Ellis. He noted that there was nothing improper about amassing so much wealth. “There is nothing in the tax law that prohibits an IRA from earning as much as the sponsor’s investment acumen allows him or her to earn,” he said.

Another way in which tax rules have favored Romney’s post-Bain financial situation is through the treatment of his severance package from Bain. Again, he benefited from a tax break in a way that is available to very few. His retirement earnings receive what is called the “carried interest” deduction. That’s an accounting classification that treats certain income from private-equity firms and other partnerships as capital gains and taxes it at a rate of 15%, rather than as ordinary income at 35%. ...

Tax experts say Romney can legally share in the carried-interest profits and take the deduction if Bain has agreed to the arrangement. Critics of the carried-interest deduction say this example highlights how the tax break can be abused. “Carried interest was intended to motivate managers going forward,” said Victor Fleischer, an expert in carried interest at the University of Colorado law school. “In cases like the Romneys, it just shows it is really all about fancy tax planning. It’s not motivating managers going forward. Not only is Mitt not providing any future services, Ann never did.” ...

Some tax experts worry that the arrangements Romney benefits from set a bad precedent for a president. “He looks for every tax angle to a degree that is unbecoming in someone who would be the executive in command of the administrative apparatus that enforces the tax law,” said Lee Sheppard, a tax lawyer and contributing editor for Tax Analysts, a publication for accounting and legal professionals.

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During this last week of being bombarded with more articles on Romney's taxes, another 374,000 people filed unemployment claims.

Stupid comment of the day: "He looks for every [legal] tax angle to a degree that is unbecoming in someone who would be the executive in command of the administrative apparatus that enforces the tax law."

Posted by: Woody | Sep 3, 2012 7:52:02 AM

This was just a lame attempt by the Obama administration to discredit him as a law abiding citizen of the United States. To the degree it worked im not sure, but from my point of view.. He used strategies that anyone else in his shoes would of used as well.

Posted by: Barbara Cruz | Sep 3, 2012 2:56:52 PM

Whoa Ho...Pe&#s envy cropping up all over the place! "It's legal but it's unbecoming" Is that the way you want your tax accountant to think?

Posted by: bill mc | Sep 4, 2012 1:16:27 AM