Having Mitt Romney in the 2012 Presidential Race could be the best thing that has happened to America...but not for the reasons you may think

Having Mitt Romney in the US Presidential race could be the best thing that has happened to America.      

OK, so you support Mitt Romney and toe the Republican line and probably couldn't agree more.  Sorry to disappoint, but that's not the reason for my introductory statement.

The reason it's a good thing is because America gets to see that the tax laws of this country unfairly favor the rich and legally allow them to avoid paying their fair share of taxes.  We have heard Romney claim he has paid all the taxes he is "legally" obligated to pay.  Some of us have heard of situations where some Corporations pay no taxes.  We understand that there is a maximum tax rate and an "effective" tax rate.  This effective tax rate is usually after the legal loop-holes have been utilized to reduce the maximum rate to Romney's "legally" obligated rate.

The rich may even be involved in some "creative" tax avoidance activity that legally runs amuck, such as what might have happened with Romney's IRA.  And now we may get to see this play out in Congressional hearings with Romney or his tax advisors as litigants.

Some Democratic members of Congress have formally filed an official request for an investigation into the activities of such wealthy people as Romney who have found ways to stash upwards of $100 million dollars into their IRA accounts.  See this link for the actual letter sent.

Since the average American can legally only deposit $6000 annually (in 2012, if age 50 or older) into an IRA, it is important to know if the actions of Romney and potentially other Americans are illegal.  I have previously speculated on one illegal way that this could have happened in an earlier publication.  See this link for the original story.

Even if the practice is found to be legal, it could make a big difference in the amount of tax revenue collected.  The US Treasury Department may want to seal up this loop-hole.

Perhaps the government is debating on whether to have these hearings now or wait until after the election.

If they have them now, it may cause havoc in the Republican Party, especially if Romney is found to be guilty of tax evasion.  If they lose their Presidential candidate, they will be forced to find an alternate, and we the people will have to go through the learning curve all over again.

If they wait until after the Presidential election, since there are two possible outcomes, it could make a difference to history.  In the one case where Romney loses, he will just be punished as a citizen criminal.  However, if he wins the election, he will have to be impeached.

I'm thinking the government will wait until after the election to carry out this investigation, betting that Romney will not be elected.

How to shelter $100,000,000 in an IRA

Recent controversy over Mitt Romney's tax returns has included questions over his IRA (individual retirement account) which is reported to contain well over $100,000,000.

For those of you who do not have an IRA, it is important to note that regulations impose a $5000 limit to the annual contribution that an individual can make to it and even less than this was allowed in the years before 2012.

If Mitt Romney worked at Bain Capital for 25 years, then at the current allowable deposit amount and excluding interest, Mitt's principal would grow to $125,000 in that time.  Yet Romney has nearly 1000 times that amount in his IRA.  So let's say that the investments made by the IRA gave Romney a 15% return each year.  After twenty-five years that IRA should contain about $1,600,000.  Still a far cry from $100,000,000.

So how could Romney's IRA contain so much more?  Allow me to speculate.

When Romney founded Bain Capital, it was created as a Private Corporation.  Legally, Private Corporations do not have the financial transparency that Public Corporations have.  The stock of the Private Corporation is not sold to the public and usually remains under the ownership of the partners of the Investment firm.

The United States Treasury Office began to see a phenomenon occurring with Private Corporations around year 2000.  In increasing numbers, Private Corporations began to find tax shelters to protect their profits from United States taxes.  Additionally, certain stock based compensation plans did not comply with what IRS called "deferred compensation" tax rules.  For example, certain individuals were given stock options with an exercise price that was less than the fair market value of the company's common stock.  To block this practice after year 2000, regulations were adopted to add an additional 20% tax on these transactions.  The idea was to discourage evading taxes by writing regulations that made it less profitable to do so.

In certain companies (Bain may be one of them), under-priced stocks were given to the owners and directly deposited into their IRA accounts.  So let's say the $5000 limit on the IRA deposit was achieved by under-pricing these stocks by a huge amount.  For example, let's speculate that the per share fair market value of the stock was $50.00 but the owners got shares deposited into their accounts at $0.10.  In that case, the number of shares at the fair market value is 100, but at the reduced price is 50,000.  For reporting to the IRS, the Individual Retirement Account meets the regulations and only $5000 is reported as being deposited.  Yet in reality, the true value of the number of shares is 50,000 shares x $50.00 per share = $2,500,000.  

Repeat this year after year and you will soon have $100,000,000.  Even if you do not reduce the price of the stock as much as in my example, you will still be there in no time.

If the individual has a Roth IRA, then the situation is even more favorable.  With a Roth IRA, the taxes are paid on the deposit amount and are not taxed upon withdrawal at retirement.  So in our example above, the Roth IRA owner would pay taxes on $5000 up front and not on the $2,500,000 withdrawn during retirement.

So if you want to shelter $100,000,000 in an IRA, open a Private Corporation, setup a Roth IRA and give yourself stock options at a seriously reduced price.  Pay taxes on $5000 and enjoy the tax-free high life at retirement.