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Mitt Romney’s Tax Dodge

A guide to how the multimillionaire twists the law to hide his massive fortune – and avoid paying his fair share in taxes

Mitt Romney illustrationMitt Romney illustration

Mitt Romney illustration

Illustration by Robert Grossman

How does a private-equity kingpin worth at least $250 million pay a lower tax rate – just 14 percent – than many teachers and firemen? By exploiting tax loopholes that favor the rich and hiding his money in the world’s most notorious havens for tax cheats. That’s what Mitt Romney has done, according to his 2010 and 2011 tax returns, a trove of secret Bain Capital documents unearthed by Gawker, and exposés by Bloomberg and Vanity Fair. “The bottom line,” says Rebecca Wilkins, senior counsel at Citizens for Tax Justice, “is that these are ways to reduce your taxes that are only available to rich people.”

Are Romney’s tax dodges legal? It’s impossible to say for sure, given how little he has disclosed. But tax experts note that there are plenty of red flags, including an investigation by New York prosecutors into tax abuses at Bain Capital that began on Romney’s watch. “He aggressively exploits every loophole he can find,” says Victor Fleischer, a professor of tax law at the University of Colorado. “He’s pushing the limits of tax law beyond what many think is reasonable.” Indeed, a look at Romney’s finances reveals just how skilled he is at hiding his wealth – and paying a fraction of his fair share in taxes.


On his 2010 tax return, Romney disclosed that his wife Ann’s trust held $3 million in a Swiss bank account at UBS, which had just been busted by the IRS for abetting criminal tax evasion by U.S. citizens. As part of a $780 million settlement, UBS was forced to turn over the names of thousands of its long-secret clients, who were then offered a partial amnesty: disclose their hidden assets, pay penalties and avoid prosecution. Romney – who had omitted the Swiss account on previous financial disclosures – suddenly came clean. Did he reveal his secret account to avoid prosecution for tax evasion? “He’s not quite denied that,” says Daniel Shaviro, a professor of tax law at NYU. The record of paying an IRS penalty on the Swiss account could explain why Romney has been so determined to keep his 2009 tax return under wraps.

Greed and Debt: The True Story of Mitt Romney and Bain Capital


Romney has buried an unknown, and perhaps significant, chunk of his wealth in what SEC filings describe as “a Bermuda corporation wholly owned by W. Mitt Romney” – driving speculation that the candidate is worth far more than he has disclosed publicly. Wealthy Americans frequently launder investments through such offshore shell companies, passing themselves off as foreign investors – a scam that makes them exempt from paying U.S. taxes, even on profits from American deals. Romney created his shell company, Sankaty High Yield Asset Investors, in 1997 and reportedly involved it in many of Bain’s biggest deals, including the takeover of Domino’s Pizza. Yet he failed to report its existence on any financial disclosures prior to his 2010 tax return, even though it is under his control. “What is this corporation? What does it do? Why was it set up in a tax haven?” asks Wilkins. “There’s a reason why it’s in Bermuda.”


In 2000, when Romney was CEO of Bain, the firm hit the jackpot: A $40 million investment in the Italian yellow pages during the tech boom returned an astonishing $1 billion. Romney himself reportedly ended up with $50 million – a cut larger than Bain’s initial investment. To evade taxes on the gains, Romney steered the profits through Bain subsidiaries in Luxembourg, Europe’s most notorious tax shelter, where the money would be exempt from foreign taxes. In 2009, as a board member for Marriott, Romney also helped the hotel chain use the same tax tricks to shelter more than $200 million in Luxembourg. Marriott wound up paying less than half the corporate tax rate – just 16.9 percent.

Mitt Romney’s Real Agenda


Romney has nearly $30 million stashed in at least a dozen Bain funds in the Cayman Islands, where, as one filing boasts, investments are free from “income, estate, transfer, sales, or other Cayman Islands taxes.” But because some of those funds are directly invested in U.S. companies, they likely disclose their investors to the IRS, making them unattractive to tax cheats. So Bain also raises capital for its deals by selling shares in “feeder funds” – intermediary entities that invest in Bain’s official funds, but don’t have to make disclosures to the IRS. “If you want to cheat, they’ve rolled out the red carpet for you,” says Wilkins.

Has Romney paid all his taxes on the shady funds? Only he and the IRS know for sure. But even if Romney never cheated personally, the feeder funds he appears to have invested in cater to tax criminals, making it easier for him and his Bain partners to raise capital and rake in big management fees.

Romney is profiting from one form of tax evasion in the Caymans: equity swaps. Under this racket run by top Wall Street banks, American firms pay out their profits – tax-free – to investment funds based in the Caymans. According to a Senate investigation, the purpose of these complex instruments is “to dodge payment of U.S. taxes on U.S. stock dividends.” Romney has more than $1.25 million invested in four funds that profit from equity swaps – including two managed by Goldman Sachs.


