A reader
of Talking Points Memo who claims to be familiar with the way equity
partners can avoid paying taxes offers this explanation of how Romney might
have indeed paid zero or near zero taxes for many years as Harry Reid claims.
The corporate structure of most private
equity firms is such that there is a management company (holding company) above
a set of LLCs or limited partnerships which are the actual funds investing the
capital and collecting the fees/distributing the profits. Romney was both a
general partner in the funds and the sole shareholder of the management
company.
The management company shares are generally
considered to have relatively nominal value (i.e. you can conceivably put them
into an IRA) as there generally isn’t a lot of (or any) income/revenue
associated with them — however, since the management company owns the brand
name and controls the funds and all hiring/firing/compensation decisions
(within Bain Capital), if Romney’s partners wanted to continue using the name
“Bain Capital” and take over control of the private equity firm and funds in
the future, they would have to buy back Romney’s shares over a period of
several years for hundred+ of millions of dollars. This is not uncommon in
private equity firms undergoing an ownership transition. Since these shares
(could) have been contributed to an IRA over the years, the Romney’s income
2002 to 2009 would largely be from his partners at Bain buying back shares that
he’s already contributed to his IRA, and just like any trading you do in your
IRA, the sale of these shares would be tax free until after he turns 65 (and/or
withdraws from said IRA) and he’d pay zero income taxes on that.
Interesting. Very interesting.
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