Romney’s gift from Congress

January 31, 2012

When the Romney campaign disclosed in December that the couple’s five sons had a $100 million trust fund, I suspected that, in setting up the fund, the Romneys used a tax strategy that allows some very rich people to avoid paying gift taxes. But it was impossible to know if this was the case without seeing their tax returns going back years.

So when Mitt Romney released the family’s 2010 tax return last week, I went looking. I found a hint on pages 132 and 134 of the return. It showed that the value of property placed that year into another family trust, the Ann D. Romney Blind Trust, was, for tax purposes, zero. The Ann Romney trust is not the same trust as the one that holds the Romney sons’ $100 million, but I wondered if the Romneys used the same approach in prior years when it came to valuing property placed into the sons’ trust.

Reuters emailed the Romney campaign spokeswoman to ask how much the Romneys paid in gift taxes on assets put into the sons’ trust over the last 17 years. The spokeswoman, citing Brad Malt, the Romney family tax lawyer, answered: none.

The idea that someone could pay zero gift taxes on contributions to a $100 million trust fund may surprise people who have heard arguments that the wealthy are overburdened by gift and estate taxes. But the Romneys’ gift-tax avoidance strategy is perfectly legal.

Under tax rules, wealthy people must pay a gift tax of 35 percent on gifts above a lifetime limit known as the “unified estate tax credit.” That limit was $1.2 million for a married couple in 1995 when the sons’ trust was created and $2 million in 2009, but is now $10 million.

So, if the limit is, at most, $10 million, how did the Romneys create this $100 million fund without paying gift taxes?

The explanation may stem from how the Romneys were able to value the assets put into the trust. If I’m right, it involves a special tax deal that Congress gives to people who manage investment partnerships, as Romney did at Bain Capital from 1984 to 1999.

This deal allows these managers to receive a kind of compensation known as “carried interest.” As the tax law sees it, carried interest does not represent ownership of stock or other securities, only the right to receive future profits. Because there is no ownership, the IRS lets people value their carried interest at zero for gift tax purposes if they meet certain technical rules. We asked the Romney campaign if carried interest was involved several times in emails. The campaign declined to comment about this and other specifics.


To understand how this works conceptually, imagine your employer gave you a bonus in company stock.

You would owe income taxes immediately on the stock as compensation, and it would be taxed at the same rate as a cash bonus. And if you gave the stock to your children, you would owe, on stock above $10 million, a gift tax of 35 percent of the market price on the day you gave it away.

Now imagine that instead of giving you stock outright, your employer gave you only the right to future increases in the value of company shares – which, like carried interest, is just a right to some potential future income. You could give that right to your children and legally tell the IRS that its value was zero provided they hold onto it for several years.

This would be legally true, even if the company’s stock had been steadily rising for years and was virtually a sure bet to continue going up in value. Of course as a matter of economics it would be a very valuable gift to your children.

The scenario of transferring a right to something of value in the future and valuing it at nothing shows up on the Romneys’ 2010 tax return, which reveals two contributions to the Ann D. Romney Blind Trust. Both contributions were valued at zero.


The Romney campaign declined to confirm that this is what happened with the sons’ trust. Malt, the family tax lawyer, and spokeswoman Andrea Saul have declined to go further than Malt’s statement that the contributions fell below the unified credit.

The campaign, which set up an email address for journalists with questions about the tax returns, did not offer any comment nor did it respond to specific questions, including whether any of the personal or trust returns had been audited, whether any adjustments had resulted and whether the gifts to the sons had been completed more than three years ago, which would put them beyond any review by the IRS.

There are other perfectly legal techniques that would also allow many millions of dollars to be passed on while avoiding gift taxes.

The Romneys could attain the same result by putting into the trust any asset whose value was expected to rapidly increase. They could also use a trust that creates an annuity for themselves for a few years provided the trust assets grew much faster than the minimum interest rate payout set by the IRS each month. In each of these cases the parents would pay any income taxes and that is just what the Romneys’ 2010 and preliminary 2011 tax returns show. They report the trust income as their own and pay the taxes on the income the trust earned from its rapidly appreciating assets — but no gift taxes.

How much income will flow from these gifts is known only to the Romney family and to Malt, who works at the Ropes & Gray law firm in Boston.

Mitt and Ann Romney appear to have complied with the law. What’s at fault is the law. Congress treats ordinary taxpayers one way and managers of private equity and hedge funds like Mitt Romney another. It’s also a fiction that there is a lifetime limit on tax-free gifts of $10 million when Congress lets unlimited sums pass untaxed this way.

Will this change? It’s hard to say, given the gridlock in Washington. But President Barack Obama’s State of the Union message could signal a new direction. In a speech that mentioned taxes 34 times, he proposed sweeping changes in the tax code, a message that could resonate in the 2012 campaign and in Congress in 2013. Watch this space.

