By Peter J Reilly
I just posted my reaction to Mitt Romney’s guest essay in the New York Times where he calls for more taxes on rich people like himself. One of the things he mentioned was closing not tax loopholes, but rather tax caverns. He doesn’t fault the rich for taking advantage of them. Still, his essay brings to mind the controversy about Romney’s taxes during the 2012 campaign.
Romney’s relationship to tax shelters was a major issue in the 2012 presidential campaign. It was an issue that I covered intensely. According to my friend Grok, whose opinions I take with a grain of salt, my coverage was really up there, although ProPublica edged me out. Grok does say that we both outpaced mainstream news in terms of depth.
At any rate, I thought it would be timely to give you a rundown on my coverage of Romney’s tax issues during the campaign to get some perspective on his attitude toward “tax caverns”. The coverage was part of a more general look at the returns of presidential candidates. Most if not all the articles appeared on another platform, but I will give you links to this one, because, well never mind my motivation, I am saving you having to go behind a paywall.
Carried Interest
In Could Romney Use His Own Return to Call Obama’s Bluff on Carried Interest ? it was still early in the game and Romney had not made any disclosures. I suggested that given his “not a penny more” attitude, he could call Obama’s bluff on carried interest and show that he had used it and challenge Obama to change the regs to prevent it. I suggested that maybe carried interest was the only thing Romney might be embarrassed by.
I carried on with the same theme in Left Should Challenge Obama, Not Romney, on Carried Interest..
The Extension
For April, I have two pieces on why it is silly to knock Romney for needing to extend his return. There was Unfair To Knock Romney For Getting An Extension, where I explained that somebody like Romney who is a partner in multiple partnerships has no choice, but to extend. I also started on my running joke about the treatment of Romney’s dog Seamus.
“So if your tax preparer is telling you that it might be a good idea to extend, don’t hold it against him too much. Also don’t think that filing an extension is some sort of moral failure or not doing it should allow you to feel superior. On the other hand, if you are taking your dog for a ride, follow your President’s example and let him ride in the car.”
I followed up with People Who Criticize Romney’s Extension Are Ignorant Or Hypocritical – The Proportions Vary.
“I’m not a big fan of Romney just like I’m not a Newt Gingrich fan. Still when Newt was being unfairly knocked about the S corporation thing, I stood up for him, so I figure I owe Romney the same courtesy. Since the extension criticism is so unfair, I’m not even going to mention the dog thing.”
Rafalca The Dancing Horse
In While Dogs Against Romney Are Rooting For Rafalca I’m Studying Hobby Loss Cases, I was covering three Tax Court hobby loss opinions, but I could not help to allude to the hobby loss storm that arose around Romney’s 2010 return which had been released in January. The Romneys were in a partnership supporting a horse, called Rafalca, that was competing in the Olympics. The partnership flowed through a small loss, which because of other things on the return did not produce any current benefit. Here was my thought on the subject.
What about Rafalca ?
I’ll bet that the deductions are much more significant to the other owners than they are to the Romneys. The suspended horse losses were a small part of over a million dollars in suspended losses from several partnerships. I don’t know how they think at PWC, but if the Romneys had been doing the Rafalca activity on their own, I would have told them to forget about deducting it. With the loss coming through on a K-1, though, you are really required to report it, if you want the return to be accurate. Of course if it was from a dog breeding deal, then I would really have to give it some thought.
Rafalca London Olympics Medal Or Not – No Current Tax Savings was a pretty deep dive into how much the loss from the dancing horse saved Romney in 2010. The answer was 0. I had been one of the people my esteemed editor Janet Novack had interviewed for her piece Both Left And Right Got The Taxes On The Romneys’ Olympic Horse Wrong, Unfortunately, I can’t read it now because it is behind a paywall. This may have been when I started calling Rafalca “a dancing horse”, which is how I characterize the “sport” of dressage. Basically anything where the result is based on a panel of experts judging is not truly a sport in my mind. The other thing is that I got the sport part of the story wrong, which subsequently made me nervous whenever there was a tax story involving a sport. Here is the analysis of the Romney benefit from Rafalca
My first thought was twenty to thirty grand. Then I remembered that his income is so heavily weighted towards capital gains and he gives so much to charity, that it might have only been about 10 grand. Then I remembered that the partnership was a passive activity with respect to the Romneys, meaning neither one of them spent at least 500 hours a year on the activity. Romney has over a million in losses from other passive activities and very little in the way of income from passive activities, so he was only allowed $50 of the loss from the partnership. Poor Rafalca. No medal and you only saved master about 10 bucks.
