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Taxation & Estate Planning: Start Making Sense
2010 Romney tax return story
"Romney had received the Sensata stock as part of a Bain payout; he listed no cost for it on his tax return. By transferring that stock to his nonprofit Tyler Charitable Foundation, he avoided roughly $25,000 in capital gains taxes he would have owed. He also shaved an additional $50,000 off his tax bill by deducting the charitable contribution from his income....
"Romney also transferred about $1.3 million worth of stock in Domino's Pizza to his nonprofit, which shaved about $600,000 off his tax bill. He reported paying nothing for the pizza shares, having acquired them as part of Bain's takeover of the company."
Let's leave the offshoring to one side, as I accept that the shifting around of global capital both is hard to fight and in the long run (at least, with appropriate safety net policies at home) is generally net-beneficial to all countries. There are several interesting tax angles here, if I correctly understand what Grim and Carter have found.
The main tax advantages to Romney that the article points to are as follows. First, there is a very poorly conceived rule for charitable contributions, under which you get to deduct the full value of a gift of appreciated property even though you have never paid tax on the appreciation. Thus, if I get invited to participate in some great IPO, and buy a share of stock for $1, then I give it to a charity when its value has increased to $1 million, I get to deduct the full $1 million even though I never paid tax on the appreciation and am only out of pocket $1. The only plausible rationale for this rule - that we want to encourage charitable contributions by allowing more than the out-of-pocket cost to be deducted - would apply equally to cash gifts.
The fact that Romney took advantage of this rule is fair game for commentary, insofar as it helps expose how the tax system works for very rich people, but it is certainly plain vanilla tax planning that no one would complain about as such.
The other rule he seems to have taken advantage of pertains to charitable foundations. Here the complaint is that he got a deduction today for stock that he may still have been effectively controlling, via any influence he could wield regarding who would end up getting the use of the donation. On the other hand, he had, presumably, irrevocably committed the value to charitable, rather than personal, use. Once again, I wouldn't regard this as unduly aggressive tax planning by Romney (and I could certainly see doing it myself if I were in his economic position), but it does give us a window on the opportunities that very wealthy people have for fun and games under the existing tax code.
By the way, he wouldn't have faced capital gains tax just because he held stock that was worth more than its basis, unless he would otherwise have sold it for a profit. So if the alternative to the Sensata gift was keeping it in his portfolio, the actual transaction didn't enable him to avoid capital gains tax that he would otherwise have paid.
What I find most mysterious about the story - and which connects to the mystery of the $20 million to $100 million in his IRA - is the assertion, which I assume comes straight from attachments to the 2010 return, that the Sensata and Domino's stock had a zero basis to Romney. That I find quite strange. If he got Sensata stock for free as part of a Bain payout, its value at the time of the transfer should have been included in his taxable income. Then it would have had a cost basis equal to that value. The charitable deduction would have been the same (since it depends on value, not basis), but his taxable income for the year when he got the stock (including if it was 2010) would have been higher. How credible is it that the stock was actually worth zero when he got it? Would have sold it to you or me for zero?
Similar question for the Domino's stock. If he acquired it via a tax-free reorganization, it would presumably have a carryover basis (i.e., the same basis it had in the hands of the prior owners). Was that zero? But suppose that Bain initially held the Domino's stock with a zero basis (or indeed with any other basis). If it transferred the stock to Romney as part of a compensatory payout, then the same analysis as that for the Sensata stock, based on value at the time of the transfer, would apply.
In sum, we have two tax planning details - pertaining to charitable gifts of appreciated property and to the rules for charitable foundations - that were clearly permissible tax planning, although they do shed light both on the state of the law and on Romney's willingness to use it to personal advantage (in ways that I freely admit I would do, too, in his position).
But the zero basis listed for the Sensata and Domino's stock strikes me as more mysterious, and as raising the questions of whether (a) he under-reported taxable income upon receiving the stock, and (b) he had a general practice of unduly low-balling the value of high-upside stock when this was tax-beneficial to him.
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