The implications of Romney's Bain profit-sharing became clear last month when his trust reported that one rarely disclosed asset had posted a $1.9 million payout. The income was described as a "true-up" payment, catch-up income that made up for unpaid earnings owed to Romney as part of his Bain separation agreement.
Such sizable earnings are possible "depending on the terms of the agreement," said tax law expert Michael Kosnitzky, an attorney at the New York firm of Boies, Schiller & Flexner. The Romney campaign acknowledged recently that it could not rule out more large future payments.
The use of offshore companies such as Sankaty is allowed under U.S. tax laws. They are typically set up as shell corporations by private equity and hedge funds to route investments from large foreign and institutional investors, such as large pension plans, into corporate takeovers. The money is used to provide equity and buy up debt. In turn, the investors gain U.S. tax advantages by passing their funds through the offshore "blocker" corporations, avoiding a high 35 percent tax on earnings that the Internal Revenue Service describes as "unrelated business income."
Set up in Bermuda in 1997, Sankaty served as Romney's partnership stake in Bain's Sankaty group, which invests in bonds, bank loans and corporate debt instruments. That first wave of Sankaty funds managed more than $100 million in investments in the late 1990s and early 2000s, according to a corporate analyst familiar with the funds. The analyst insisted on anonymity because the analyst was not authorized to discuss the funds publicly.
Since late 2003, Romney has left his financial decisions to what his campaign describes as a "blind trust" overseen by lawyer R. Bradford Malt, a longtime Boston legal associate. The trust was set up under Massachusetts law, but it's not a federally qualified blind trust — which Romney plans to use if he wins the presidency. Romney does not oversee his investments under his current trust, but its general composition is made public and Malt invests according to Romney's political positions.
Romney's 2010 tax returns show him and his wife as sole owners of Sankaty. A 2011 Bermuda legal document lists Malt as Sankaty's president. Michael F. Goss, currently Bain Capital's chief operating officer, is listed as vice president, and Quorum Corporate Ltd., a Bermuda law firm, as secretary. Malt deferred questions about Sankaty to the Romney campaign; Bain Capital and Quorum declined to comment.
The candidate's 2010 tax returns listed at least 20 investment holdings besides Sankaty that had not been previously disclosed on federal reports. At least seven were foreign investments. Bain Capital Inc., the holding that posted the $1.9 million earning, was listed on Romney's state ethics reports in 2001 and 2002, when he ran for governor, but was missing from any annual ethics report until Romney's trust included it last month on his 2012 financial statement.
Sankaty is the only offshore holding in the Romneys' portfolio under their full control. On his 2010 taxes, Romney's blind trust filed an IRS form identifying Sankaty as a "controlled foreign corporation." That filing is required for any U.S. taxpayer who owns more than 50 percent of a foreign company. Romney's 2010 tax returns indicate that he and his wife control all 12,000 shares.
Several U.S. Securities and Exchange documents from the late 1990s and 2000s depicted Romney as Sankaty's owner at the time, but when he ran for Massachusetts governor in 2001 and 2002, Romney did not list the company on annual disclosure forms required by the Massachusetts State Ethics Commission.
The ethics commission would not comment on the omissions. Boston College law professor R. Michael Cassidy, who was a member of the commission at the time, said that if Romney "owned this business before he signed his ethics disclosure, then he was obliged to report it." The state's disclosure rules also allow a $1,000 minimum threshold. A six-year statute of limitations covering Romney's ethics reports has since expired.