THE BAIN DOCUMENT dump of confidential papers by Gawker earlier today is keeping finance and econ geeks, as well as political writers, busy reading or analyzing or both.
Here’s one analysis that’s interesting. It comes from Victor Fleischer who is a law professor at the University of Colorado Law School and has taught at the law schools of UCLA, Georgetown, Illinois, Columbia, and NYU. The excerpt below comes from his analysis titled Romney’s Management Fee Conversion:
Fund VII. Gawker today posted some Bain documents today showing that Bain, like many other PE firms, had engaged in this practice of converting management fees into capital gain. Unlike carried interest, which is unseemly but perfectly legal, Bain’s management fee conversions are not legal. If challenged in court, Bain would lose. The Bain partners, in my opinion, misreported their income if they reported these converted fees as capital gain instead of ordinary income.
[...] To be clear, there is some economic risk, and presumably this is how Bain’s tax counsel justified its reporting. The economic risk is that the priority profit must come from future profits, presumably from the investment to which the converted fee is allocated. On the other hand, the managers get to choose which investment in the portfolio they want to skim, and they are in a good position to know which investments are safest. Because the fees come off the top, they are not subject to real investment risk, but only the limited risk that even their best investments will decline in value, every single quarter, for the rest of the life of the fund. Even in 2009, an iffy year for Fund VII, the priority profit share increased in value by $3.8 million.
(UPDATE: Here’s another example. Bain Capital Fund X LP reported that it converted $338 million as of the end of 2009. At a 20% tax rate differential, that $67 million in taxes unpaid. Plus deferral.)
Bottom line: Mitt Romney has not paid all the taxes required under law.
UPDATE: More agreement from other tax experts that Mitt Romney may indeed owe more taxes.
h/t Naked Capitalism