Posts Tagged ‘Mitt Romney’

Tax Roundup, 9/26/12: Romney vs. John Edwards; Also: low taxes, if you don’t count some taxes.

Wednesday, September 26th, 2012 by Joe Kristan

Not every S corporation is a “John Edwards” shelter.  The TaxProf highlights a New York Times piece by Colorado Tax Professor Victor Fleischer, who says that Mitt Romney may be using the “John Edwards Tax Shelter” to avoid Medicare taxes.

The “John Edwards shelter” got its name from the model husband and former Democratic vice-presidential nominee.  He ran his law practice in an S corporation, so much of his multi-million dollar income came to him on the K-1.  Unlike wage income or law partnership K-1 income, S corporation K-1 income is not subject to self-employment, Social Security or Medicare taxes.

Mr. Fleischer says:

Mr. Romney continues to receive cash payments from the companies that manage Bain Capital’s funds. A couple of weeks ago in this column, I described how private equity firms like Bain Capital convert management fees, which would normally generate ordinary income, into investments that yield capital gain.

R. Bradford Malt, the trustee who manages Mr. Romney’s Bain holdings, has stated that Mr. Romney did not participate in the fee conversion program. One might have logically inferred, then, that Mr. Romney’s share of the management fee income would be reported as wage income on Mr. Romney’s tax return.

Not so. Instead, the payments are reported on Schedule E of the return as distributions from S corporations — the largest being $1,961,325 from Bain Capital Inc. The distinction between wage income and an S corporation distribution is meaningless from a business standpoint, but it’s important for tax purposes.

Current law imposes a 2.9% Medicare tax on all wages and self-employment income. To avoid this tax, taxpayers have an incentive to characterize as much labor income as they can as investment income (like carried interest) or as a distribution from an S corporation.

Mr. Fleischer gets this badly wrong.  Wage income and S corporation income can be hugely different from a business standpoint.   For an obvious example, consider a second-generation family business S corporation — say, a farm.  One member of the second generation may continue the business, while the others may go do other things but remain owners.   As S corporation earnings must be allocated straight-up based on share ownership, the only way to compensate the sibling who runs the business is through additional salary.  The working sibling gets the only salary in the family, while all siblings get K-1 income.

While much is uncertain about how much S corporation income should go between K-1 income and W-2 income, it is certain that it usually isn’t all compensation when capital investments are involved.  To the extent that that Bain Capital Inc. owns passive interests in Bain Group investments, it certainly isn’t disguised wages.  As his termination deal largely involved receiving passive investment interests, it’s a stretch to say that this translates into an Edwards Shelter.

 Update: Victor Fleischer replies in the comments:

Hi Joe.  Thanks for the thoughtful post.  I’ve replied here:

Bain Capital Inc. is the management company, and as far as I can tell receives nothing but fee income.  No passive investments, which are instead held by the GP.  You are right that I overstated the general point about S Corps, but in this particular case it’s hard to see how the S Corp income is related to passive investments or investment income of any kind.


Is Romney really paying the “lowest rate”?  From Joseph Thorndike at Tax Analysts (Subscriber link):

     So applying the Romney method to his actual returns, we get an average rate of 14.02 percent in 2010 and 2011. As many commentators have noted, that’s a lot lower than President Obama’s average effective tax rate of 26.45 percent during his presidency. (It’s also lower than the average rate Obama paid in the same two years covered by the Romney release: 23.4 percent.)

     But Romney’s rate isn’t low just by comparison with our current president. It’s also low compared with every president of the last 40 years.

That 14.02% rate is because of several factors.

  • Lots of dividend income, taxed at 15%.
  • Lots of capital gain deductions, taxed at 15%.
  • Huge itemized deductions for charitable gifts and state taxes.

Of course, this also ignores how dividends come from corporations, which pay their own 35% federal tax.  Capital gains are from the sale of corporate stock, which means accumulated and anticipated corporate earnings taxed at 35%.  Romney is only paying the second tax on that income.