PHOTO: Republican presidential candidate and former Massachusetts Governor Mitt Romney (L) introduces his sons Tagg (2nd L), Craig (3rd L), Josh (2nd R) and Matt, as his wife Ann (C) looks on, at a campaign rally in Des Moines, Iowa January 3, 2012, the day of the Iowa caucus.   REUTERS/Brian Snyder


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Astounding. I bet there is a loophole that existing regulations could close, and I wish some ambitious IRS lad would take it on. Perhaps it’s simply an irony that this gamey republican has a multi-million dollar property that is valued at zero for sake of untaxed hand-me-down to his kids. The ultimate in underwater mortgages?

This is just the sort of practice that put occupiers on Wall Street, and is what the tea-baggers would be angry about if they could be bothered to think their anti-tax sentiments through to the logical conclusion.

Posted by hyperlux | Report as abusive

“Congress treats ordinary taxpayers one way and managers of private equity and hedge funds like Mitt Romney another.”

In a way it’s surprising that the American people haven’t revolted already. But then they are up against a very effective campaign aimed at discrediting any notion that there are reasons to revolt. The above quote intimates the question, why? It’s hard to imagine any other answer besides private equity and hedge fund managers are big contributors to political campaigns. So they get what they want. In today’s America if you’re wealthy you can buy influence in our government. In fact, that mode of business is just about the only mode our government functions in now. If you aren’t a millionaire you don’t exist as far as our government is concerned. THIS is what has to stop.

There are a lot of people who have been, and continue to be, critical of the Occupy Wall Street movement (particularly on the right) and their reasons are as varied as the reasons the protesters are protesting. But this op-ed really gets to the bi-chambered heart of the matter: Americans live in a system that is grossly unfair and we are being governed by a corrupted system of government. One way or another, this has to change and change in a big way. This also underscores why electing Mitt Romney as our President at this point in time makes about as much sense as it would have to deny George Washington the Presidency after the Revolutionary War.

Thank you, David Cay Johnston, for another lesson on how our nation is REALLY run. Voices like yours are few and far between in our corporate-guided news media.

I strongly encourage you and all like-minded journalists to use whatever influence you might have to get the issue of government corruption into the Presidential debates. I found it deeply disturbing that it wasn’t brought up during the 19? 20? Republican debates. At least one carefully worded, detailed question about our government’s corruption must be asked during the Presidential debates.

Posted by doggydaddy | Report as abusive

David Cay Johnston has been reporting on our skewed tax code – and a lot of other billion-dollar ripoffs – since before it was cool.

Do you realize that while he sleeps at night Romney makes more than $2,400 an hour?

Posted by mschladen | Report as abusive

The bigger question is: Should we tax gifts at all?

I personally think we should not.

Posted by jaham | Report as abusive

The issue with carried interest income is that it is not guaranteed. One has a reasonable expectation receiving it, but it is not guaranteed. Have a crash like 2008 and lots of funds will be under their high water mark and not pay any carried interest.

So, without the carried interest exclusion, Mitt could gift $100mm, pay $35mm in gift taxes, and the next year have the remaining $65mm in value wiped out. Clearly that works just as poorly as does the zero dollar valuation.

Perhaps we need to move to only cash accounting for taxes instead of the current accrual method. Like that anyone could defer their taxes as long as they like, but when they pay out, taxes get paid too.

Posted by PapaDisco | Report as abusive

Great work David!

Posted by StuartLevine | Report as abusive

This will NEVER change!

Now we can see how Romney (his tax lawyer) has squeezed every inch of the tax code for his maximum benefit. But this is no lost to congresspeople; on the contrary, it would be very interesting to see how many of them also benefit from it including their families.

All of this is done at the same time that Romney and other GOP hypocrites blasts those who receive welfare as if they were guilty of being unemployed.

Romney is particularly hypocrite. He sees the breadcrumbs being taken by the poor and the impoverished but it is not bothered by him taking over the bread bakery!!!

And I wonder what “sacrifice” their children have made to be rich before sweating a single drop!!!

As a country, we are doomed.

Posted by ecogabriel1 | Report as abusive

Thanks for taking time to research this esoteric but important trick for getting around taxation. This is just one of many loopholes that you can use to avoid paying taxes, as long as you have enough money to hire some really smart attorneys just to help you get even more rich.

Somebody get Stephen Colbert on the phone and ask him to fund some ads that explain this concept in plain language. Even the people that are voting for Romney right now would be appalled.

Posted by Nullcorp | Report as abusive

Apparently, the candidate is deeply concerned about what is legal but not regarding what is morally correct.

