Bain documents show how it lowered taxes

This photo taken Aug. 7, 2012 shows Republican presidential candidate, former Massachusetts Gov. Mitt Romney campaigning in Elk Grove Village, Ill. Barack Obama's backers roll out a new ad assailing Mitt Romney's business record at Bain Capital, while the Republican candidate seeks to paint the Democrat as a big-government liberal. (AP Photo/Charles Dharapak)

Gawker posted 950 pages of internal documents Thursday from companies affiliated with Bain Capital, where Republican presidential candidate Mitt Romney made his fortune. The website asked readers to help it sort through the elaborate financial transactions described in them.

WHAT THE DOCUMENTS SHOW

The documents reveal a complicated web of partnerships and investments typical for a private equity firm like Bain but rarely looked at closely by the public. The biggest discovery among the documents was a controversial technique used by many firms to reduce the partners’ taxes.

* Colorado tax law professor Victor Fleischer noted that Bain, like many other private equity firms, converted some management fees into carried interest so that the tax rate would be lower. He says that means Romney did not pay as much on taxes as he should have:

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. …

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

* Bloomberg writes that the conversion “had the effect of turning fees that would be taxed at ordinary income rates, as high as 35 percent, into capital gains, taxed at a rate of 15 percent.”

* The New York Times calculates that Bain partners might have saved “ than $200 million in income taxes and more than $20 million in Medicare taxes” from the conversion.

* The Financial Times points to an IRS rule “which might mean the practice is tolerated.”

* But a 2009 article in the journal Tax Notes by University of North Carolina law professor Gregg D. Polsky argued that “the IRS can make quite strong arguments under current law to deny managers the tax benefits they seek in converting fees.”

WHY IT MATTERS

Although he often cites his experience in business, Romney has resisted explaining in much detail exactly how Bain Capital operated and plans to release only two years’ worth of his tax returns, which showed he paid a federal income tax rate of 13.9 percent in 2010. The documents provide more fodder to critics who say Romney has not been transparent enough.

HOW ROMNEY RESPONDED

Campaign spokeswoman Michele Davis: “Governor and Mrs. Romney’s assets are managed on a blind basis. They do not control the investment of these assets, the investment decisions are made by a trustee. Furthermore, the trustee does not decide where funds he invests in are domiciled, the sponsors of the funds do.”

WHAT PEOPLE THINK

A July poll by Gallup showed that 54 percent of Americans think Mitt Romney should release more tax returns and 37 percent think he should not. Among Democrats, 75 percent thought he should release more returns, while 53 percent of independents felt the same way, and just 30 percent of Republicans agreed.

WHAT HAPPENS NEXT

A Romney adviser said he will make his 2011 tax returns available on Oct. 15. Previously, only a partial return was available for that year as accountants were still preparing the returns.

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