A few years ago, I was buying gold likeso many others. I did this by purchasing shares in a Canadian mutual fund company that held bullion. I sold my shares in 2011 for a small capital gain. At first, I thought I would pay tax at the low 15 percent capital gains rate, or perhaps at the higher rate for collectibles, but as I researched the rules on taxation of foreign-based mutual funds, I determined I would have to pay tax on my profit in the highest bracket for ordinary income of 35 percent.
I am a small-town practitioner and my clients are unsophisticated middle-class taxpayers. The 35 percent rate on foreign investment companies was news to me.
What made the circumstances more frustrating was my subsequent discovery that there is an election I could have made using an obscure IRS form -Form 8621- in the year I acquired my mutual fund investment. That election would have made it possible to avoid the 35 percent rate.
Several months ago, the Mitt Romney campaign made his 2010 return public, along with an estimate for 2011. I had no intention of reviewing it, but sometime in mid-August, I linked to the return from a news story about the $4.8 million capital loss carryover on his 2010 Schedule D. What I found was a document of over 200 pages including IRS forms and supporting schedules.
Yes, there was that $4.8 million capital loss carryover on Line 14 of the Schedule D, but what struck me next was that so much of the return was comprised of Form 8621. There are 122 pages of actual IRS forms in the document, and of those, 34 pages are multiple copies of Form 8621 electing out of paying the 35 percent rate.
I counted 63 pages of Internal Revenue Service forms directly related to foreign transactions. I also found 12 pages of Form 8886 filings, which is filed to disclose what the IRS terms "abusive tax shelters and transactions." These filings likely relate to foreign investments. That means that 75 of the 122 pages - well over half - are devoted to foreign activities.
I stopped for a moment to ponder the absurdity of a tax system that allows a taxpayer to participate in an abusive tax shelter as long as the activity is disclosed.
Continuing to peruse the return, I noted a Form 5884 and a Form 3800, four pages altogether, reporting a transaction in the amount of only one dollar: a flow-through from a partnership or trust of a one dollar work opportunity jobs credit. "Good work creating U.S. jobs, Mitt," I muttered under my breath.
Then I turned to the supporting statements.
WHICH COST TO PAY?
Before I describe what I found on the supporting statements, I should provide some background.
Experts had noted that at 13.9 percent of total income, Romney's federal tax rate in 2010 is lower than for most middle-class taxpayers, who, in addition to income tax, pay a disproportionate amount of federal payroll taxes.
Some discussion in the media revolved around that $4.8 million capital loss carryover appearing on the 2010 Schedule D, which is a clue to what we would find on his 2009 tax return. Romney was able to offset all of his capital gains in 2009 and still have a $4.8 million capital loss to carry into the 2010 year.
Romney had refused to release tax returns for years prior to 2010, despite a tradition of presidential candidates making several years public. (As of press time, he still hadn't released any prior returns, but had announced that he would be releasing his 2011 return.) The day I linked into the 2010 return, Romney announced to the press that he had personally reviewed his returns over the prior decade. "I did go back and look at my taxes and over the past 10 years," Romney said. "I never paid less than 13 percent. I think the most recent year is 13.6 or something like that. So I paid taxes every single year."
Romney did not specify what kind of taxes he paid in prior years that added up to more than 13 percent. The 13.9 percent reported in news stories for 2010 was the federal income tax plus the self-employment tax divided by total income. Romney's 2010 federal income tax liability is computed under the Alternative Minimum Tax rules, net of a $77,565 foreign tax credit. Foreign tax credits reduce federal tax liability on a dollar-for-dollar basis. Therefore the $77,565 represents foreign taxes paid in addition to the U.S. taxes paid, and, if counted, would increase the rate paid from 13.9 percent to 14.25 percent.
I stopped to wonder if Romney was counting the foreign taxes paid in prior years when he said he always paid more than 13 percent.
Why not release the returns prior to 2010? ABC News commentator George Will summed it up best. "The costs of not releasing the returns are clear," Will said. "Therefore, he must have calculated that there are higher costs in releasing them." Political pundits speculated he may have paid no or very little federal income tax in prior years.