Mr. Thorndike acts like Romney has done something shady:

If he wins his race for the White House — and continues to file tax returns that look like the ones released during the campaign — President Romney will have only Richard Nixon to keep him company at the bottom of the rate roster. Generally speaking, Nixon is not a happy point of comparison for presidents, and this is true for taxes as well as break-ins and cover-ups.

Joseph Thorndike, what is Romney supposed to do?  Dump his dividend paying investments and buy bonds so he only earns interest, taxable at the top rate?  Stop earning long-term capital gains?  Stop deducting his charitable contributions?  Oh, wait, he’s already done that.


Trish McIntire,  Shorting Deductions

Dear Client – I know what you’re thinking. Since Gov. Romney didn’t claim all his charitable deductions so that he could hit his target tax rate, you’re thinking about not taking all your business (farm) deductions so that you can manipulate your income tax. I’m sorry to break the news to you but you can’t do that. Business deductions are not the same as charitable deductions.


Daniel Shaviro,  Should Romney pay a lower tax rate than the rest of us?

Howard Gleckman,  Will Romney Scale Back Rate Cuts If Congress Won’t Curb Tax Breaks? (TaxVox)

TaxGrrrl,  The Most Tax Friendly Country In The World Is…. (Spoiler Alert: It’s Not the U.S.)

Paul Neiffer,  IRS Extends Drought Replacement Period for Ranchers

Joseph Henchman, D.C. Judge Rules Online Travel Companies Must Pay Hotel Tax on Their Services (Tax Policy Blog)

Jim Maule, Biting the Hand that Feeds the Tax Critic.

Peter Reilly weighs in on the Iowan who claimed to be a South Dakotan while sporting Iowa vanity plates:   State Residence For Income Tax – Pay Attention To The Basics

Martin Sullivan,  Capital Gains: The Missing Link toTax Reform?

Dan Meyer,  “Going Concern” Explanatory Does Not Always Mean that the Sky is Falling

Robert D. Flach has posted his Wednesday Buzz.

The Critical Question:  Who — Aside From the Rap Community — Doesn’t Pay Any Income Tax? (Anthony Nitti)



Tax Roundup, 9/24/2012: Mitt files! And USA bucks trend of lower corporate rates.

Monday, September 24th, 2012 by Joe Kristan

Mitt Romney filed his extended return on Friday. In addition to remininding us laggards that the extension season will end three weeks from today, it shows us that the Republican nominee has a lot of money.  Who knew?

The strangest item may the candidate’s voluntary walking away from a charitable contribution deduction.   He did that to ensure the “effective rate” on his adjusted gross income  was at least 13%.  Of course, he has three years to change his mind and amend his return.

The return has one thing in common with the Obama 1040s: self-employment income.   While the Obamas began taking retirement plan contributions based on that income, perhaps because they secretly read the Tax Update, the Romneys do not.  They could still set up a SEP plan, amend their returns, and take a 2011 deduction against his director fee income.  They may be too busy for that right now,  but if you have an extended return with self-employment income, it’s not too late for you!

The campaign also issued a letter from PWC summarizing his taxes over the past 20 years, debunking the foolish innuendo that Harry Reid peddled that Romney had zero-tax years.

The TaxProf has a Romney return roundup.  More coverage:

Going Concern:  Mitt Romney’s 2011 Tax Returns Reveal He’s the Richest Unemployed Dude You’ve Ever Seen and Footnotes: Romney Tax Returns, Romney Tax Returns and Romney Tax Returns.

Kay Bell,  Romney will file an amended 2011 tax return on Nov. 7 … if he loses

Anthony Nitti,  Reactions to Romney’s 2011 Tax Return and Romney Forgoes Full Charity Tax Break for 13% 2011 Rate

Janet Novack,  On 2011 Federal Income Tax Return, The Romneys Decide Horse Losses Are Personal and Romney Paid At 14% Federal Tax Rate In 2011, Pegs 20 Year Average At 20%

Peter Reilly,  Romney Accountant’s Letter – Exercise In Obfuscation ? and Mitt Romney Passing On Nearly Two Million In Charity – Stupidest Thing I Ever Heard


Related: TaxGrrrl, Ryan’s Amended Returns Offer More Questions Than Answers



Meanwhile, in news that matters:  Sweden to Lower their Corporate Rate to 22 Percent, 18 Points below Ours (William McBride, Tax Policy Blog).