Romney gives more to the Mormon church each year than he spends paying taxes.

Posted by breezinthru | Report as abusive

Apparently, the candidate is deeply concerned about what is legal but not regarding what is morally correct.

Romney gives more to the Mormon church each year than he spends paying taxes.

Posted by breezinthru | Report as abusive

We shouldn’t blame the man for taking advantage of his opportunities; and obviously he can afford to hire the most acute advisors to give him the benefit of every loophole ever known to man.

But if the Romneys were one of the families who supported the effort some years back to create loopholes for the very rich, that’s another matter.

I’m reminded of this quote: “I believe in the division of labor. You send us to Congress; we pass laws under which you make money …and out of your profits, you further contribute to our campaign funds to send us back again
to pass more laws to enable you to make more money.”
— Senator Boies Penrose (R-Pa.), 1896, citing the relationship between his politics and big business.

What do we know about the Romney’s political contributions over the years? I’m sure they’ve been in support of his own interests and worldview, and the interests of his children.

We ought not to blame him for taking advantage of every loophole that was created for people in his position. Rather, we ought to change the system. Electing him is not going to change that system.

(Churchill have a fine speech in 1909 saying that we ought not to blame landlords for growing wealthy under the current system; rather, we ought to change the system. See “The People’s Rights,” an eloquent speech.)

Posted by LVTfan | Report as abusive

This article is misleading. Everyone is given this general allowance on gifts under chapter 26, section 102(a). The Trust that Mitt has set up only gives the children a possibility of money in the future. There might not be any at all, that’s the risk.

The important piece of the puzzle that was left out is that the children will have to pay taxes on the gain, and their basis will be zero, so they will have plenty of tax burden in the future.

Posted by ChrisSiebenaler | Report as abusive

Only little people pay taxes.

Posted by El_Monstro | Report as abusive

There’s another angle here: Romney has set up a pension plan for his five sons, presumably at $20 million each. And what have the sons done to earn the money? Meanwhile Republicans and corporate Democrats are slashing pensions for people who actually work and whose pensions are often deferred wages?

Somehow it’s okay for wealthy people to give free money to their kids but it’s not okay for society to do similar through welfare programs, disability, health care, and help many more people. I guess it’s the color of your skin that matters, the weight of your wallet, and your ability to scam the system. Romney also is second generation wealth and benefitted at least from his father’s connections.

Democracies can’t survive full blown aristocrats with the ability to fund endless generations. This is an excellent example.

Posted by FredFlintstone | Report as abusive

Ah, the rich! If they aren’t different when they start out, they certainly become so. Does this special pension plan for his sons require that they not serve in any U.S. military service when their father is so pro war, so happy to rattle sabers for other people’s sons to take up and fight? Are they only their father’s five-man army?

Posted by jlj | Report as abusive

I admit upfront I’m not a long time reader of Mr. Johnson’s. Did he do this kind of exhaustive work on McCain? What about Obama? Kerry? I have absolutely no problem with Romney earning $2400 an hour while sleeping. What do Buffet, Gates, Buffet’s secretary earn while sawing logs? I hope to someday be able to earn some cash while crashing. It’s the way you get rich!

Posted by wildbiker | Report as abusive

@ wildbiker, I have been writing about the tax returns of politicians in both parties for a very long time, as well as anyone else who’s return gets into the public record, like Donald Trump’s first five tax returns, which you can read about in my 1992 book Temples of Chance. Or when the Clintons paid twice the income tax required by law, which is all the more amazing since they paid about $9,000 per year to have their returns prepared.

The next year they changed the way they did their taxes, which meant they paid less and charity got more since proceeds from Mrs. Clinton’s two books went to charity.

Posted by DavidCayJ | Report as abusive

Must be nice to be able to start out life as a $20 million plutocrat trust fund child. This is why the estate tax was enacted, to cut down on big money family dynasties. We’ve seen how well those work out with the Bush family.

Posted by borisjimbo | Report as abusive

What I can’t figure out is why, when the US government has provided such a lucrative field for Romney to harvest, he doesn’t seem to think that the US government has done anything that he should be grateful for. No one likes paying taxes and I don’t think anyone should be taxed at anything even approaching the 50% or even 40% rate, but surely something like 25 – 30% would not be unreasonable for someone who has benefited so greatly from the US economy, which is upheld by the US government. It seems rather haughty and ungrateful to me.

And valuing any property whatsoever at zero is just a flat out lie. This kind of manipulation to avoid paying taxes has got to go. Flat taxes using the Bowles Simpson guidelines would be a better solution. No gimmicks and no games.

