Documents Show Details on Romney Family Trusts

Hundreds of pages of confidential internal documents from the private equity firm Bain Capital published online Thursday provided new details on investments held by the Romney family’s trusts, as well as aggressive strategies that Bain appears to have used to minimize its investors’ and partners’ tax liabilities.

The documents include annual financial statements and investor letters circulated to limited partners in more than 20 Bain and related funds where Mitt Romney’s financial advisers have at times invested large parts of his personal fortune, estimated at more than $250 million.

As part of his retirement agreement with Bain, Mr. Romney has remained a passive investor in the company’s ventures and continues to receive a share of the firm’s investment profits on some deals undertaken after his departure.

The documents, obtained and published by Gawker.com, do not specify the stakes held in the funds by the Romney family trusts or by other investors. But they highlight the range and complexity of Mr. Romney’s investments at a time when those very qualities have been the subject of the Obama campaign’s main attacks against him, including demands that Mr. Romney release his tax returns to clear up any suggestion that he might be benefiting financially from legal loopholes or tax shelters.

Many documents disclose information that, while routinely provided to Bain’s investors, is not typically disclosed to the public: the dollar value of Bain investments in specific companies, fees charged by Bain and other investment managers, and the value of different Bain funds in some years.

The documents also reveal that Bain held stakes in highly complex Wall Street financial instruments, including equity swaps, credit default swaps and collateralized loan obligations.

“The unauthorized disclosure of a number of confidential fund financial statements is unfortunate,” said Alex Stanton, a Bain spokesman. “Our fund financials are routinely prepared by auditors and demonstrate a commitment to transparency with our investors and regulators, and compliance with all laws.”

Mr. Romney said last week that he had paid an effective federal tax rate of at least 13 percent over the past decade, but he declined — as he has over months of speculation and attacks — to release returns before 2010.

“My view is I’ve paid all the taxes required by law,” Mr. Romney said.

Bain private equity funds in which the Romney family’s trusts are invested appear to have used an aggressive tax approach, which some tax lawyers believe is not legal, to save Bain partners more than $200 million in income taxes and more than $20 million in Medicare taxes.

Annual reports for four Bain Capital funds indicate that the funds converted $1.05 billion in accumulated fees that otherwise would have been ordinary income for Bain partners into capital gains, which are taxed at a much lower rate.

Although some tax experts have criticized the approach, the Internal Revenue Service is not known to have challenged any such arrangements.

In a blog post Thursday, Victor Fleischer, a law professor at the University of Colorado, said that there was some disagreement among lawyers, but that he believed: “If challenged in court, Bain would lose. The Bain partners, in my opinion, misreported their income if they reported these converted fees as capital gain instead of ordinary income.”

A typical private equity or hedge fund pays its managers in part with a management fee based on the size of the fund, and in part with a share of the profits earned by the fund. Those profits are considered “carried interest” and taxed at capital gains rates, which in recent years have been 15 percent, assuming that the underlying investment profits qualified for that treatment.

The tax strategy Bain appears to have used is intended to convert the remaining management fee — the part not based on investment profits — into capital gains. Mr. Romney appears to benefit from the carried interest structure in these funds, but it is not clear from the documents made public whether he also benefits from the fee waiver. The Romney campaign declined to comment.

In an article that appeared in the journal Tax Notes in 2009, Gregg D. Polsky, a tax law professor at the University of North Carolina School of Law, called the tax strategy “extremely aggressive” and said it was “subject to serious challenge by the I.R.S.”

Details in the documents suggest that Bain funds in which Mr. Romney’s fortune is invested also used a variety of legal mechanisms to help some investors avoid significant taxes.

A 2009 document concerning Bain Capital Asia, one of the firm’s overseas private equity funds, for example, refers to three “blocker” corporations used to invest in D&M Holdings, a Japanese electronics company.

Blocker corporations, typically set up in tax havens like the Cayman Islands, can help investors avoid a levy known as the unrelated business income tax, which was created to prevent nonprofit groups from undertaking profit-making ventures that compete with taxpaying companies.

The documents also showed that some of the funds owned equity swaps, which have been used to avoid taxes that would otherwise be owed on dividends paid by American companies to foreign-based investors, like funds based in the Caymans.

The major purpose of such “swaps,” a Senate committee report stated in 2008, “is to enable non-U.S. persons to dodge payment of U.S. taxes on U.S. stock dividends.” Congress later adopted a provision intended to prevent that tactic. Parts of that provision took effect in 2010 and other parts this year. It is not clear how effective the provision will be, and final I.R.S. regulations have yet to be released.

Before enactment of that provision, if a Cayman Islands hedge fund owned an American stock that paid dividends, a tax would normally be withheld when the dividend was paid. Under the swap arrangement, the shares were “owned” by an American company, typically a bank or brokerage firm, which was exempt from withholding taxes.

The hedge fund entered into a “total return swap,” in which the bank agreed to transfer all the financial benefits of owning the stock to the hedge fund, including the dividend payment. The hedge fund pays an interest rate that, in effect, pays the bank for the tax benefit of avoiding the withholding tax.

The 2009 financial statements of Absolute Return Capital Partners LP, a fund that maintains Cayman Island subsidiaries, reported $17.7 million in realized and unrealized profits from “equity contracts.” It was not clear if all of those profits related to total return swaps, but it is likely that at least some of them did.

That tactic is also used to avoid taxes in some other countries and to avoid restrictions on share ownership by noncitizens of some countries. In its 2010 annual report, released by Gawker, Viking Global Strategies, a hedge fund, reported using such swaps in Europe, Asia and Latin America. Romney family trusts have indirect stakes in that fund through a Goldman Sachs fund.

Like many other private equity and hedge funds, Bain and its affiliates operate several offshore funds that are domiciled in the Caymans for a variety of tax and regulatory reasons. For the most part, these Cayman-based funds are completely routine and legal, tax experts say.

This article, “Documents Show Details on Romney Family Trusts,” originally appears at the New York Times News Service.