I have gone through the final version of Mitt Romney’s 2011 federal tax return. It came out at 3:00 PM yesterday. It was very considerate of the campaign to release it on Friday, allowing the poor tax bloggers with day jobs to spend some quality weekend time with it. I’m taking this weekend off even though second tax season has less than a month to go. (That’s the time until 2011 returns that went on extension are due.) I cannot express how much I admire the folks at PWC for getting the return done this early. Thirty three years in public accounting almost entirely at the local, regional level is not going to endear one to the Big 4 (It was 8, when I started), but I have to give credit where credit is due. Do you have any idea how hard it must have been to get the return done this early?
Why is it so hard ? Romney is involved in partnerships, complicated partnerships. Likely some of those partnerships are partners in partnerships and possibly some of those partnerships are partners in other partnerships. It is called a tiered structure. The extended due date of partnership returns is September 15th (17th this year because the 15th was on a Saturday). You just need one partnership in the chain to be slow and you are causing the whole tiered structure to be potentially late or at least go to the wire. So there must have been a push to get early action on any return that was Romney related. That would not just be ones that he or the trusts were in, but also the lower tier partnerships that he was only indirectly involved in. I can just imagine somebody calling me up and telling me I had to put something on the front burner to get it done early, because there was a Romney return a couple of tiers up. I’d tell them I didn’t care and that I was voting for Jill Stein. Then I would do it anyway, because what is important to my clients is important to me.
The Percentage Thing
Then there was this percentage thing. I’m never sure what exactly is being used as the numerator and the denominator, although in Romney’s case it does not make much difference. I’m going to stick with Line 55 (total income tax net of various credits, but not including a variety of other items, like self-employment tax and household employee taxes) as the numerator and Line 38 – adjusted gross income as the denominator. Personally, I think it is a stupid computation, which I will explain later, but since everybody else cares about it, it must be important. The draft return came out at 15.37%. The final return came out at 13.96%. If you include the self employment tax you get 14.13%. I think including the self-employment tax is not a good comparison with most working stiffs, whose social security tax does not show up on their 1040s. Of course, I think the whole exercise is stupid.
Why The Percentage Thing Is Stupid
Why is the exercise stupid ? The exercise is stupid because really effective wealth building tax planning is the Warren Buffett way. It is not a matter of paying a lower rate, helpful as that might be, it is avoiding income realization altogether. We can see that principle at work in the Romney return. You have to have the patience to scroll through many pages of mostly pointless disclosure forms (PWC was nothing if not thorough) to get to Form 8283 Noncash Charitable Contributions. There is nothing sinister in the form being so deeply buried. If you look in the upper right hand corner there is an “attachment sequence” number which tells you the order that the IRS wants the forms to come in. The “attachment sequence” is not the same as the form number sequence. So Form 8283 really does belong after those countless 8621s.
What Does Form 8283 Tell Us ?
The noncash charitable contributions are shares in three companies. The deduction allowed is the fair market value of the stock, regardless of how much was paid for it. The total fair market value is just over $900,000. So Romney must have earned money to buy those stocks and now he is getting a deduction for the untaxed appreciation? Pretty slick. If there is other stock that he bought at the same time that he holds till he dies, he will never be taxed on the appreciation. It gets even better, though. The stocks were not acquired by purchase. They were distributed from a partnership. According to the form, it appears that Romney recognized no income at all in order to acquire those securities. That is the fabled “carried interest” at work. It is not just allowing the earnings from venture capital to be taxed at a lower rate, it avoids any recognition at all as long as the securities are not sold. That never realized income and the resulting tax avoided shows up in neither the numerator or the denominator. That is why the percentage is such a silly distraction.
What Happened to the 15.37% ?
It is those darn partnerships again. In January when the draft return was released, PWC would have had a fairly solid estimate, if not the precise number, on some things like interest and dividends, but the K-1s from the partnerships are simply not predictable that early. Line 17, which is where a lot of flow-through income goes, on the draft return was $2,830,078 . On the final return it was $120,375. Capital gains came in a lot lower also. That fouled up the denominator. The way they came up with to keep the percentage at an acceptable level was to not deduct all the cash charitable contributions. It was $3,100,000 on the draft and $1,330,199 on the final return. I can just imagine myself going to the first managing partner of CCR LLP, Bruce Carlin, God rest his soul, and suggesting that a client not deduct nearly $2,000,000 in cash contributions. I can hear him now “That’s the stupidest thing I ever heard”. Only I left out a word. The contributor guidelines are so awkward sometimes.
Want to make a bet ?
There would probably never be a way to settle it, but I am willing to bet that if Romney loses the election and retires from politics, he will amend his 2011 return and pick up the money he left laying on the table. He has three years to amend. He also has those deductions as a cushion if his return is audited.
You can follow me on twitter @peterreillycpa.
Originally published on Forbes.com on September 22nd, 2012