Posted by lhathaway | Report as abusive

The tax laws are written to protect the interests of the rich. This certainly will not change if we continue to elect very wealthy people like Romney, Bloomberg, etc., to high office.
I recall many years ago, when Nelson Rockefeller was interested in becoming Governor of NY State, I was asked to sign a petition to place him on the ballot. The argument to try to convince me to sign was “he is so rich, he wouldn’t steal.” Well to quote a famous ballad(Pretty Boy Floyd), “some rob you with a six-gun, and some with a fountain pen.”
And as David Cay Johnston points out, it is all legal!

Posted by GrandpaBob | Report as abusive

two questions If this is a carried interest. Should it not have appeared on his financial statement before it was transferred to his son’s trust ( also his own carried interest). Even if he valued it as zero his future earnings would be tied to the future value of Bain. Therefore, he has a vested interest in Bain Capital and any action taken by them influences his potential income. He should at least have divested himself completely from this company by selling all his future carried interest.

Posted by joepomp | Report as abusive

Thank you, Mr. Johnson, for tackling this job! There’s an angle on donations to LDS that bears scrutiny, too: MR donated some stock, +/- 90,000 shares, valued as a donation at $2.9 mil, in Feb, 2011 to LDS. LDS held the shares 4-5 months, then sold them for cash. A month or two after that, the company filed Chapter 13. Here are points to note: 1) MR obtained the shares while at Bain for about 50 cents/share (in exchange for management-work,) so he got $2.9 mil write-off contribution credit for shares he acquired for work valued @ +/- $45,000.; 2) MR was “hands off” the company when it crashed for about 6 months — the 6 months LDS had the shares; 3)LDS got the $2.9 mil, MR got the tax-credit, but the company & its creditors, employees & community location lost everything that company had meant. 4)LDS has no structure beyond its lay-leadership, of which MR is an integral part; 5) Is/Was Bain, at least in part, a “front” for funneling assets & resources to LDS members, families and community/church? Bears checking out!

Posted by ShastaKath2 | Report as abusive

in Mittens stump speech he rails against the “entitlement society” yet he and his like get all the entitlement in the world. the system is rigged for the wealthy, by the wealthy and if not for this election, a lot of people would have not known about any of this.

if Mittens and his bunch paid their fair of taxes there would be enough money to pay for infrastructure improvement and other programs and put people back to work.

besides the tax avoidance, it’s all a scam to make people believe that they are watching out for the 99% and that everything negative is the Democrats fault.

unfortunately there are too many people that take Fox as fact and they have no clue what the Republicans continue to do to them The Republicans think as long as they can get in others face and yell over them then they win.

Elections have consequences.

Posted by bstnboy54 | Report as abusive

Our commercial media do a poor job of explaining policy, preferring to focus on the excitement of political clashes. Mr. Johnston does his usual excellent job but explanations such as his do not reach a wide enough audience. Perhaps he can nudge 60 Minutes into pursuing the story. Note too that Mr. Romney advocates cutting his own taxes while “broadening” the tax base (i.e., raising federal taxes on those earning below the median).

Posted by BellaK | Report as abusive

Maybe the solution is to elect Romney. He will revert to the financial policies of Bush 43 that got us into this mess and will enahance the tax breaks for the rich. Tax breaks for the rich have proven not to be job creators. By the end of his first term we will probably be in a depression, at which time a Roosevelt type Democrat could be elected along with a filibuster proof Democrat Congress. Hopefully, they will realize that big business support will be counter productive and the whole mess will be straightened out. Or am I dreaming?

Posted by jdavid1 | Report as abusive

@breezinthru “Apparently, the candidate is deeply concerned about what is legal but not regarding what is morally correct.

Romney gives more to the Mormon church each year than he spends paying taxes”

And that is somehow immoral? lol

Posted by jaham | Report as abusive

@borisjimbo…yes we need to break up these dynasties, tax them and redistribute their welath to the poor, uneducated and unemployed…

…Amass a fortune only to be taxed because you are too rich; you know, I don’t recall that being the ending to the American dream – according to Dems, I am mistaken.

Posted by jaham | Report as abusive

This is a perfect example of how special interests (read the wealthy) over the years have corrupted the tax code to their favor. The tax code has been used to give breaks to business startups, innovation, research, promote social behavior, and progressively provide an income to a government that provides service to all citizens that private industry can’t or won’t. What is disturbing is to find those people who benefited the most don’t want to help their fellow citizens survive and maintain some dignity and don’t want to support the government that gave them the opportunity. For every person who received a dollar he/she didn’t earn, there is a person who earned a dollar he/she didn’t get.

Posted by drandVN | Report as abusive

Unfortunately, Mitt is never satisfied. In his promise to eliminate the estate tax (death tax), if he is successful, he will save the Romney family an additional $100 million or more upon his death, and his rich friends billions. Greed, pure and simple.

Posted by Dave010304 | Report as abusive