Romney has stockpiled as much as $87 million in his IRA – even though contributions to such retirement accounts are limited to just $30,000 a year. “Congress never intended IRAs to be used to accumulate that kind of wealth,” says Wilkins. To get around the limits, Romney appears to have directed his IRA to invest in a special class of Bain stock. By assigning an artificially low value to the shares, Bain ensured that any returns would be wildly inflated – as much as 30 times the initial investment. By buying rigged stock with his limited IRA dollars, Romney got to reap the bonanza tax-free.

Romney also padded his IRA by investing in “blocker funds” that Bain has set up in the Caymans. Such funds attract tax-exempt investors – like college endowments or Romney’s IRA – that want to avoid paying the Unrelated Business Income Tax, a 35 percent penalty designed to prevent tax-exempt investors from having an unfair advantage over for-profit businesses in private-equity deals. But by buying shares in offshore blocker funds that then invest in Bain and other takeover artists, investors like Romney bilk the Treasury out of $100 million a year. “It’s an absurdly easy escape,” says Shaviro.


For political purposes, Romney claims his investments are held in a blind trust that he doesn’t actively manage. (In fact, the trust sees just fine: It’s managed by a close friend and is invested heavily in his son Tagg’s hedge fund.) But if Romney told the IRS he were merely a passive investor, he wouldn’t qualify for his most notorious tax break: the loophole for carried interest.

Here’s how it works: Bain partners earn a cut of the profits from the investments they manage – usually 30 percent. This “carried-interest” is not a return on any personal investment they made – it’s just another form of compensation, like an ordinary paycheck. Yet under the carried-interest loophole, the earnings are taxed at the capital gains rate of 15 percent, rather than the income-tax rate of 35 percent. (They’re also completely exempt from payroll taxes, which support Social Security and Medicare.) “When Romney says, ‘I have a low tax rate because most of my income comes from investments,’ that’s not really true,” says Fleischer. “He’s receiving carried interest in exchange for past services.”

Indeed, more than a decade after he left Bain, Romney is still booking carried interest as though he were actively leading the firm. Ann Romney’s blind trust also claims carried interest, for allegedly “performing services” for a Bain fund in the Caymans. In the past two years alone, the loophole has allowed the Romneys to dodge $2.6 million in taxes.


Not content with the carried-interest boondoggle, Bain also uses a scheme known as fee conversion to transform smaller management fees – which are supposed to be taxed as regular earnings – into investment income taxed at only 15 percent. A Bain manager simply “waives” his right to his fee and is instead staked an investment of equal value in the private equity fund. Because the manager can then cherry-pick from the fund’s investments, he is virtually guaranteed a rich return – flouting the spirit of the lower tax rate on capital gains, which is designed to reward investors who take risks with their money. “Because they didn’t receive the cash, they claim that it’s not a taxable event,” says Fleischer. “It’s not legal.” New York’s attorney general has launched a criminal investigation into the practice.

Romney denies he took part in such waivers, which may have robbed the Treasury of up to $220 million. But according to Fleischer, Romney’s financial records suggest he “benefited personally from fee conversion.” He also served as the sole shareholder in the firm that set up the deals, making him legally responsible for determining how Bain structured them.


Romney has shifted enormous wealth – as much as $100 million – into a family trust, a fortune he doesn’t include in the $250 million estimate of his net worth. His campaign admits he paid no gift taxes in transferring assets to the trust, even though individual gifts above $13,000 are subject to taxation. A direct gift of $100 million would have incurred a tax hit of at least $29 million, according to Michael Graetz, a former Treasury official under George H.W. Bush.

How did Romney skirt the limits on gifts? Tax experts believe that he made his contributions to the trust in the form of the carried interest he received from his Bain funds. For income-tax purposes, the assets were technically valued at zero, because the gains would not be taxed until the fund’s investments were cashed out years later. In reality, though, Romney could have sold his carried interest to a third party for millions – making it absurd for him to pretend that his gift had no market value. Yet even if the move was illegal, Romney has nothing to fear: Tax returns on gifts are almost never audited, and they can’t be challenged at all after three years.

Romney also used a scheme called an “intentionally defective grantor trust” to dodge the gift tax. Instead of having the trust pay taxes on its profits, Romney pays the tax bill himself. That keeps more money in the trust – amounting to another massive transfer of wealth that evades the gift tax. Even worse, the trust is exempt from the estate tax – meaning Romney’s heirs will eventually pocket some $31 million they would have owed in taxes had he not siphoned off his fortune into the trust, tax-free.

This story is from the October 25th, 2012 issue of Rolling Stone.

In This Article: Election 2012, Mitt Romney


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