Tax advice for those who want to be like Mitt

January 24, 2012

What advice do tax lawyers give private equity managers about saving on taxes as they build wealth?

We may get a first glimpse at the answer on Tuesday when, bowing to public pressure, Mitt Romney promises to release his 2010 tax return and a tax estimate for 2011. (See the returns here.)

To get a full picture of Romney’s taxes while he made his multimillion-dollar fortune, we would need to see returns going back to 1984-1999, which is when he ran Bain Capital Management. So far, the Republican presidential candidate has not committed to release those returns.

There’s no suggestion that the former Massachusetts governor did anything illegal. However, Congress allows managers of investment partnerships like the one Romney ran to enjoy tax-saving strategies not available to other taxpayers.

So I asked 10 lawyers in seven states how they might advise a new client who is launching an investment partnership – someone like Romney. While we do not know just what Romney’s lawyers advised, the 10 lawyers laid out nearly identical scenarios.


(1) DEFER TAX: Congress requires that most workers have income taxes withheld from their pay, but it lets investment partnership managers like Romney earn compensation now and pay taxes later, decades later. It’s called “carried interest.” Paying a tax in the future reduces its cost. Deferring a tax for three decades is the same as not paying it, the lawyers said, because the value from investing the money is far greater than the tax eventually paid. Some of the lawyers said the ability to defer will surprise people who are used to having taxes withheld before they get paid. Mitchell Gans, who teaches tax law at Hofstra Law School in Long Island, N.Y., said it takes only a minute to make clients comfortable with the idea “because it goes with the psychological phenomena that we would all rather pay later than sooner.”

(2) MINIMIZE SALARY: Take only enough salary to live comfortably, the lawyers said, and instead take as much compensation as possible in tax-deferred carried interest. The carried interest will mostly be taxed at the capital gains rate of 15 percent. By contrast, top wage earners pay tax on their highest income of 35 percent and they pay it immediately.

(3) MAXIMIZE THE VALUE OF FAMILY GIFTS: With careful planning many millions of dollars can be given to children while paying little gift tax. Make gifts in years when appraisals show the value of the carried interest is reduced because the investment is not doing well. All 10 lawyers said thorough appraisals are essential to avoid fights with the IRS over valuation, which could result in higher gift taxes and a court fight that would end up in the public record, revealing business details that would make investors shy away from the manager in the future. Romney set up what his campaign said was a trust fund now worth $100 million for his sons, but has not indicated that he will release the gift tax returns, which would show if he discounted the value of assets put into the trust and what gift taxes, if any, he paid.

(4) OBEY THE RULES: Making sure every one of the many technical tax rules is followed at all times reduces the risk that an audit dispute with the IRS or state tax authorities will spill into the public record and cause the loss of tax benefits.

(5) START A SELF-DIRECTED RETIREMENT ACCOUNT: With a self-directed account the fund manager can invest in his own deals. Some of the lawyers noted that retirement funds, including those rolled over into Individual Retirement Accounts after leaving a job, can be shielded from creditors, a valuable strategy if things go awry in the distant future. This makes retirement accounts partial substitutes for asset protection trusts, but without the stigma of asset protection trusts, which some people consider a way to evade obligations to creditors. Large retirement accounts carry no such untoward connotation, the lawyers said. However, they did caution that any asset protection offered by retirement funds comes with an increased tax. That is because any gains are taxed at the same rate as wages, 35 percent for someone like Romney, instead of the 15 percent capital gains rate. Romney’s disclosures show that he holds about a 10th of his fortune – an overall fortune estimated by the campaign at $190 million to $250 million – in retirement accounts with some of the money legally invested in the Cayman Islands and other offshore funds.


I asked the lawyers if their advice would differ for clients whose background suggested they might run for public office someday. They split on this.

Some said that their advice would be the same. Others, noting the attacks on Romney by Republican rivals over his offshore accounts or the blistering comments at many websites by individuals, said they might raise the issue of how voters would react to offshore investments, which are legal but not widely understood by Americans who are misled to believe by movies and films that they must be improper.

