Skip to main content
Part of complete coverage on
 

Did Romney enable a company's abusive tax shelter?

By Peter C. Canellos and Edward D. Kleinbard, Special to CNN
August 9, 2012 -- Updated 2224 GMT (0624 HKT)
When Mitt Romney was audit chair at Marriott International, the company engaged in a series of abusive tax shelter activities.
When Mitt Romney was audit chair at Marriott International, the company engaged in a series of abusive tax shelter activities.
STORY HIGHLIGHTS
  • When Mitt Romney was audit chair at Marriott, company engaged in abusive tax shelter
  • Peter Canellos, Edward Kleinbard: Marriott tie shows Romney's professional ethics
  • They say Romney displays a consistent highly aggressive attitude towards tax obligations
  • Canellos, Kleinbard: Romney was willing to bend the rules to seek an unfair tax advantage

Editor's note: Peter C. Canellos, a lawyer, is former chair of the New York State Bar Association Tax Section. Edward D. Kleinbard is a professor at Gould School of Law at the University of Southern California. He is the former chief of staff of Congress's Joint Committee on Taxation.

(CNN) -- 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?

Opinion: Why won't Romney release more tax returns?

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.

Edward D. Kleinbard
Edward D. Kleinbard

Romney has had a close, long-standing, personal and business connection with Marriott International and its founders. He served as a member of the Marriott board of directors for many years. From 1993 to 1998, Romney was the head of the audit committee of the Marriott board.

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.

The Son of Boss transaction was vulnerable to attack on at least two grounds.

First, the transaction's promoters and consumers relied on a strained technical statutory analysis. Second, the Son of Boss deal violated the fundamental tax principle that the tax law ignores transactions unless they have a motivating business purpose and a substantial nontax economic effect.

In the Marriott case, the IRS raised both arguments and won on the first interpretive issue.

The Court of Claims (affirmed by the Court of Appeals) rejected Marriott's technical analysis, finding no reliable argument or authority to support it. The court therefore did not need to reach the issue of business purpose and economic substance. In subsequent decisions, involving similar transactions but other parties, the courts have sustained the second line of attack as well, finding the claimed losses to be fictitious.

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. In a transaction of this magnitude, sensitivity and questionableness, the prudent step would be to secure advice to the audit committee and the board from experienced and independent tax counsel, who would certainly have cautioned that the Marriott position was risky and not supported by precedent or proper statutory interpretation.

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.

No one could accuse Romney of lacking the intelligence and analytical skills to have dealt with this transaction appropriately. Indeed, his strengths in this regard were the reason the other board members relied on him.

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.

Reid puts GOP in a bind over Romney's taxes

Follow us on Twitter @CNNOpinion

Join us on Facebook/CNNOpinion

The opinions expressed in this commentary are solely those of Peter C. Canellos and Edward D. Kleinbard.

