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Thu Aug 23, 2012, 10:43 PM

Bottom line: Romney has not paid all the taxes required by law. (Victor Fleisher, CO Law Prof)

This is by the Colorado professor who blogged about the tax evasion strategies revealed in the Bain info dump today.

http://victorfleischer.com/archives/306

SNIP

Management Fee Conversion. Current law on carried interest is already a sweetheart tax deal for private equity, but why not make it better? Private equity folks are not the type to walk past a twenty-dollar bill lying on the sidewalk. In the 2000s it became common for private equity fund managers to “convert” their management fees into carried interest. There are many variations on the theme, but here’s how many deals worked: each year, before the annual management fee comes due, the fund manager waives the management fee in exchange for a priority allocation of future profits. There is minimal economic risk involved; as long as the fund, at some point, has a profitable quarter, the managers get paid. (If the managers don’t foresee any future profits, they won’t waive the fees, and they will take cash instead.) In exchange for a minimal amount of economic risk, the tax benefit is enormous: the compensation is transformed from ordinary income (taxed at 35%) into capital gain (taxed at 15%). Because the management fees for a large private equity fund can be ten or twenty million per year, the tax dodge can literally save millions in taxes every year.

The problem is that it is not legal. Because the deals vary in their aggressiveness, there is some disagreement among practitioners about when it works and when it doesn’t. But in my opinion, and the opinion of many tax practitioners, the practices that were common in the private equity industry in the 2000s became very, very questionable, and it’s unlikely that they would have stood up in court.

Fund VII. Gawker today posted some Bain documents today showing that Bain, like many other PE firms, had engaged in this practice of converting management fees into capital gain. Unlike carried interest, which is unseemly but perfectly legal, Bain’s management fee conversions are not legal. 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

SNIP

Bottom line: Mitt Romney has not paid all the taxes required under law.

7 replies, 1866 views

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Reply Bottom line: Romney has not paid all the taxes required by law. (Victor Fleisher, CO Law Prof) (Original post)
pnwmom Aug 2012 OP
Marie Marie Aug 2012 #1
Mnemosyne Aug 2012 #2
pnwmom Aug 2012 #3
Angry Dragon Aug 2012 #4
mzmolly Aug 2012 #5
defacto7 Aug 2012 #6
pnwmom Aug 2012 #7

Response to pnwmom (Original post)

Thu Aug 23, 2012, 10:50 PM

1. Your last sentence says it all.

And THAT is why he won't release them. Why hasn't this man been audited? Oh, that's right - he's rich.

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Response to Marie Marie (Reply #1)

Thu Aug 23, 2012, 10:56 PM

2. I was audited a couple years ago, with a $15,000 income. Says it all. nt

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Response to Marie Marie (Reply #1)

Thu Aug 23, 2012, 11:00 PM

3. He claims he has been audited.

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Response to pnwmom (Original post)

Thu Aug 23, 2012, 11:45 PM

4. Willard -- the great American liar and fraud

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Response to pnwmom (Original post)

Fri Aug 24, 2012, 01:10 AM

5. Ethics aside, I agree ... that doesn't sound

legal.

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Response to pnwmom (Original post)

Fri Aug 24, 2012, 01:39 AM

6. audited by whom?

his equity funds manager?

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Response to defacto7 (Reply #6)

Fri Aug 24, 2012, 01:41 AM

7. Hah. I'll have to check that quote. n/t

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