Romney Claims Bain Activity to Avoid Taxes

Here’s a very interesting development in the Mitt Romney tax story. Apparently, he claims on his tax returns to still be an active participant in Bain decisions even while telling voters that he can’t be held responsible for anything Bain has done since he left in 1999 (or 2002, depending on which day it is). And he does so to save millions of dollars in taxes:

But according to his 2010 tax return, when the Internal Revenue Service comes calling in April, Romney has a different answer: The presumptive GOP nominee reaps lucrative tax breaks for “active” participation in the private equity firm he founded, as well as a host of other investments.

As David Kautter, a tax expert at American University, explains, the concept of active investment has different meanings for the IRS and for regular people. “When you say you’re actively involved in all these businesses, people do think, OK, you’re actively involved. But the tax law has its own definition,” he said.

The IRS advises that “[f]actors that indicate active participation include making decisions involving the operation or management of the activity, performing services for the activity, and hiring and discharging employees. Factors that indicate a lack of active participation include lack of control in managing and operating the activity, having authority only to discharge the manager of the activity, and having a manager of the activity who is an independent contractor rather than an employee.”

Even if Romney could persuade the IRS his involvement was legitimately active, that still leaves him in a rhetorical jam: For tax purposes, he claims an active status; for political purposes, he claims to have zero to do with the investments.

The distinction is valuable, for the IRS treats passive and active income and losses differently. If a passive investment loses money, the taxpayer can only write off that loss if passive gains have also been made. But active losses can be written off at a 35 percent rate and deducted from the taxpayer’s ordinary income. In other words, a taxpayer wants active losses, not passive losses. So by describing many of his investments as active, Romney saves himself millions of dollars in taxes.

With those active investments, he is also securing a tax break few Americans enjoy: When he wins, he’s paying a 15 percent rate on the gain. When he loses, he’s writing it off at 35 percent, meaning that tax policy is subsidizing Romney’s risk in his Bain investments…

Romney’s 2010 tax return lists $301,630 in “trade or business interest” deductions and $503,737 in “trade or business expense” deductions — all of it described as expenses from his business partnerships, including Bain. Specifically from his various Bain-related activities, Romney scored a total of $547,525 in such deductions.

These kinds of deductions are only available to “active” participants in business partnerships. While Romney filed as an active participant for tax purposes, there is no evidence that he took part in Bain management decisions in 2010, and he has denied doing so.

Which means he’s lying to the IRS and he did not, as he has so often claimed, paid every dollar in taxes that he is legally required to pay.

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  • Chiroptera

    Could the IRS use Romney’s campaign speeches as evidence against him in a perjury trial?

  • eigenperson

    Why do I think that if I tried this trick, I would be audited and forced to pay a massive penalty?

    More to the point, why wasn’t Romney audited?

  • d cwilson

    But Ann says we should trust Mitt.

  • steve oberski

    @eigenperson why wasn’t Romney audited

    Because he’s a Mormon and not a Scientologist ?

    Maybe those magic underw

  • steve oberski

    Wow, keyboard went wild in the middle of that !

    I sense the dead hand of Joseph Smith in this.

  • eric

    The IRS’ definition of active/inactive forms a logical pair. You must be one or the other.

    This makes for a refreshing change. Normally we are not sure whether Romney is lying to group A, B, or both. In this case, we can at least eliminate the “both.”

  • Jeez, I’m running out of nicknames for this guy.

    Mittunswillard, Mittmoroni, Mittunslither…

  • Randomfactor

    May be some good stuff in here:

    It appears he set up some of his retirement bennies from Bain AFTER retiring from Bain.

  • nobonobo

    Wow! I thought it said he was claiming brain activity.

  • grumpyoldfart

    He’s too famous. He will never be charged.

  • Ichthyic

    at first i thought the title of the article started with:

    “Romney Claims Brain Activity…”

    which I knew just couldn’t be right.

  • Ichthyic

    Wow! I thought it said he was claiming brain activity.

    doh! just saw this.

    I see I’m not the only one.

  • I, for one, has a not surprised — dude’s a freakin’ slimeball.

  • iangould

    “I sense the dead hand of Joseph Smith in this.”

    Joseph Smith isn’t dead. He regularly makes his physical presence manifest and has conversations with the leaders of the LDS. So do Brigham young, Moroni, Nephi, Jesus, Abraham, Moses and the rest of the prophets.

  • F

    I’m sorry, but I thought you had said Romney Claims Brain Activity to Avoid Taxes, which has interesting angles all its own.

  • F

    eric @ 7

    Schrödinger’s Romney, Quantum Romney.

  • slc1

    The problem with this revelation is that it’s too complicated to explain in a 30 second attack commercial. Because of that, it probably won’t have the impact it should have. Clearly, Romney has skated close to the line, if, in fact, he hasn’t crossed it.

  • “The problem with this revelation is that it’s too complicated to explain in a 30 second attack commercial.”

    Only if you’re an HONEST person. The GOP has been running blatantly false, fantastic and totally convoluted 30 second–or less–attack ads for years. There target demographic has no problem at all with understanding the message.

  • uzza

    Now, now, people, he didn’t lie, he simply mittspoke.

  • unbound

    @eigenperson – Perhaps he has been audited.

    The difference between you or I being audited and Romney being audited is that we would be talking to the IRS probably alone or with a cheap tax lawyer. Romney, on the other hand, brings in his tax attorney team and can probably work their way out of the whole thing (another benefit of being part of the 0.001% that the 99.9+% of us don’t have).

    It might be a possibility that his current public statements of not being actively involved in Bain could be a basis for an issue, but I think DoJ would still have to file a suit to get the process started. And as much as we like to think that Democrats are on the side of the masses, the reality is that the leadership at DoJ are also rich and aren’t likely to file suit.

  • Eric Ressner

    “The problem with this revelation is that it’s too complicated to explain in a 30 second attack commercial.”


    Scene: generically attractive woman, mid-30s, strolls out from behind a stately oak tree (or perhaps an elm). Generically attractive lake/forest background.

    GAW: So, Mitt. You’ve been claiming you weren’t at Bain when they raped and pillaged XYZ Company, leaving thousands out of work and uninsured. But your 2010 tax return says your income from Bain was based on active management of your investments. You save $X,000,000 in taxes if that’s true. So which is it: were you working there or not? Can you help us with this?

    I’m sure a savvy copy-writer could do better, but I only had 10 minutes.

  • jesse

    To be slightly fair to Mittens, the IRS definition of active and passive (as the article states) aren’t “common sense” definitions. For example, you count as an active investor if you have a money manager make decisions (Like if you have a managed account with a financial adviser) because you can make investment choices; you can tell the manager / broker “buy 100 shares of IBM” even if he has a whole other portfolio he set up for you that you didn’t take part in building.

    You are NOT an active investor if you happen to own a mutual fund in your 401k or IRA, even though you can make decisions about how the money is allocated between one or more funds (we’ll leave aside for the moment that 401ks are taxed in their own little universe) you don’t make any decisions about how the funds themselves are built.

    Romney could have been an “active” investor even if he had nothing to do with day-to-day decisions. The problem is that Mitt won’t clarify any of this for us non-tax lawyers. Because aside from his tax bracket, I want to know how much of a hand he had in the businesses Bain Capital bought. PE firms aren’t evil. But if he’s going to talk about creating jobs I want to know what he was doing when Bain bought various companies. Because some PE firms are built on success — they invest, they sell when the company goes public or gets a bigger buyer — and some on failure. They take over distressed companies and sell the pieces. Which was Bain, Mitt?