Friday, July 06, 2012

Romney's IRA again

I am quoted in this Talking Points Memo post, from an interview that I conducted some time back, regarding the extraordinary accumulation of wealth in Romney's IRA, which has more than $100 million in it.  The angle that I discuss, though certainly relevant, is not in fact the biggest takeaway from the story.

As I note, while we can't know anything for sure because Romney is so determined to minimize any disclosure, there is reason to surmise that he may have used Caymans "blocker" entities to avoid U.S. unrelated business income tax (UBIT) on IRA-level borrowing.  The basic trick is that, instead of borrowing to hold stock that appreciates and pays dividends, you create a Caymans entity that does the borrowing and holds the stock.  This would increase the gross assets that the IRA could hold, through what is basically a loophole in the UBIT rules, circumvening their limitation on the use of direct borrowing to create tax-exempt investment income.

In defense of this use of "blocker" entities, not only does it appear to be the case that "everyone does it" (i.e., not just the most aggressive taxpayers), but in addition Congress has looked at the problem and declined to act, plus it is very difficult to devise a compelling rationale for the UBIT rule that Romney may be avoiding.  That is, if we allow tax-exempt entities such as IRA vehicles to invest tax-free, why shouldn't the rules let them borrow non-deductibly to invest still more tax-free.  There's no tax arbitrage involved here, given that the exemption is symmetric on the inclusion and deduction sides.

Despite this point, one could certainly argue that it is unseemly for a presidential candidate to be using Caymans or other such "blocker" entities to avoid the UBIT.  I have no especially strong opinion on this argument, one way or the other, given that the tax planning is widespread, clearly works, and avoids an anti-borrowing rule that lacks any compelling rationale.

The bigger issue raised by Romney's $100 million IRA is whether - as I would have to say seems extremely plausible, just from the otherwise unlikely facts that we know - he grossly undervalued the assets that the IRA holds when he placed them inside, in order to evade - not just avoid - the annual contribution limits.  Ed Kleinbard explains the basic issue here.  Again, a Romney defender might be factually correct in arguing that "everyone does it" (so long, as by "everyone," we are understood to mean high-flyers like Romney who have access to special insiders' classes of non-publicly traded financial instruments.).  But in this case the "it" would be violating the law, not just engaging in a clearly legally effective tax planning strategy.  That would certainly strike me as inappropriate, and as raising broader questions about Romney's character and general modus operandi.

Romney says that he takes care to pay the taxes he owes and not a penny more.  But of course the law is not always clear, and aggressive tax planning that one expects to get away with (or at least to be able to engage in without fear of getting hit by penalties) is not exactly up to the highest standard.

Everyone assumes that Romney must be tax-planning within the law, because it would be stupid to take chances and besides he is cautious.  This reminds me a bit of the arguments a few decades back that of course Nixon wouldn't be involved in planning things like the Watergate break-in, because surely he wasn't that stupid.  In assessing the claim about Romney, we should keep in mind that he is extremely aggressive, pushing the limits past where most other people would stop, with regard to little things like telling repeated lies on the campaign trail (e.g., regarding Obama's supposed apology tour).  While I'm sure that he is too smart and cautious to have engaged in, let's call it stupid people's tax fraud, such as omitting gross income and claiming fake deductions, his perspective on tax planning may be such that he just doesn't consider it a problem to engage in extremely aggressive tax planning that some people would regard as far out on the abusive tax shelter fringe.  It may just be how he does things.

Likewise, his extreme penchant for secrecy (e.g., not disclosing any pre-2010 tax returns) does not necessarily have a relatively innocent explanation, even though one could come up with such explanations.  We know, for example, that in 2009 he completely zeroed out his capital gains income from the carried interest fees, but actually showing this would be worse for him than our merely knowing it.  So he wouldn't have to be hiding bad stuff in order to be as secretive as he is about prior years' returns.  But I see no reason for giving him the benefit of the doubt about this.

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