First off, I would like to start out by thanking Mr. Romney for not releasing a big batch of prior year returns and hope he will stand his ground and continue not to release them. The reason is simple. There are a limited number of bloggers who actually work on returns at that level of complexity, so I will feel obligated to study them. My biggest fear is that he will dump them on us on October 5th, when all the people who work on those type of returns are totally absorbed in their day jobs. By the time we come up for air around October 20th, the media will be on to something new. Enough about my petty personal concerns though, now I must weigh in on why it is that Mitt might not be releasing his returns from years past. I’m thinking Son of Boss and the Geithner challenge. We’ll take the Geithner challenge first.
The Geithner Challenge
There is a video clip of Tim Geithner
that I have probably overused, but I’m using it once more, because I am going to show you what a stand-up guy Tim really is. There was a mistake made on four of Mr. Geithner’s returns. Salary he received from the IMF should have been treated as self-employment income. Frankly, it is a mistake that was easy to make, particularly if you use software. (That is the Wandering Tax Pro, you hear laughing right now, but even somebody doing returns by hand might blow it, particularly if he only has one client working for an international agency.) Regardless, it was caught on audit and Mr. Geithner paid the tax for the open years. Let me be clear. In a million years, it would not have occurred to me that he should pay the tax for the closed years (i.e. those for which the statute of limitations had expired). When he was being vetted for Treasury Secretary, though, he decided to do that (or it was decided for him).
Republican Senator Jon Kyl still gave him a hard time about it:
“It’s legal to rely on the statute of limitations. There’s nothing wrong with relying on the statute of limitations,” Kyl said. “I think what some people find implausible is that that isn’t what you’re saying you did. What you’re saying is that you didn’t think about it until it was brought to your attention in connection with your nomination.”
Senator Kyl set a new standard, which I call the Geithner challenge. If you find out there was something wrong on your return, you should cowboy up and pay the tax, even though the statute of limitations says you don’t have to. That brings us to Son of Boss.
Son of Boss
I never figured out Son of Boss, while it was being used. I think it is, because I am too attached to double entry. I finally grasped it early in my blogging career, when I was writing about EMC Chairman Richard Egan’s doomed tax shelter:
The plan for eliminating capital gains works like this. You write a very large option which entitles you to receive a large premium. You use that premium to buy a very similar option. When it unwinds you will most likely have a loss, particularly after fees, but not a very large loss relative to the notional amount of the options. Get ready for the magic and if you are passionately attached to double entry remain calm. Form a partnership and contribute these two contracts to the partnership. Slowly. Carefully. One at a time. First there is that option you bought for say 150,000,000 (Never mind where you got it from). That’s easy. Your basis is 150,000,000, the partnerships basis in it is 150,000,000. Increase your basis in your partnership interest by 150,000,000. You probably want to take a break. Now you’ve got that other thing. The option that you wrote. Well you got a lot of money and it seems like it could require you to pay out a lot of money. In some ways it seems like a liability. But remember this is a partnership. You need to check Section 752. Well something that you maybe have to pay isn’t going to pass muster as a liability under 752. So now you are done. Your basis in your partnership interest is 150,000,000.
Now you put in your stock in Bigco which is worth 150,000,000 and has effectively zero basis. After those options sort themselves out for some relatively negligible effect, you are ready for your next step. You contribute your partnership interest into an LLC and make a 754 election. You now have to allocate your basis in your partnership interest among the assets of the technically new partnership. Your basis is still 150,000,000 and the only thing to allocate it to is the Bigco stock. So now your partnership has basis in your Bigco stock. It can sell it at a small gain or no gain or, as worked out in this case, a loss. Mr. Egan’s minions needed to put more and more EMC stock into the partnership to take advantage of all the shelter they had bought as the price of EMC collapsed.
The only thing wrong with the plan is that creating basis out of thin air doesn’t even make good nonsense.
People who used Son of Boss to reduce their tax liability were relying on some very prestigious firms. They did not think they were doing anything wrong. Everybody now knows it was wrong though. Sometimes the IRS gets six years to catch up with you instead of three. There was a big fight about how that rule applied to Son of Boss deals. The Supreme Court ended up saying it was only three years. There was dancing in the streets. Contributor Robert McKenzie scolded me for not being more enthusiastic about it. Regardless of Home Concrete, though, if you were in a Son of Boss deal and you want to pass the Geithner challenge, you should pay up anyway.
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.”
Maybe instead of asking for those returns, which would be a real burden for me, we can just ask if he was involved in any Son of Boss deals. The follow-up question would be whether he would rise to take the Geithner challenge, which could be real expensive.
You can follow me on twitter @peterreillycpa.
Originally published on Forbes.com on July 18th, 2012