BACK TO THE RETURN
So these were the events transpiring on the day I linked into the 2010 return. I made my observations about the IRS tax forms, described above, and then turned to the supporting statements.
There are 69 supporting statements. Right away, just starting to turn the pages, I found much of interest. For example, Statement 2 reports cancellation of debt income. What I found on Statement 4 really got my attention. Statement 4 discloses refunds received from state governments for years prior to the immediately preceding year (i.e., for years prior to 2009). The states are not disclosed, but there are likely several involved on a tax return of this complexity.
When a tax preparer sees a taxable state refund from prior years on the federal return, the preparer's first thought is that there was a net operating loss carried back from the immediately preceding year and applied in prior years. Many states allow such carrybacks.
How could Romney have generated an NOL in 2009? An NOL generally results when an active trade or business is losing money. Romney is essentially retired. One possibility would be a suspended passive loss deductible in the year the activity was liquidated. Also possible would be a loss flowing through from a Bain entity deductible under the passive loss rules if he could show material participation in the entity for any five of the preceding 10 years. This could be politically damaging, because Bain began aggressively moving jobs overseas within this time period.
I asked myself, if there had been an NOL in 2009, why didn't I see carryforwards of unused charitable contributions on the 2010 income tax return? Charitable deductions cannot be claimed to the extent they exceed 50 percent of adjusted gross income. With an NOL, there usually isn't much AGI on the return. I found the answer on the 2010 return. Due to Romney's high interest and dividend income, there was the potential for a low-seven-figure charitable deduction even in a year with a significant NOL.
I paused to consider the similarities between tithing and taxes. Both are a percentage of income. Romney gives millions to his church and receives back the same spiritual services as the church member sitting in the pew next to him, who may give only several thousand dollars. Romney appears to be willing to tithe at the same rate as other church members, but pays federal taxes at a lower rate than most middle-class taxpayers. The church provides assistance to the needy, but so does the U.S. government, and to a much greater degree.
Other possible explanations exist for the tax refunds from prior years. Perhaps there was an amended return, or a state taxing authority may have held a 2008 filing for review before issuing the refund late. There are several other possibilities.
On balance, though, there was enough there, on Statement 4, to keep me interested. I continued to review the supporting statements, looking for more evidence that 2009 was a loss year, a year in which Romney paid no or little federal income tax.
DEEPER IN
I kept turning the pages, until I got to Statements 28 through 40, which concern the foreign tax credit. Specifically, on Statement 30 I found evidence supporting an NOL for 2009. On this statement appears the 10-year history of foreign taxes paid and related foreign tax credits claimed, in the passive category, under the regular income tax system. In every year except 2009, Romney claims as a credit the full amount of the foreign taxes paid.
What about 2009? In 2009 Romney claims a zero foreign tax credit and carries the full amount of foreign taxes paid in 2009 over to 2010. This suggests that either he had no foreign taxable income in 2009 or he had no U.S. federal taxable income tax that year. Which one could it be?
17 Comments
Most of you if your not Investment Advisors haven't even heard of this..
http://www.thestreet.com/stock-market-news/10954701/special-investigation-graphic.html
Posted by: DDTS | October 31, 2012 7:19 AM
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One more thing.. All companies and INDIVIDUALS involved in Chinese Reverse Mergers seem to have something in common.. Bank accounts in the Cayman Islands. We wonder if Bain Capital was involved in getting around the NYSE IPO rules and selling shell USA companies to Chinese companies. http://articles.businessinsider.com/2011-05-27/wall_street/30065796_1_legal-advisor-bain-capital-special-committee
Posted by: DDTS | October 31, 2012 7:16 AM
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"If Mr Romney was doing something illegal we would of heard it by now" Now think about that Mr Madoff was doing something illegal and Mr Madoff chose to shield the Govt from the truth for some 20+ years.. Who says Mr Romney and his accountants are Not capable of the SAME thing?
Posted by: DDTS | October 31, 2012 7:09 AM
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Don't blame the player, blame the game.
