N.Y. Probes Bain Capital’s Tax Strategy

Questions about Republican presidential nominee Mitt Romney’s record at Bain Capital are not likely to go away any time soon, especially now that it’s been revealed that Bain is among a number of major private equity firms under investigation by the New York state attorney general’s office for tax-related reasons. The issue: Determine whether the firms used tax loopholes to avoid paying hundreds of millions of dollars in taxes.

The New York Times:

The attorney general, Eric T. Schneiderman, has in recent weeks subpoenaed more than a dozen firms seeking documents that would reveal whether they converted certain management fees collected from their investors into fund investments, which are taxed at a far lower rate than ordinary income.

… The tax strategy — which is viewed as perfectly legal by some tax experts, aggressive by others and potentially illegal by some — came to light last month when hundreds of pages of Bain’s internal financial documents were made available online. The financial statements show that at least $1 billion in accumulated fees that otherwise would have been taxed as ordinary income for Bain executives had been converted into investments producing capital gains, which are subject to a federal tax of 15 percent, versus a top rate of 35 percent for ordinary income. That means the Bain partners saved more than $200 million in federal income taxes and more than $20 million in Medicare taxes.

… The tax strategy used by Bain and other firms to convert management fees — the compensation normally taxed as ordinary income — into capital gains is known as a “management fee waiver.” The strategy is widely used within the industry: 40 percent of the 35 buyout firms based in the United States surveyed in 2009 by Dow Jones said their partners used at least some of the firm’s fees to make investments in their funds.

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Even though Romney has long since retired from Bain, he still receives profits from the private equity firm. What’s more, some funds Romney has invested in use the tax strategy, according to documents.

Whether he benefited from it is another story. His campaign wasted no time responding to news of the probe, saying its candidate received no financial gain from the practice.

“Gov. Romney’s retirement agreement did not give the blind trust or him the right to do this, and I can confirm that neither he nor the trust has ever done this, whether before or after he retired from Bain Capital,” his lawyer said.

— Posted by Tracy Bloom.