Romney’s illegal ‘Son of Boss’ tax avoidance scheme

Posted by AzBlueMeanie:

I have previously posted about Bloomberg News' report on Willard "Mittens" Romney's "The Italian Job," in which Bain Capital ripped off the country of Italy and used foreign tax avoidance shelters to avoid paying any taxes on their profits. Romney Persona Non Grata in Italy for Bain’s Deal Skirting Taxes – Bloomberg.

And I posted about how Romney hired a lobbyist to get a property tax break for his McMansion in la Jolla, Californa, the one he is tearing down to build a bigger McMansion with its own car elevator. Romneys, caught in housing bust, got property tax cut in La Jolla – latimes.com.

Now we learn of an ever bigger tax avoidance scheme by Romney when he was the audit chair of Marriott — the "Son of Boss" tax shelter scandal. Romney as Audit Chair Saw Marriott Son of BOSS Shelter Defy IRS – Bloomberg:

Mitt Romney has long had close ties to hotel operator Marriott International Inc. The candidate for the Republican presidential nomination, whose full name is Willard Mitt Romney, was named after the chain’s founder, J. Willard Marriott, a friend of his father. He joined the company’s board in 1993, and has served on it for 11 of the past 19 years, including six as chairman of the audit committee.

During Romney’s tenure as a Marriott director, the company repeatedly utilized complex tax-avoidance maneuvers, prompting at least two tangles with the Internal Revenue Service, records show. In 1994, while he headed the audit committee, Marriott used a tax shelter known to attorneys by its nickname: “Son of BOSS.”

A federal appeals court invalidated the maneuver in a 2009 ruling, siding with the U.S. Department of Justice, which called Marriott’s transaction and attempted tax benefits “fictitious,” “artificial,” “spectral,” an “illusion” and a “scheme.” Marriott had argued the plan predated government efforts to close such shelters.

Employing another strategy, Marriott legally avoided hundreds of millions of dollars in income taxes thanks to a federal tax-credit program criticized and allowed to expire by Congress. Marriott has also shifted profits to a Luxembourg shell company. During Romney’s years on the board, Marriott’s effective tax rate dipped as low as 6.8 percent, compared with the federal corporate statutory rate of 35 percent.

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As a Marriott director, [Romney's] responsibilities included oversight over the tax planning conducted by management, according to a company statement.

Romney’s position as chairman of the board’s audit committee for six years gave him and the other members responsibility to review financial reporting, according to Marriott’s annual proxy filings. Members of that committee review “the results of internal and external audits, the accounting principles applied in financial reporting, and financial and operational controls,” according to the company proxy filed covering his first year heading that committee.

Romney, 64, regularly attended the meetings of the audit committee and board, said Gilbert M. Grosvenor, who overlapped with Romney for more than nine years on the Marriott board and also sat on the audit committee.

Romney’s first stint on Marriott’s board lasted from 1993 to 2002. . . For all but the last year he was a member of the audit committee, which he headed from 1993 to 1998. During his time on the committee, Marriott implemented the Son of BOSS shelter attacked by the Department of Justice, bought a synthetic fuels business reliant on tax credits criticized by Congress as a tax shelter and took deductions that eventually led to a $220 million settlement with the IRS on another issue.

[This so-called Son of BOSS shelter helped a Marriott subsidiary sell about $81 million of mortgage notes and yet report a roughly $71 million tax loss. After the IRS challenged the benefit, Marriott sued the government.

In 2008, a U.S. Federal Court of Claims judge ruled against Marriott. The company appealed and, in 2009, lost again in federal appellate court.]

[Marriott clashed with the IRS on another issue. In 2000, 2001 and 2002 the company took $1 billion of deductions related to an employee stock ownership program from the forgiveness of principal and interest on a loan, Marriott securities filings show. The IRS challenged the deductions and, in 2007, Marriott agreed to pay about $220 million in income taxes, excise taxes and interest to the Treasury and various states.]

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Another tax-avoidance strategy that prompted criticism took advantage of a federal tax credit for synthetic fuels. The government offered companies the opportunity to claim potentially lucrative subsidies for attempts to turn coal into unconventional fuel.

In 2001, Marriott bought four synthetic fuel plants to use the credit. Companies could get the benefit by producing fuel after they sprayed coal with various substances, regardless of environmental improvement from the procedure. The process gave rise to a derisive nickname for the subsidy: “Spray and pray.”

Such credits cut Marriott’s tax bill sharply. In 2002, its first year receiving the benefit, Marriott legally claimed $159 million of such credits, cutting its effective tax rate to 6.8 percent. That’s far below the U.S. federal statutory corporate rate of 35 percent. The following year, the tax credits more than eliminated Marriott’s federal income-tax provision and helped the company report a negative income-tax rate.

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Marriott has also cut its taxes by legally sending profits overseas, in part through a Luxembourg subsidiary created in 2008 called Global Hospitality Licensing S.à.r.l., which reported having a single employee.

The unit collected $229 million in revenue in 2009, primarily from royalty, licensing and franchise fees letting hotel owners and operators use various Marriott brand names. It also owns rights to license the brand name for Ritz-Carlton, owned by Marriott. These transactions help Marriott attribute profits from those brands to the offshore subsidiary instead of to the U.S. parent company, where they would be taxed at the 35 percent federal income-tax rate.