Yes, I do find it very aggravating that an individual making 300k pays a 26% average income tax rate when a super rich guy can pay 15% on 100million or more! Doesn't seem right does it, that's because it isn't! Only better gig I've ever seen is when the royal family had their "followers" believing that they shouldn't have to pay ANY taxes. Well they finally had enough and the royals started paying taxes in 1992.(How decent of them) I would like to see everyone get a $5,000,000 lifetime exemption on long term capital gains. After that, tax it as ordinary income.
The numbers can be adjusted, but you get the point.
Posted by: SENSIBLE | October 26, 2012 9:20 AM
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Really great article, that I hope more people outside the accounting/tax professions get to see. The negative comments above totally miss the point of what Bose has to say, without contradicting his premise. Governor Romney obviously realized that refusing to release his 2009 taxes would bring far less political consequences than to have people see what was actually on them.
Posted by: uburolf | October 25, 2012 2:40 PM
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Additional to many of the other comments made to Mr Bose, I would like to add the following: Mr Bose writes "Romney appears to be willing to tithe at the same rate as other church members, but pays federal taxes at a lower rate than most middle-class taxpayers. The church provides assistance to the needy, but so does the U.S. government, and to a much greater degree." Two problems with that statement; one is that the average middle class taxpayer DOES NOT pay at a higher average tax rate. Yes they maybe in the 15% tax bracket on their last dollar of income, but their average rate of tax vs Gross Income is much lower for the average middle-class taxpayer. I may not agree with the law that allows Mr Romney to pay at that rate, but that is the law and I do not fault him for taking advantage of the l;aw as it stands. Second problem is Mr Bose's comment about the church provides assistance to the needy, but so does the US Government and then stated "to a much greater degree" Poppycock! I do not believe that to be correct either. What the US Government does is waste money and pay bureaucrats large salaries and benefits well above the average middle class taxpayer. And it probably costs well over Two Dollars paid to the US Government for each Dollar that goes to assist the needy. Furthermore, it is the right of US Citizens to decide where they want to contribute and how they want to assist the needy. I hope Mr Bose's clients read his article and decide for themselves whether he is doing an adequate job.
Posted by: Plebe2001 | October 25, 2012 1:36 PM
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So, you are upset that a person who had not control over the legislation of the I.R.C. simply used it to calculate his taxes and you intimate he's doing something wrong.
Worse, you hold yourself out as a tax compliance person and failed to know or research foreign mutual fund taxation. Where I come from that's called malpractice if it were planning/compliance for a client and missed.
I love (not really) all these persons who are dicing Romney for doing what we all do; attempt to some degre structure our lives to reduce our tax burden. Worse is someone in the industry who has a fiduciary duty to aid his clients in paying the least amount but their legal share of tax burden.
For many who invest offshore actually pay overall a greater overall tax than if they were wholly in the US. Simply look to see if there is a a FTC carryforward.
Oh, by the way, what was your incentive to invest offshore; from the article it appears you also were hoping to avood US taxes but screwed up. So, whatever you think or say about Romney and his tax structure, simply look in the miror and point the finger straight ahead.
Posted by: BrianL | October 25, 2012 12:48 PM
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It appears that Mr. Romney has some very good accountants and tax accountants. There is no evidence that he has broken the law or that would have come out in the press by now.
If you are truly concerned with tax evasion you might first want to look at those individuals within the federal governments payrolls that have been identified as not paying their taxes and ask why we the law abiding citizens of this country are still paying them each week. We have Congress men and women along with federal workers that are in violation of the law and we do nothing...
RBL
Posted by: Unknown | October 25, 2012 12:41 PM
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So according to opensecrets.org you gave $2,500 to Obama and $2,500 to some organization called Priorities USA Action.
Your article would have been more enjoyable if it stuck with the tax analysis, and left the political commentary.
BTW, if I were Obama, I'd be embarassed for someone to see my tax returns from the early 2000's. He and his wife were in the 1% of earners yet they gave very little to charity.