PHOTO: Republican presidential candidate and former Massachusetts Governor Mitt Romney speaks during a roundtable discussion about housing issues in Tampa, Florida January 23, 2012.   REUTERS/Brian Snyder


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I was furious when seeing Romney’s returns. I don’t care about the amount of money, but anyone who runs for office in the USA and who has accounts in the Cayman Islands and secret Swiss bank accounts should be automatically disqualified from running for office. Why would any true-blooded American have foreign accounts? Secrecy and tax avoidance, which are basically the same thing. IT IS ESSENTIAL TO SEE HIS TAX RETURNS FROM 1994 until now. I want to see HOW HE RAN HIS BUSINESSES and investments at Bain Capital. It will not only shed light on Romney, but also how the private equity process works. Those were Romney’s formative years and he will be using those skills in Public Office. He needs to COME CLEAN with those records or give up NOW!

Posted by NeoDemo | Report as abusive

Of course, when all the rules are stacked in your favor, you have the option of doing all of these things.

For those who are not wealthy, their options are extremely limited and not likely to be able to accomplish a single one of them.

That’s what is wrong with this country, and it is prevailing attitudes characterized by this article that will bring this country down hard.


Posted by Gordon2352 | Report as abusive

PseudoTurtle will remember the time (not so long ago) when we had true accelerated depreciation (not ACRS), income averaging, ITC (Investment Tax Credit), and many other opportunities to lower earners to have some control over their taxes. The tax “reform” acts of the late 1980’s were a great reason why I abandoned tax accounting as a profession. I would think most who are familiar with the past tax code would agree that simplifying the tax code did not mean making it fairer.

Posted by rocque | Report as abusive

PseudoTurtle: And yet we keep on electing rich (or soon to BE rich) lawyers to make the rules. Then they make them in such a way that THEY get to trade on inside information they get in the course of the “public servant” charade they put on as campaigners.

“We” (the people) have a variant of Battered Wife Syndrome. It’s like we’re saying, “Go on back to Washington for your umpteenth term and beat me up again, it hurts so good.”

Posted by TerryOtt | Report as abusive

Disagreed – any hard working individual could start a small business and accomplish each of these items.

Further, when you state that “managers of investment partnerships like the one Romney ran to enjoy tax-saving strategies not available to other taxpayers” you make it seem that only a Bain capital type firm gets these tax breaks which is incredibly misleading (I presume this is your intention based on the general sentiment of your previous editorials). In fact, you could start a partnership and go into just about any type of business and have these benefits available to you.

The problem is that the American people are largely financially illiterate, which is exemplified by one of your closing lines “offshore investments, which are legal but not widely understood by Americans who are misled to believe by movies and films that they must be improper.”

Americans miss many tax breaks they could take, they don’t start their own companies and take the entrepreneurial route, and they don’t know enough about business/politics/economics to understand that the Leftist model of taxing the rich and giving handouts to the poor is doomed for failure.

Posted by jaham | Report as abusive

Well all I can say is when these folks like Romney tell me that they aren’t breaking any laws it makes me sick… first, the laws are made for them to evade jail, and they make sure they are that way by bribing everyone they can find that has any association with that law. Secondly, and much more important, that justification surely doesn’t square with the spirit of being a good American and Christian. I liken it to being on the battle field, and leaving your wounded buddy behind… nothing says you have to go through the firing line again to pull him to safety, but your morals, and commitment to country… by the way two important things this country was built on…

Posted by WD7179 | Report as abusive


Agreed. That loser gave $7M to charity in 2010 to lower his tax bill. What a loophole exploiting louse!

Posted by jambrytay | Report as abusive

@ jaham,

and what of all the taxing of those down the income ladder to give to the rich which I have documented in this column and in my book Free Lunch? There are whole industries who derive all of their profits taxpayer gifts and specific companies I have identified.

Most of what you consider redistribution is actually just timing differences — all newborns get subsidies (education, for example) and so do old people (SS if they contributed to the system and Medicare if they can afford the co-pays) while in between they work and pay taxes to fund these systems to those born before and after them. The issue is whether the pricing is correct, but the theory of redistribution for these common goods (education, healthcare) is flawed as they are paid for by those who benefit.

@Carl and @jambrytay, when you give away cash or property to a public charity you do not have it; your economic resources are diminished. No one is better off for having made the gift except for gifts of appreciated property if viewed on the basis of the difference between the cost basis of the gift and its appreciate value offsetting ordinary income. A charitable remainder trust, for example, is less valuable to a family than a commercial trust because of the cat of the gift.

Posted by DavidCayJ | Report as abusive

When Mr. Romney must start taking minimum distributions from his IRAs, perhaps we’ll see how much has been stashed in those tax-favored vehicles, over and above the taxable capital gains of $21 million.

Is it the actions of others which caused him to recognize these capital gains, or something over which he has control?

Posted by LVTfan | Report as abusive