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.
VALUING A GIFT AT ZERO
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.
NO COMMENT
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
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.
“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.
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?
The bigger question is: Should we tax gifts at all?
I personally think we should not.
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.
Great work David!
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.
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.
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.
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.
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