The profit generated by the offshore unit is unclear because the page containing its income statement is missing for its only two public annual reports from 2009 and 2008, according to the Luxembourg corporate registry.

In 2010, foreign operations cut 3.7 percentage points off Marriott’s effective tax rate. In 2011, they cut just under a percentage point off the rate, according the company’s annual report. As of the end of 2011, the company had $451 million in offshore earnings on which it hadn’t paid any U.S. federal income tax.

Romney has said he wants to end altogether the federal income-tax obligation for such offshore profits, a change his campaign promises will begin "on day one" of his administration.

Peter C. Canellos, a lawyer and former chair of the New York State Bar Association Tax Section, and Edward D. Kleinbard, a professor at Gould School of Law at the University of Southern California and former chief of staff of Congress's Joint Committee on Taxation, published this op-ed at CNN. Did Romney enable a company's abusive tax shelter? – CNN.com:

Mitt Romney's refusal to release tax returns in the critical years of his income accumulation has done little to dispel the legitimate concern that arises from hints buried in his scant disclosure to date: Did he augment his wealth through highly aggressive tax stratagems of questionable validity?

One relevant line of inquiry, largely ignored so far, is to examine what exists in the public record regarding his attitude toward tax compliance and tax avoidance. While this examination is hampered because his dealings through his private equity company, Bain Capital, are kept shrouded, there are other indicators.

A key troubling public manifestation of Romney's apparent insensitivity to tax obligations is his role in Marriott International's abusive tax shelter activity, as previously reported by Jesse Drucker in Bloomberg.

During that period, Marriott engaged in a series of complex and high-profile maneuvers, including "Son of Boss," a notoriously abusive prepackaged tax shelter that investment banks and accounting firms marketed to corporations such as Marriott. In this respect, Marriott was in the vanguard of a then-emerging corporate tax shelter bubble that substantially undermined the entire corporate tax system.

Son of Boss and its related shelters represented perhaps the largest tax avoidance scheme in history, costing the U.S. many billions in lost corporate tax revenues. In response, the government initiated legal challenges that resulted in complete disallowance of the losses claimed by Marriott and other corporations.

In addition, the Son of Boss transaction was listed by the Internal Revenue Service as an abusive transaction, requiring specific disclosure and subject to heavy penalties. Statutory penalties were also made more stringent to deter future tax shelter activity. Finally, the government brought successful criminal prosecutions against a number of individuals involved in Son of Boss and related transactions not associated with Marriott, including principals at major law and accounting firms.

In his key role as chairman of the Marriott board's audit committee, Romney approved the firm's reporting of fictional tax losses exceeding $70 million generated by its Son of Boss transaction. His endorsement of this stratagem provides insight into Romney's professional ethics and attitude toward tax compliance obligations.

Like other prepackaged corporate tax shelters of that era, Marriott's Son of Boss transaction was an entirely artificial transaction, bearing no relationship to its business. Its sole purpose was to create a gigantic tax loss out of thin air without any economic risk, cost or loss — other than the fee Marriott paid the promoter.

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The complete judicial rejection of the Son of Boss tax scheme was entirely predictable. In mid-1994, for example, roughly contemporaneously with Marriott's execution of its Son of Boss trade and well before Marriott filed its return claiming the artificial loss, the highly respected Tax Section of the New York Bar Association filed a public comment with the U.S. Treasury and IRS urging rejection of the technical claims made by promoters of such schemes.

In his key position as head of the board's audit committee, Romney was required under the securities laws and his fiduciary duties to review the transaction. In fact, it has been publicly reported that Romney was the Marriott Board member most acquainted with the transaction and to whom the other board members turned for advice. This makes sense because aggressive tax-driven financial engineering was a large part of what Romney (and Bain) did for a living. For these reasons, it is fair to hold him accountable for Marriott's spurious tax reporting.

Romney's campaign staff has attempted to deflect responsibility, arguing that he relied on Marriott's tax department and advisers.

This claim is disingenuous. . . Moreover, on the key issue of the business purpose and economic substance, Romney was, or should have been, aware of the facts that the transaction had its genesis solely in tax avoidance and was a "marketed" tax shelter.

He had an insider's perspective on the motivation and lack of substance in the transaction, as well as the financial sophistication to understand the tax avoidance involved. Romney failed in his duties to Marriott and its shareholders and acted to undermine the fairness of the tax system.

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What emerges from this window into corporate tax compliance behavior is the picture of an executive who was willing to go to the edge, if not beyond, to bend the rules to seek an unfair advantage, and then hide behind the advice of so-called experts to deflect criticism when a scheme backfires.

The Obama for American campaign has released a new television advertisement, titled “Son of Boss,” that asks the same questions Americans are asking – questions that are especially relevant given voters’ heightened attention in this election to the fate of their own tax rates, and the central role tax reform will play in the next administration. While the President has fought for tax reforms that would eliminate special loopholes for the wealthiest and large corporations to pay down the deficit and protect the middle-class, it’s clear Mitt Romney is quite comfortable exploiting those special loopholes.

To accompany the new ad, Obama for America also released a memo from National Press Secretary Ben LaBolt that poses in clear terms the unanswered questions facing Mitt Romney – and challenges Romney to respond to the American people he hopes will elect him in November about whether he did in fact unduly gain from tax avoidance schemes. Romney’s Tax Dodge Extended to Businesses He Managed(.pdf).