It is even worse though. If Romney had not had the Rafalca loss, he would have been able to deduct $50 more of the losses from his other passive activities. So for 2010, Rafalca saved master nothing.
Of course none of my 2012 Romney pieces was complete without a Seamus (the dog) reference.
Anyway, nice try Rafalca. I was rooting for you and so were Dogs Against Romney . Hope they let you ride inside on the flight home.
Son Of Boss?
Earlier in July, I had gotten serious and posted Romney Returns – Could Son Of Boss Deals Be Worrying Him?. Son of Boss was part of a craze of tax shelters around the turn of the millennium. It involved artificially inflating basis. It was none other than Janet Novack who had broken the story about these sort of things in 1998. Here is a link to the story which after 27 years remains behind a paywall. Romney had been chair of the audit committee of Marriott when it saved $70 million from that sort of thing and he seemed to practically think it was an obligation to minimized taxes. My work was picked up by the Daily Kos.
Here is my takeaway.
Was Romney In Son of Boss Deals ?
We don’t know. It is possible that even if we get to look at his returns, we won’t be able to tell, since they were designed to be opaque. We do know, however, that he was or at least should have been quite familiar with them. We know this because he was on the audit committee of Marriott, when Marriott did Son of Boss deals. Given how pervasive the deals were and the high reputation of the firms involved in them, I could see Mr. Romney thinking it would be irresponsible to not do a Son of Boss deal – “I pay all the taxes owed and not a penny more.”
I actually don’t remember exactly when it happened. But this is likely when the big breakthrough I passed on came up. I got a call from MSNBC to go on the show to talk about Romney’s returns. A year earlier I would have jumped at the opportunity, but a year earlier I had been a partner in CCR LLP, then, at least by its own account, the largest CPA firm in New England. In 2012 I was a managing director (too old to come in as a partner) of a not quite Big 4 firm that had bought us. I would occasionally get called in by my immediate boss because something I had written had displeased somebody. So I figured I was supposed to ask somebody if I could go on the interview. When I finally got the right person, she just told me that upper management might not like it if I did it. That by itself was not enough to stop me, but I felt bad for the management of our cluster so I begged somebody to forbid me going and they came through.
Some Zero Tax Romney Returns Would Be As Shocking As Gambling At Rick’s discusses why there may well have been some zero tax returns among the ones not released and why, given everything else we knew, that that should not be upsetting.
I followed that quickly with Romney, Marriott And Son Of Boss —- For Dummies. I did my best to explain how the Marriott deal Romney should have known about worked or rather purported to work.
Playing With The Percentages
Then there was the video of the secret meeting where Romney seemed to scorn 47% of the population.
With Mitt Romney And The 47% All A Matter Of Context, I sort of stood up for him again.
So overall, the secret video doesn’t give us any more relevant information than the final version of Mitt’s 2011 return will. Mitt was just hitting potential donors over the head with the fact that 47% of the population does not think that the allocators of capital have been doing that well by the rest of us. I feel so bad for him that I am not even going to mention the dog thing or the dancing horse.
Near the end of September, Romney’s 2011 return was released. There had been a lot of focus on what percentage he was paying and they actually passed on some charitable deductions in order to pump it up. I thought that was really silly – Mitt Romney Passing On Nearly Two Million In Charity – Stupidest Thing I Ever Heard.
Romney never released any more returns. But along with the 2011 return he released a letter from PWC that stated since 1990 there had been no year in which he owed no state or federal income taxes. They further stated that his lowest “effective personal income tax rate” in any of those years was 13.66%. I took the report apart in Romney Accountant’s Letter – Exercise In Obfuscation ?.
Romney could have told people it was none of their business what his taxes were before 2010. He could have provided complete copies of twenty years worth of returns or redacted copies, if there is information on the returns that he has a duty to not disclose. There is speculation that Romney might have engaged in Son of Boss deals or other sketchy tax shelter transactions. Well, now there is a spreadsheet with 40 interesting numbers on it which PWC has boiled down to a few percentages. You have 20 years of adjusted gross income and twenty years of total tax. Why not release those two series ? Is it because the twenty years worth of adjusted gross income would be difficult to reconcile with a net worth of $250,000,000 ?