Romneys Biggest Tax Story Still Untold – Could Result in Open Republican Convention

With all the stories on Romney’s finances, many of which resulted from my observations regarding his tax returns and investment accounts, in particular his IRA, and the interaction of the trusts, foundation and Bain Company filings, the most important story is still untold.

Here it is, the story that could likely open the Republican convention to draft a new candidate.  I have been unsuccessful in getting a major reporter to tell the story, so I guess I’ll just have to tell it myself.

I’ll lay it out in simple steps with no conclusions or opinions.  It is simply astonishing that the media has not told this story.

1)  While head of Bain Capital, Mitt Romney set up a SEP-IRA pension plan that allowed employees to invest in Bain deals.  Mark Maremont of the WSJ did a fine story on this.

2)  IRAs are tax exempt and like other tax exempts must file a special return, a 990-T, if they are invested in leveraged transactions.  This is as straightforward as requiring employers to pay unemployment insurance for employees as part of periodic payroll transactions.  The purpose of the 990-T is to recognize the UBIT or Unrelated Business Income Tax, the rate of which approximates the corporate rate of 35 percent.

Congress adopted this approach for obvious reasons in that if an investor was getting tax exempt income in an IRA, let’s say interest income on a leveraged debt offering, and on the other side of the fence the borrower was taking large interest expense deductions, the net impact would be a double deduction and a grossly dysfunctional tax system.

3) Bain Capital is a leveraged buyout firm in which employees invested in numerous “Bain Deals” via their IRA accounts.  These investments are leveraged and clearly subject to UBIT tax.  Other leading private equity firms do not allow employees to invest in their own deals via IRA accounts.

4)  All 990-T returns, including those relating to IRAs, are by law public.  One need only make a request to the IRS.  In April, I made such a request for Bain and 12 top executives, including Romney, for their SEP IRAs covering the period 1992-2007.  The IRS responded none had been filed.  In addition, I also confirmed no filings were made from 2008-2011 with respect to the new Bain Capital Pension Plan set up by Ropes and Gray in which the official retirement age is 23 (not a misprint).   Maremont of the WSJ also reported on this “unusually young” retirement age.

5)  The only way to escape the 990-T requirement and UBIT tax is to make the investment through a foreign blocker corporation.   Domestic corporations are fully subject to the UBIT and leading law firms are very careful in structuring partnerships to account for this, that is, making sure such investments go through a foreign blocker corporation.

6)  Edgar Online is a public corporation ticker, EDGR, effectively controlled by Bain Capital via a convertible bond issue.  SEC filings clearly indicate this control, summarized in Edgar Online’s executives own words.

Edgar Online is in the business of summarizing  SEC data in user friendly formats that are widely used in the financial and media world.  Many leading databases including Lexis Academic, which is available in most public libraries, use Edgar Online.  One need only search for Mitt Romney using the Lexis Academic database, while specifying a search database of “SEC Filings” from 1/1/2000-12/31/2003 to see a list of references.

7)  In but one example, on February 13, 2000, SMTC Corp, ticker SMTX, filed a 13G report on behalf of Bain Capital.  Under section Item 2a, Name of Filing Person, it specifically states that BCIP Trust Associates II is a Delaware partnership, not a foreign blocker corporation.   This form also states Romney is the sole shareholder of Bain Capital and the only “control person” capable of declaring a special dividend.

8)  ERISA rules require pension plans to be trusts.  For example, if I want to set up a pension plan for Joe’s Consulting with TD Ameritrade, the title for each participant’s account would be Joe’s Consulting Pension Trust FBO followed by the employee name.  For example, Joe’s Consulting Pension Trust FBO Jane Doe would be one employee and Joe’s Consulting Pension Trust FBO Mitt Romney would be another.  The reason is to make absolutely certain each employee’s assets are held in and protected by a separate trust, which is required by ERISA rules.

In Romney’s IRA, note that he is not invested in BCIP Associates II but rather BCIP “Trust ” Associates.  The key word “trust” is a calling card for the IRA.  This can be seen in his recently filed 2012 Personal Financial Disclosure Statement.  Note that the most recent filing shows BCIP Trust Associates III, not II.  Trust III is identified as a foreign blocker in SEC filings yet in previous filings Romney was in Trust II and its predecessor, both domestic Delaware Corporations.

9)  The 13G filing regarding SMTC Corporation on behalf of Bain, referred to in item 7 of this analysis, specifically says BCIP Trust Associates II is a Delaware Corporation, not a foreign blocker.

If this SEC filing is accurate, and it certainly is, then not only Romney, but many other Bain employees have failed to file the required 990-T returns and pay the necessary UBIT tax.   Other leading private equity firms, including KKR and Blackstone, do not allow employees to invest in company deals via retirement accounts for good reason.  Perhaps Bain just got too greedy, consistent with its fees being 50 percent higher than the industry average.

There is a whole cottage industry of law firms that advise tax exempt investors on how to avoid UBIT by using foreign blocker corporations.  These clients include leading endowments such as Harvard and Yale, foundations such as the Gates Foundation and public pensions.

Romney says he trusts his advisors, yet that was clearly a mistake.  They have failed him in not only setting up a valid blind trust, but also a credible investment approach for a Presidential candidate.  See February 22, 2012 blog post for related material and comparison to Bill Esrey, former CEO of Sprint.

More importantly, if these filings made by one of Bain Capital’s portfolio companies, SMTC, and summarized via another entity they effectively control, Edgar Online, are accurate, then Romney is indeed involved in a massive tax fraud and by nature disqualified from being a viable candidate for President.

This is not complicated and hopefully someone will elevate it from the obscurity of a blog to where it belongs, front page top right above the fold on a Sunday.