More coverage of the Iowa guy who filed as a South Dakota resident:  Linda Beale, Tax Home–where the heart is, but not necessarily where the taxes are lowest and Russ Fox,  Home Is Where the Family Is.


Jack Townsend,  Restitution in Tax Cases

Jason Dinesen,  “Consumer Reports” Highlights Identity Theft

Jim Maule,  Raising the Tax Shame Noise Level

Nanette Byrnes, Essential reading: GOP retreat on taxes likely if Obama wins, and more

Martin Sullivan,  The Critical Question. “If the Obama wins, will the Republicans comrpomise or double down?” Maybe we should ask the Ben Bernanke.

Russ Fox,  Las Vegas Attorney Accused of Tax Evasion and Structuring

And it wouldn’t be a weekend without a new Buzz from Robert D. Flach.


Quote of the day:

Wind energy tax credits, like all government-sponsored tax incentives, don’t work. They violate every principle of sound tax policy. The wind tax incentives place the risks on the public and promise the rewards to a chosen few. As the insurance company ad said, even a caveman could see that. Nevertheless, there is a bipartisan crescendo building to ensure the wind energy suppliers continue to receive their credits.  (David Brunori, Tax Analysts (subscriber link))


Tax Roundup, 9/10/2012: Walter Anderson fights on, fails on. Also: tax credit scams and tax returns as pornography.

Monday, September 10th, 2012 by Joe Kristan

“Biggest Evader” Walter Anderson loses appeal of adverse Tax Court ruling.  The persistence that Walter Anderson showed in building his tech fortune so far hasn’t helped him in his ongoing battle with the IRS.

Mr. Anderson pleaded guilty to evading taxes on investment income earned in overseas corporations for 1998 and 1999; as part of the plea deal, charges for 1995, 1996 and 1997 were dismissed.  The IRS also pursued collection of $184 million of taxes for those hyears, plus $138 million of civil fraud penalties.  Mr. Anderson resisted.  In a tactical maneuver, the IRS conceded the issues for 1995-97.  From the Third Circuit opinion:

In its motion, the IRS explained that nearly 80% of the total deficiency and penalties for the five-year period stemmed from just 1998 and 1999, and that because proving fraud for 1995 through 1997 via trial would needlessly complicate and lengthen the case for a comparatively limited additional monetary recovery, it preferred to abandon its efforts for those years.

The Tax Court didn’t formally dismiss the first three years taxes for some procedural reason, but said its final ruling would reflect the IRS concession.  But Mr. Anderson then said that the IRS concession for those three years also meant the IRS couldn’t pursue collection for the two years for which he pleaded guilty.   The Tax Court thought that was a bit much.

The Third Circuit appeals court upheld the Tax Court:

We hold that Anderson’s conviction for tax evasion in 1998 and 1999 precludes him, by virtue of the doctrine of collateral estoppel, from contesting in subsequent civil fraud proceedings that the income of G & A was taxable to him in those years. We additionally conclude that the IRS’s concession of all deficiency and penalty issues for the years 1995, 1996, and 1997 has no preclusive effect on those issues for 1998 and 1999. For these reasons, we will affirm the Tax Court’s judgment.

Mr. Anderson says his guilty plea was coerced by poor jail conditions while he was awaiting trial.  Unfortunately for him, the law makes it very hard to undo a guilty plea.  Once you plead guilty to evading taxes for a year, the rest is just ugly details.

Cite: Walter C. Anderson v. Commissioner, CA-33, No. 11-1704.  Jack Townsen has more.  Some background here.


Paul Neiffer,  Section 179 for 2013:

We have gotten a few emails in the last few weeks asking what the Section 179 deduction will be in 2013.  The current law is a limit of $25,000 for 2013.