Posted by: Go Hokies | October 25, 2012 12:38 PM
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A CPA's fiduciary duty is to minimize the tax burden of his client while complying with the law. Last I heard it was not a crime to have a good CPA. CPA's also have a duty to understand the tax code and forms, including Form 8621.
Posted by: nwairhead | October 25, 2012 11:30 AM
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Blah, Blah, Blah. Two pages to say all that? If Romney did something illegal, we would know by now. Harry, you're either an Obama supporter trying to disparage Romney or you're jealous of his income and the abilities of his accountants. Only you can answer that. My advice to you is to mind your own business. As a CPA, you should feel some guilt discussing someone else's return publicly. If I was Romney, I would hire the best accountants available, too. It would obvoiusly not include you.
Posted by: timblackcpa | October 25, 2012 11:19 AM
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Harry you are obviously an Obama Supporter. But I'm a little surprised that a CPA would make a statement that Romney is paying at a rate less than the middle class, Really? That is intentionally and patently false. This would make as much sense, 34 liters x $3.50 gallon= 119 euros, is this math correct. (True correct answer 24.26 Euros given current exchange rates) You know that Romney's earnings are mostly based on Long term Capital Gains, correct? With a 2011 top rate of 15% for "taxable" incomes over $69,000 for Married And "middle class" is defined as around $75,000 for a family of four, using standard deductions their taxable income would be $48,600, 15% bracket = 6,444 in tax w/o credits which is 8.6% for "EARNED INCOME" and if children are under 17 tax =$4,444 or 5.9% But let's say 100% of their income is from Long Term Capital Gain, what is their tax liability? -0- zero what is their capital gain tax Rate? -0- zero NOT 15% They could make $95,400 in LT capital gains and still pay -0- in tax In fact they could earn up to $108,735 and pay -0- zero tax ($22,335 wages, 86,400 LT CG, with $2,000 child tax credit) And you're saying that they (middle class) are paying a higher rate than Romney? IF, you still maintain that view, you need to get a refund from University of Oregon and go back to a real school such as Hillsdale College or University of Michigan (my Alma matters). All Kidding aside, I think the real issues are economic. Loss of Medium Household income, 40% loss of middle class net worth since 2007 and loss of value of US Dollar and it will take a bi-partisan effort to correct. Obama can't even get a budget out of the Senate, which is controlled by his party. (You do not need a matching house budget to pass your own in the senate. Pass a senate version and send to conference committee.
Posted by: Savage Grace | October 24, 2012 9:22 PM
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The majority of the negative comments appear to be missing, deliberately or otherwise, the real point of the article.
Had Romney said "I did go back and look at my taxes, and over the past 10 years I never paid less than 13 percent. Of course, quite a lot of that was to foreign governments" his standing in the polls might not be quite so high.
The issue has nothing to do with whether tax advice is good or bad, or the legitimacy or otherwise of using the tax code to one's advantage. It is about telling the truth.
Posted by: Roystons | October 24, 2012 8:54 AM
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Adding onto gmadden's comment, you yourself admit to being frustrated that you did not file the Form 8621, which would have made it possible to avoid the 35% rate. Sounds like you would have employed tax minimization strategies if you could have, but are critical of Gov Romney for doing the same.
Posted by: TJC | October 23, 2012 9:57 AM
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From where I stand, it appears that Mr. Romney has not been in a position to change federal tax law to favor himself, but only to report the facts just like the rest of us. RDA
Posted by: ranweilersr | October 22, 2012 9:06 PM
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Your last sentence explains why you would go through such self-inflicted pain to examine another's tax return as you have. However, I choose to share the following tax rulings that have been issued by the courts:
"Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes."
Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934)
"Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant."
Commissioner v. Newman, 159 F.2d 848, 851 (2d Cir. 1947) - dissenting opinion
Had you been as diligent as Governor Romney's accountant, you too could have enjoyed a lower tax rate.
Posted by: gmadden | October 22, 2012 11:20 AM
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I'm not a tax geek and I still found this interesting. Loved the last line! Thanks to the TaxGirl newsletter for the link :)
Posted by: MFN | October 22, 2012 12:05 AM
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