Tax experts who have begun to examine the Bain Capital documents released Thursday by Gawker are raising questions as to whether presumptive GOP presidential nominee Mitt Romney has paid all the taxes he owed.
At issue are two tax-avoidance techniques employed by Bain Capital,
the firm founded by Romney, which have been commonly used in the private
equity world but have come under increasing legal scrutiny.
The first scheme involves owning U.S. dividend-paying stocks in an
offshore account and pretending, for accounting purposes, not to own the
stock. Instead, the taxpayer tells the Internal Revenue Service that he
owns a derivative product that is identical in every way to the stock
-- except it isn't the stock, so therefore no U.S. taxes are owed. It's
called a "total return equity swap," because the buyer still gets the
benefit -- the "total return" -- of owning the stock, or equity.
"This use of total return equity swaps, such as to avoid the U.S.
dividend withholding tax, was very widespread for more than a decade,
and may not be dead yet, although the IRS issued a shot-across-the-bow
Notice concerning the practice in 2010," writes Daniel Shaviro, the Wayne Perry Professor of Taxation at New York University School of Law.
"But taxpayers who engaged in it to avoid the dividend withholding tax
were coming perilously close to committing tax fraud, in cases where the
economic equivalence to direct ownership was too great."