However, both the President and Congress have discussed increasing the deduction up to $500,000 with a phase-out starting at $2 million…

My estimate is that Section 179 deduction for 2013 will increase, but who knows by how much and this is always subject to the whims of Congress and the President.

I agree that it will probably not be $25,000, but until the political situation sorts itself out in November, we don’t have much to even guide our guesswork.


Joseph Henchman,  Missouri to Look More Closely at Ineffective Tax Credits  (Tax Policy Blog) Iowa has certainly gone in for them whole-hog.  Missouri has reconvened a commission to try to contain tax credits.  David Brunori weighs in:

Governor Jay Nixon has reconvened a commission to study tax credits in the state. That is a good thing, of course. The state spends over $600 million on tax credits alone. Real estate developers receive the bulk of that largesse. There are credits for economic development held sacred by both parties because of the phony claim they create jobs.  There are credits for historic development which turn run down eyesores into commercially viable properties. The people of Missouri actually give developers money to fix up old properties and sell them at a profit. We used to call that welfare. And there are credits for developing low income housing. Liberals love low income housing credits because it makes them feel like they are doing something to help the poor and dispossessed. I think some people love low income housing because it segregates all the poor people in one place away from the “decent” folks. And I know developers love low income housing credits because it allows them to take advantage of a well intentioned but incredibly flawed system.

It’s no coincidence that two of Iowa’s most prominent low-income housing developers are deeply embedded in the state political system.


Elevating the level of debate:  Hustler publisher offers $1 million for Mitt Romney’s filing info, tax returns (Kay Bell). It’s a federal offense to leak confidential tax information, so I doubt that the feds would let a snitch keep the million dollars.  Especially if Romney wins.  TaxGrrrl also notes that it’s a crime to accept stolen property.

Christopher Bergin, Where’s the Tax Plan, Man – Uh, Men?

Jim Maule,  Do-It Yourself Lawyering Brings Tax Unhappiness.  Yes, the thrifty ex-husband is still divorced, but he botched the alimony language, meaning he couldn’t deduct the payments.  But look on the bright side: she doesn’t have to pick it up as income!  He may not find that consoling.

Bruce the Missouri Tax Guy looks at Tax Apps for your phone.

Peter Reilly, tax maven, shows his Civil War cred: Next Monday September 17 Remember America’s Bloodiest Day.  And not just because corporate extensions are due.

Dang.  Summer is gone (Daniel Shaviro)

News you can use: Politicians Lie. In Other News, Water is Wet (Anthony Nitti)

Trick question. They’re all Azkaban.  Let’s Compare the Big Four Accounting Firms to the Four Houses in Harry Potter (Going Concern)


Tax Roundup, 8/17/2012: Politicians, thieves — but I repeat myself

Friday, August 17th, 2012 by Joe Kristan

Compared to what?  The TaxProf covers a spat between the Tax Policy Center and the Wall Street Journal.  TPC says that Mitt Romney’s tax plan would require tax increases to the middle and lower classes.  The Wall Street Journal argues that it doesn’t have to.

When almost half of taxpayers don’t pay income tax, and the top 1 percent of taxpayers paying more federal taxes than the bottom 90 percent,  it wouldn’t be surprising if any given tax reform plan shifted some of the burden to lower incomes.   But if spending isn’t cut by a lot in the next few years, that’s going to happen anyway.  Why?  Because the “rich” simply don’t have enough income to pay the bill.

While you can defer the tax increases for awhile by borrowing, eventually that will get cut off.  Then you have to pay the bill.  Taking even 100% of the income of “the rich” doesn’t cover the annual budget deficitwithout starting to work down the $14 trillion national debt.  The only way to pay that sort of bill is to dramatically increase taxes on everybody, like they do in EuropeThe rich guy isn’t buying. So the question isn’t just whether Romney will increase taxes on the “non-rich.”  It’s also whether he will do so less than the alternative.


