Romney's Bain Capital under investigation for tax dodging

New York's attorney-general starts examining private equity firms

Bain Capital – the company formerly run by Republican presidential candidate Mitt Romney – is among a number of private equity firms being investigated for underpayment of taxes, according to a report in the Financial Times:

[New York's attorney-general, Democrat Eric] Schneiderman has issued subpoenas as part of an investigation into the “fee-waiver” strategy, in which executives invested management fees paid by investors back into one of the investment funds. Any profits on those fees would be taxed at the capital gains rate – a much lower tax rate than if it were treated as ordinary income. There is debate over whether the strategy is legal, aggressive or illegal. The strategy was risky and could have resulted in losses for the manager if the investment funds were not profitable.

The fact that Bain Capital is being investigated has led to some – including one "private equity executive" quoted by the FT – to brand the move as a political one, but other equity groups are being investigated as well, including KKR (part owners of Alliance Boots, amongst others) and Apollo Group (an education-focused firm which owns one of Britain's two private universities, BPP University College).

Bain is being roped into the investigation – run by the state's Taxpayer Protection Bureau – due to the hundreds of pages of the company's internal financial documents which were leaked by Gawker, which reveals that the Bain partners save more than $200m in federal income taxes and more than $20m in Medicare taxes.

The New York Times reports that there is widespread belief that the practice is not only legal, but ethically justifiable as well:

Tax lawyers have justified the arrangements by arguing that converting the management fees into carried interest, which could lose some or all of its value if a fund does poorly, entitles the managers to the lower capital gains rate, which is intended to help mitigate the risks taken by investors.

“They’re risking their management fee — they’re giving up the right to that management fee in any and all events,” said Jack S. Levin, a finance lawyer whose firm has represented Bain on some matters. Mr. Levin said he did not consider the practice risky or even aggressive.

“The I.R.S. has known that private equity funds have been doing this for 20 years,” he said.

If the move is politically motivated, it's likely to prove rather successful. Romney's tax status has been under examination since the day he made his first presidential bid, and he has been extremely unwilling to reveal anything but the barest minimum of information about it. The most compelling theory as to why is the suggestion that, in 2009, he may have taken advantage of an IRS amnesty into illegal Swiss bank accounts. And the status of Romney at Bain is similarly murky.

All of which is to say that the candidate has the whiff of financial impropriety floating around him most of the time, and it doesn't take much from, say, a Democratic attorney-general to make more bad news for him.

Obama and – Bane? Bain? Romney. Obama and Romney.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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Cabinet audit: what does the appointment of Liam Fox as International Trade Secretary mean for policy?

The political and policy-based implications of the new Secretary of State for International Trade.

Only Nixon, it is said, could have gone to China. Only a politician with the impeccable Commie-bashing credentials of the 37th President had the political capital necessary to strike a deal with the People’s Republic of China.

Theresa May’s great hope is that only Liam Fox, the newly-installed Secretary of State for International Trade, has the Euro-bashing credentials to break the news to the Brexiteers that a deal between a post-Leave United Kingdom and China might be somewhat harder to negotiate than Vote Leave suggested.

The biggest item on the agenda: striking a deal that allows Britain to stay in the single market. Elsewhere, Fox should use his political capital with the Conservative right to wait longer to sign deals than a Remainer would have to, to avoid the United Kingdom being caught in a series of bad deals. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.