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Bain Capital Tax Documents Draw Mixed Reaction


Mitt Romney stands by his decision not to release more than two years of his tax returns. Democrats keep hammering away, suggesting the Republican presidential candidate has something to hide. Well, last week, the website Gawker released over 900 pages of financial documents related to Bain Capital. That's the private equity firm Romney co-founded.

NPR's Yuki Noguchi reports that experts are divided over what to make of the release. Some say not much, while others insist these documents raise serious questions about how Romney and his Bain associates handle their taxes.

YUKI NOGUCHI, BYLINE: The document dump happened last Thursday. Later that day, University of Colorado law professor Victor Fleischer blogged about what he believes is a big problem.

VICTOR FLEISCHER: The whole point of this arrangement is to dodge taxes.

NOGUCHI: The arrangement Fleischer refers to is Bain's handling of its management fees. Bain, like other private equity firms, collects a 2 percent annual fee from investors in its funds, in addition to a substantial chunk of the funds' profits. This management fee, according to Fleischer, is compensation and therefore should be taxed as ordinary income, which tops out at 35 percent.

But Bain often opted to convert those fees into an investment, meaning it could both defer the tax payment and qualify for a capital gains rate of just 15 percent.

FLEISCHER: And they did so in a way that was very aggressive from a tax standpoint and in my view, was probably not legal. And they did this on hundreds of millions of dollars of management fees over time.

NOGUCHI: Fleischer argues the documents reveal tax savings amounted to about $100 million for one Bain fund alone. His comments went viral.

FLEISCHER: From my point of view, there's, you know, hundreds of millions of dollars of tax liability at stake, and that's just at Bain. Right? So we're talking billions across the industry. Why hasn't the IRS been more aggressive on this?

NOGUCHI: That question is now echoing through tax circles. The IRS itself didn't respond to requests for comment. One possible explanation for why the IRS hasn't acted is that it's not convinced there's a problem. That's the position of the Private Equity Growth Capital Council, a trade association. In a statement, it defended the practice, saying it helps align the interests of fund managers and their investors. A Bain spokesman also said the financial statements are in compliance with all laws.

JACK LEVIN: This is not the least bit unusual.

NOGUCHI: Jack Levin is a tax attorney who represents private equity clients. Nearly all of whom, he says, adopt a similar approach to management fees.

LEVIN: The IRS has, to the best of my knowledge, never challenged the validity of that kind of transaction.

NOGUCHI: The leaked documents are not tax returns and do not make clear how executives or beneficiaries, like Romney, may have handled the fees they earned in their own filings. Levin argues fund executives are essentially plowing money back into their investments, building companies and putting capital at risk and should therefore be taxed at the lower rate.

But Lee Sheppard takes a different view - that funds have been allowed to exploit a grey area of the law. Sheppard is a tax attorney and contributing editor of Tax Notes. She says the fact that so many firms have done this does not make it right by the law.

LEE SHEPPARD: They take aggressive positions, and they figure that if enough of them take an aggressive position, and there's billions of dollars at stake, then the IRS is kind of stopped from arguing with them because so much would blow up. And that is called the Wall Street Rule. That is literally the nickname for it.

NOGUCHI: Sheppard says these cases are difficult and complex for the IRS to tackle. but with $4 trillion in private equity and hedge funds, the agency should be doing more to challenge aggressive accounting strategies.

But it's not just the IRS that has shied away from taking a stance on the fee issue. Dean Zerbe is former tax counsel for Senate Finance Committee Republicans. He says Congress considered writing clearer tax rules governing private equity. In the end, he says...

DEAN ZERBE: While there were a lot of speeches given, nothing was done on this issue.

NOGUCHI: And so it remains, he says, a grey area of tax law. Yuki Noguchi, NPR News, Washington.


BLOCK: You're listening to ALL THINGS CONSIDERED from NPR News. Transcript provided by NPR, Copyright NPR.

Yuki Noguchi is a correspondent on the Science Desk based out of NPR's headquarters in Washington, D.C. She started covering consumer health in the midst of the pandemic, reporting on everything from vaccination and racial inequities in access to health, to cancer care, obesity and mental health.