So much for the “honor among thieves” thing.  Gino Carlucci, an Arizona man, could have a tough time finding a joint venture partner.  Mr. Carlucci was sentenced to 188 months in federal prison this week for charges, including tax charges, arising out of a scheme where he defrauded and double-crossed another fraudster.  The Department of Justice press release tells this story:

According to the evidence presented at trial, Carlucci and his co-defendant, Wayne Mounts, stole large sums of money and assets from Joseph Flickinger, a tax return preparer in Ohio who had himself defrauded multiple clients of their life savings in a fraudulent investment scheme. Flickinger pleaded guilty to federal charges in a separate case and was sentenced to 70 months in prison. After defrauding Flickinger of the money, Carlucci and Mounts devised a scheme to have Flickinger arrested by federal officials, and then used the money for their own personal benefit.

I don’t suppose Mr. Carlucci remains on Mr. Flickinger’s Christmas card list.

In addition to money, Carlucci and Mounts defrauded Flickinger out of several high-end vehicles and a condo near Lake Erie, Ohio, which they quickly sold for $210,000. Carlucci had some of the funds transferred into bank accounts held in the name of his wife and father-in-law. Carlucci’s wife and Mounts withdrew more than $300,000 in cash over several months in increments of $10,000 or less so that they could avoid having the bank report their withdrawals to authorities. Carlucci and Mounts spent an additional $150,000 of the funds to buy a 43-foot luxury boat whose existence Carlucci concealed from the government for over two years.

Unfortunately the press release doesn’t tell us how Mr. Carlucci got caught.  I suspect the cash withdrawals had something to do with it.


Kay Bell, Romney-Ryan tax plan details to be revealed after the election.

Peter Reilly,  13% Of What Mr. Romney ?

David Brunori, Shame on Companies Who Use the Tax Laws To Stifle Competition.  When a state government develops a nicotine addiction, it goes out of its way to help its pushers.

Anthony Nitti, Wells Fargo Denied Deduction in District Court, Immediately Raises All ATM Fees to $17 to Make Up Difference*   (but follow the asterisk)

TaxGrrrl,  IRS Offers Tool to Help Students With Financial Aid.  It automatically fills out part of the FAFSA form.

Leaving Saly.  From Going Concern, “Same As Last Year” and Inept Senior Auditors Are Failures of the Audit Industry

Credentials aren’t everything.  Just ask the CPA/former IRS agent who had a bad day in Tax Court yesterday.  Russ Fox has the scoop.


Tax Roundup, 8/3/2012: Sales tax holidays, $5 billion in refund fraud, and smoked pot clinic deductions.

Friday, August 3rd, 2012 by Joe Kristan

Flickr image courtesy K@t marsh

Hey, the Iowa Sales Tax Holiday on clothes runs today and tomorrow. Take a cue from our state tax holiday spokesmodel and get a nice outfit to wear to South Carolina later this year for their annual sales tax holiday on guns.

Harry Reid needs to prove he isn’t stealing identities to claim fraudulent refunds.   TIGTA: IRS to Issue $21 Billion in Fraudulent Tax Refunds From Identity Theft Over Next Five Years  (TaxProf).   From the TIGTA report:

Our analysis of tax returns using characteristics of identity theft confirmed by the IRS identified approximately 1.5 million undetected tax returns with potentially fraudulent tax refunds totaling in excess of $5.2 billion. TIGTA estimates the IRS could issue $21 billion in potentially fraudulent tax refunds resulting from identity theft over the next five years.

$5.2 billion in one year.  To put that in perspective of other (ridiculous and shameful) tax evasion assertions, the IRS is giving to thieves a fortune equal to about 21 times Mitt Romney’s net worth every year.  So just maybe passive losses for Rafalca aren’t the biggest tax issue this season.

The Wall Street Journal has more.

Howard Gleckman, Why Romney’s Tax Agenda Doesn’t Add Up, Even if it Isn’t a Middle-Class Tax Hike. Not that the system we have exactly adds up either. (TaxVox)

That’s one way to park your money offshore.  The London Daily Mail Online reports:

The billionaire L’Oreal heiress has sold a Seychelles island for £39 million in the middle of a tax evasion case, the island’s government have said.