ADVERTISEMENT
Part of complete coverage on
July 30, 2014 -- Updated 1941 GMT (0341 HKT)
Stuart Gitlow says pot is addictive and those who smoke it can experience long-term psychiatric disease.
July 30, 2014 -- Updated 1645 GMT (0045 HKT)
Gabby Giffords and Katie Ray-Jones say "Between 2001 and 2012, more women were shot to death by an intimate partner in our country than the total number of American troops killed in the Iraq and Afghanistan wars combined."
July 29, 2014 -- Updated 2357 GMT (0757 HKT)
Alan Elsner says Secretary Kerry's early cease-fire draft was leaked and presented as a final document, which served the interests of hard-liners on both sides who don't want the Gaza war to stop.
July 30, 2014 -- Updated 1158 GMT (1958 HKT)
Vijay Das says Medicare is a success story that could provide health care for everybody, not just seniors
July 30, 2014 -- Updated 1818 GMT (0218 HKT)
Rick Francona says Israel seems determined to render Hamas militarily ineffective.
July 30, 2014 -- Updated 1743 GMT (0143 HKT)
S.E. Cupp says the entrepreneur and Dallas Mavericks owner thinks for himself and refuses to be confined to an ideological box.
July 30, 2014 -- Updated 1311 GMT (2111 HKT)
A Christian group's anger over the trailer for "Black Jesus," an upcoming TV show, seems out of place, Jay Parini says
July 30, 2014 -- Updated 2028 GMT (0428 HKT)
LZ Granderson says the cyber-standing ovation given to Robyn Lawley, an Australian plus-size model who posted unretouched photos, shows how crazy Americans' notions of beauty have become
July 30, 2014 -- Updated 1939 GMT (0339 HKT)
Carol Dweck and Rachel Simmons: Girls tend to have a "fixed mindset" but they should have a "growth mindset."
July 28, 2014 -- Updated 1156 GMT (1956 HKT)
A crisis like the Gaza conflict or the surge of immigrants can be an opportunity for a lame duck president, writes Julian Zelizer
July 26, 2014 -- Updated 1822 GMT (0222 HKT)
Carol Costello says the league's light punishment sent the message that it didn't consider domestic violence a serious offense
July 28, 2014 -- Updated 1251 GMT (2051 HKT)
Danny Cevallos says saggy pants aren't the kind of fashion statement protected by the First Amendment.
July 28, 2014 -- Updated 1852 GMT (0252 HKT)
Margaret Hoover says some GOP legislators support a state's right to allow same-sex marriage and the right of churches, synagogues and mosques not to perform the sacrament
July 28, 2014 -- Updated 1831 GMT (0231 HKT)
Megan McCracken and Jennifer Moreno say it's unacceptable for states to experiment with new execution procedures without full disclosure
July 30, 2014 -- Updated 1744 GMT (0144 HKT)
Priya Satia says today's drones for bombardment and surveillance have their roots in the deadly history of Western aerial control of the Middle East that began in World War One
July 28, 2014 -- Updated 1635 GMT (0035 HKT)
Jeff Yang says it's great to see the comics make an effort at diversifying the halls of justice
July 26, 2014 -- Updated 1555 GMT (2355 HKT)
Rick Francona says the reported artillery firing from Russian territory is a sign Vladimir Putin has escalated the Ukraine battle
July 27, 2014 -- Updated 1822 GMT (0222 HKT)
Paul Callan says the fact that appeals delay the death penalty doesn't make it an unconstitutional punishment, as one judge ruled
July 24, 2014 -- Updated 2225 GMT (0625 HKT)
Pilot Robert Mark says it's been tough for the airline industry after the plane crashes in Ukraine and Taiwan.
July 25, 2014 -- Updated 1510 GMT (2310 HKT)
Jennifer DeVoe laments efforts to end subsidies that allow working Americans to finally afford health insurance.
July 26, 2014 -- Updated 1533 GMT (2333 HKT)
Ruti Teitel says assigning a costly and humiliating "collective guilt" to Germany after WWI would end up teaching the global community hard lessons about who to blame for war crimes
July 25, 2014 -- Updated 1245 GMT (2045 HKT)
John Sutter responds to criticism of his column on the ethics of eating dog.
July 25, 2014 -- Updated 1302 GMT (2102 HKT)
Frida Ghitis says it's tempting to ignore North Korea's antics as bluster but the cruel regime is dangerous.
July 25, 2014 -- Updated 1850 GMT (0250 HKT)
To the question "Is Putin evil?" Alexander Motyl says he is evil enough for condemnation by people of good will.
July 24, 2014 -- Updated 1803 GMT (0203 HKT)
Laurie Garrett: Poor governance, ignorance, hysteria worsen the Ebola epidemic in Sierra Leone, Guinea, Liberia.
July 24, 2014 -- Updated 1349 GMT (2149 HKT)
Patrick Cronin and Kelley Sayler say the world is seeing nonstate groups such as Ukraine's rebels wielding more power to do harm than ever before
July 23, 2014 -- Updated 2205 GMT (0605 HKT)
Ukraine ambassador Olexander Motsyk places blame for the MH17 tragedy squarely at the door of Russia
July 24, 2014 -- Updated 1142 GMT (1942 HKT)
Mark Kramer says Russia and its proxies have a history of shooting down civilian aircraft, often with few repercussions
July 24, 2014 -- Updated 1853 GMT (0253 HKT)
Les Abend says, with rockets flying over Tel Aviv and missiles shooting down MH17 over Ukraine, a commercial pilot's pre-flight checklist just got much more complicated
July 24, 2014 -- Updated 1317 GMT (2117 HKT)
Mark Kramer says Russia and its proxies have a history of shooting down civilian aircraft, often with few repercussions
July 24, 2014 -- Updated 1637 GMT (0037 HKT)
Gerard Jacobs says grieving families and nations need the comfort of traditional rituals to honor the remains of loved ones, particularly in a mass disaster
July 24, 2014 -- Updated 1413 GMT (2213 HKT)
The idea is difficult to stomach, but John Sutter writes that eating dog is morally equivalent to eating pig, another intelligent animal. If Americans oppose it, they should question their own eating habits as well.
July 23, 2014 -- Updated 1630 GMT (0030 HKT)
Bill van Esveld says under the laws of war, civilians who do not join in the fight are always to be protected. An International Criminal Court could rule on whether Israeli airstrikes and Hamas rocketing are war crimes.
July 30, 2014 -- Updated 1209 GMT (2009 HKT)
Gordon Brown says the kidnapped Nigerian girls have been in captivity for 100 days, but the world has not forgotten them.
ADVERTISEMENT