Saturday, September 15, 2012

Mitt Rmoney and his $100+ million IRA (Not a typo...)

Private-equity firms (which buy, invest in, help manage and eventually sell companies) and hedge funds (which invest in a wide variety of markets) are run by managers on behalf of outside investors. When profits from a firm’s investments are disbursed, they are typically distributed according to each investor's stake. This income is taxed on each individual’s tax return, usually at the capital-gains rate of 15 percent.
Fund managers may receive some income this way, but there’s a separate stream of income that is usually more lucrative for them. They often take 2 percent of the fund’s assets per year as a management fee, which is paid in cash and taxed at ordinary income rates of 35 percent, plus 20 percent of the profits as a performance-based bonus. The 20 percent portion is typically "carried over" for years at a time, often until the investment is closed out (thus the name, "carried interest"). This payment is taxed at capital gains rates of 15 percent -- less than if it were salary or wages.
But IRA contributions are limited to $6,000 per year. 
In order to contribute to an IRA, you must have taxable income. Your maximum contribution is determined by the annual contribution limit or your total taxable income, whichever is less. As of 2009, the contribution limits are $5,000 if you're under age 50, and $6,000 if you are 50 and up.
Yet somehow Mitt's IRA has accumulated $100+ million
Individual Retirement Accounts were designed as a tax-free way for middle-class Americans to plan for their retirement. The annual contribution limit is $6,000, but somehow Mitt Romney managed to to build his IRA into a $100+ million treasure chest. Without specifically naming Romney, House Democrats are saying they want a review of the loopholes that someone like Mitt Romney would need to exploit in order to generate such a massive amount of tax-free wealth in an IRA:
In all likelihood, Mitt “sold” some of his Bain investments to his IRA.
Next, there’s his IRA, which began life as a 401(k). Many Americans have them, generally modest in size. But Romney’s has a current value of $20.7 million to $101.6 million — one of the largest ever recorded.
With annual contributions to 401(k)’s and IRAs subject to relatively low caps, how on earth did Romney’s get so large? He may be a good investor, but there’s no chance that he took those small amounts, bought some publicly traded stocks and turned it into $20 million, let alone $100 million.
In all likelihood, he “sold” some of his Bain investments to his IRA. Because they are not publicly traded, and therefore “illiquid,” under the tax law, he would be allowed substantial discounts on their valuation — effectively increasing his IRA contribution.
More amazingly, he may well have “sold” some of his Bain carried interest to his IRA. If he did so at the outset of the fund, he likely put little or no value on that transfer — though it was potentially worth millions. Such a transfer would be of questionable legality, according to a recent Tax Analysts article by Lee A. Sheppard.

Bain invested the $37 million of capital in its first fund in twenty companies and by 1989 was generating an annualized return in excess of 50 percent. By the end of the decade, Bain's second fund, raised in 1987 had deployed $106 million into 13 investments. As the firm began organizing around funds, each such fund was run by a specific general partnership – that included all Bain Capital executives as well as others – which in turn was controlled by Bain Capital Inc., the management company that Romney had full ownership control of.  As CEO, Romney had the final approval say on every deal made. 

Insider trading is against the law 
In the United States and Germany, for mandatory reporting purposes, corporate insiders are defined as a company's officers, directors and any beneficial owners of more than ten percent of a class of the company's equity securities. Trades made by these types of insiders in the company's own stock, based on material non-public information, are considered to be fraudulent since the insiders are violating the fiduciary duty that they owe to the shareholders. The corporate insider, simply by accepting employment, has undertaken a legal obligation to the shareholders to put the shareholders' interests before their own, in matters related to the corporation. When the insider buys or sells based upon company owned information, he is violating his obligation to the shareholders.
For example, illegal insider trading would occur if the chief executive officer of Company A learned (prior to a public announcement) that Company A will be taken over, and bought shares in Company A knowing that the share price would likely rise.

Mitt's tax-free IRA was funded by deposits of carried interest that included shares and earnings from Bain Capital funds that were under his direct control.  Mitt was personally benefiting from profitable investment choices he made with access to information that was outside the public realm, but available to him as the private equity fund manager at Bain.  Whatever this practice is called, it is indistinguishable from insider trading.  The reason that this whole scheme is not illegal is that Mitt has been blazing a new trail with these financial shenanigans and the law and the courts just haven't caught up to him and the others following him yet.  

Look out Mitt.  The IRS has a history of retroactively closing closing tax loopholes like this one.

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