Liliane Bettencourt, France’s richest woman sold the tiny island in the Indian Ocean to offshore company Save Our Seas Foundation (SOSF), a Swiss-based campaign group, for £27.7 million more than she bought it for in 1997.

French authorities have also ordered her to pay £85.8 million in unpaid taxes after her island ownership came to light along with a number of undeclared accounts.

That’s one asset that they won’t find  by subpoenaing your Swiss bank.

Is the IRS handing out an illegal tax credit under Obamacare?   (Michael Cannon,

Priorities, people.  Going For Tax-Exempt Gold: Bill Introduced to Eliminate Tax on Olympic Medals  (TaxGrrrl). That will make all of the people forced to pay huge penalties for inadvertent offshore paperwork violations feel a lot better.

Tax Policy Blog: The Two Hardest (But Most Important) Sales Tax Reforms.  No, they don’t involve Amazon.

In November, Michigan voters will decide whether future tax increases will require a two thirds vote of the legislature. It will pass. The people of Michigan are increasingly weary of taxes and the inefficiencies of government.

We should try that here in Iowa, except we’re too busy trying to buy prosperity with tax credits.

News you can use.  Better Move Quick If Your Cataracts Are Acting Up: Tax Court Strikes Blow to Medicinal Marijuana Industry (Anthony Nitti).  Russ Fox has more.


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Mitt’s 203-page tax return

Tuesday, January 24th, 2012 by Joe Kristan

There’s a lot to the Mitt Romney 2010 1040. 203 pages long, with over $20 million of adjusted gross income, it tells a story of a wealthy and sophisticated investor. The would-be GOP nominee also released some trust returns that feed into the 1040. There’s a lot here, and far more than I should spend unpaid time thinking about — but I can’t resist a little bit of voyeuristic observation.
– Mitt had a much better 2010 than 2009. His “protective” estimated tax based on 2009 tax was about $1.37 million. He had to pay in another $3.25 million with his extension. Much of that was cushion to cover 2011 estimated tax payments; he had a $1.6 million overpayment on the completed return, all of which went to 2011 estimates.
– 2010 was better because of $16.7 million in capital gains, offset by a $4.8 million capital loss carryover.
– That said, with $3.3 million in interest income and $4.9 million in dividend income, Mitt can hardly have a really bad year.
– The return was signed by somebody at PricewaterhouseCoopers on October 15, at the end of the extension period. Can you imagine the scene if Mitt had pointed out a mistake on the return on the extended due date? I can only imagine the logistical nightmare of making sure the return was signed and filed by the taxpayers on time.
– The return was, of course, prepared on what Robert D. Flach would call “flawed and expensive” tax return software. To do this return by hand, like Robert does his returns, would require a small army of flawed and expensive staff accountants with good penmanship. If nothing else, it shows that the current complexity of the tax law is possible only because of computers.
– Mitt has a $2 million passive loss carryforward, of which over $1 million is attibutable to 2010 losses.
– His return is fraught with potential expensive foot-faults. For example, he has a Form 8865 to report a foreign partnership and a Form 5471 for a controlled foreign corporation. Failure to file either one of these on time would have generated a $10,000 IRS penalty notice.
– The total tax on the 1040 is just over $3 million. If you counted the 35% tax paid by corporations on income generating the $3.3 million in qualified (15%-rate) dividends he reported, it would be about $1.79 million higher.
I’m sure the Obama, Gingrich and Santorum opposition research teams will be forthcoming with much more detailed analysis soon.
Link: Romney campaign page tax return links and campaign overview.
TaxGrrrl, “Romney’s Tax Returns are Remarkably… Unremarkable
The TaxProf has a roundup.
Kay Bell, “Romney Release 2010 tax returns
Philip Klein, “Romney needs no apology on tax returns
Christopher Bergin, “Romney


Corporations are people too!

Monday, August 15th, 2011 by Joe Kristan

Mitt Romney caught some grief for telling an Iowa State Fair heckler an obvious truth – corporations are people. They are a tool for people to organize their activities and cooperate to do things. That this is at all controversial is sad.

TaxVox explains: