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Posts Tagged ‘taxes’

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Warren Buffett has announced his largest buyout in history, the $38 billion takeover of Portland, Oregon based Precision Castparts.  This is almost twice the size of the Heinz takeover, one of his largest prior takeovers.

Heinz and other Buffett enterprises, including Burlington Northern and Pacific Power, are having a strong negative impact on the Oregon economy.

This includes potato farmers in Eastern Oregon who had a win/win long term relationship with Heinz cancelled, and local communities battling to prevent oil and coal from being shipped by rail thru their communities without adequate safety guidelines.

Burlington Northern receives more than one-third of its gross revenues from the shipment of coal and also carries more than 80 percent of the oil transported by rail in the United States.  Pacific Power’s primary source of energy is coal.

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Below is the link to a press release by Parish & Company in October 2005 which was provided to Berkshire Hathaway’s David Sokol and Warren Buffet for review.

Warren Buffett Dupes Intel with Ingenious Tax Scheme

In typical Buffett fashion, he is providing assurances to “top management,” what some might call insider dealing,  with inevitable devastating cost cuts to follow in mid management along with significant outsourcing to related companies and aggressive use of tax havens. Not to mention erasing long-term oriented shareholder gains as investors are forced to sell the stock.  One can also expect Berkshire Hathaway to use a related subsidiary to loan Precision funds at a rate significantly higher than market rates, that’s the Buffett formula.

The legal team representing Precision Castparts and its shareholders consists of Portland based Stoel Rives, the state’s largest law firm that was also intimately involved in Enron’s affairs prior to its demise, and New York based Swain Cravath, Swaine & Moore LLP.

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SEC Chair Mary Jo White’s husband John White is a senior partner at Cravath, Swaine & Moore LLP. Most large law firms are now living off merger and acquisition fees and those that are doing straight up legal work have been decimated from a loss of clients due to such consolidations.

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SEC Chair Mary Jo White              John White, Cravath Partner

As a former CPA and auditor I can attest that independence must be achieved both in “appearance” and “in fact,”   the most fundamental principle of auditing. That is a standard question on the CPA exam yet sadly it is impossible  for SEC Chair White to meet.

This is not some small merger or takeover but rather the biggest deal in Berkshire Hathaway’s history and one that will greatly impact the tax base in Portland, Oregon as jobs are cut and outsourcing accelerated.   Police, fire and school budgets will be greatly impacted.

The question is, how on earth are such inside deals between top management and takeover artists like Buffett being tolerated by the SEC?  Put another way, who is advocating for ordinary investors in Precision Castparts?  Remarkably, there has been almost no public discussion of this “deal” between top management at Precision and Buffett, expected to close in early 2016.

And where  is the SEC, the “Investors Advocate,” whose job it is to protect ordinary investors interests.  Granted, the workload for the SEC is staggering, and made more difficult by Buffett’s control of the media.  News coverage has in fact ceased largely due to Buffett’s enormous media clout, which includes his ownership of Business Wire, numerous newspapers and other media channels, not to mention vast advertising budgets capacity to influence news decisions.

White’s job at the SEC is difficult indeed.  For example, last month the Oregonian ran a lead editorial against the “fiduciary standard,”  openly challenging an important SEC initiative White is advocating.  Former SEC Chair Arthur Levitt, on the boards of both Bloomberg and the Carlyle Group, has called failure to establish this standard a “national disgrace.”

Buffett is clearly a political genius.  Rarely discussed is that his father was an influential four term Republican Congressman from Nebraska, who also chaired Taft’s Presidential campaign in the 1950’s.  No one could have started their career more politically connected.

And here in Oregon the joke is that he owns the State Legislature along with taking control of the Governor’s office with the ascension of Kate Brown after popular four term Governor, John Kitzhaber, was run out of office over a scandal regarding his partner’s advocacy of “clean energy.”

Hayes was not a state employee yet emails indicated she was actively acting as if she were. Of course this is nothing new for spouses of public officials.  What really put Kitzhaber’s demise on overdrive was charges against Hayes of tax fraud, specifically, not reporting her consulting income on behalf of clean energy non-profits.

These charges were completely made up and a gross breach of journalistic ethics given that Hayes released her 1040 showing net consulting income yet never provided a schedule C, which would show gross consulting income along with all her various expenses.  Reporters essentially took the net income amount on the 1040, compared it to publicly disclosed gross revenues from consulting contracts, and claimed tax evasion in several major front page stories and editorials.

How do I know this?  I was asked the by key journalist involved, as often is the case, to review the tax returns for major public officials.  In this case I was provided the returns by Nigel Jaquiss of the Willamette Week, completed the review, and clearly indicated there was nothing there.  Nigel followed up with a thoughtful analysis, highlighting net business income.  Sadly, other reporters at major publications then took this “net” number and compared it to the publicly revealed gross consulting revenues and ran major front page stories and editorials, almost on a daily basis, essentially charging Hayes with criminal tax evasion.

What never came out is the Kitzhaber and Hayes filed separate returns in which he used a local CPA firm and Hayes returns were “self prepared.”  Rather than give Hayes the benefit of the doubt and let the IRS do their job, as should be the case with any citizen, public or private, she was crucified in the media and remarkably no one came to Kitzhaber’s defense.

And once the new Governor Kate Brown stepped in, her first major action was to try and bargain away the “clean energy” bill for a transportation funding package.  And who would be the single biggest beneficiary, that’s right, King Coal Warren Buffett.

Bravo Warren!  You are amazing?

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Investment advisors like myself who walk the walk with respect to long term oriented investment rely on the SEC to function as the “investor’s advocate.”  That is all investors, not just takeover artists like Buffett who have never created anything but rather specialize in inside deals with top management, appeasing shareholders with a short term spike in the stock price and then gutting companies, as was done with Heinz, Burlington Northern and Pacific Power.

One could argue that this takeover should be denied on national security grounds given Precision Castparts key role in the aerospace industry and Buffett’s inability to manage companies in which true innovation is required.  Similarly, if the national power grid is a strategic issue, how can we rely on Buffett to make the key decisions required for security when all he seems to know how to do is gut companies and then thrive on corporate welfare.   And while he boasts about the cash flow Burlington Northern is generated, businesses suffer from gross neglect and related bottlenecks in the rail system.

In 2015 Buffett boasted in a front page Barron’s story that he and his Brazilian private equity partners made $22 billion in the first two years after his $25 billion takeover of Heinz.  Long term Heinz shareholders were stuck with a tax bill and dedicated employees and vendors were betrayed.  Buffett creates one debacle after another yet the media never seems to provide coverage.

Meanwhile here in Oregon the $80 billion state pension fund managers have said nothing about the takeover of Precision Castparts.  They perceive their role as narrow and only related to returns on portfolio investments.  One could argue however that the PERS system needs a strong tax base, in addition to returns on the existing portfolio.   A tax base being decimated by such takeovers.

Oregon PERS was the original large outside investor in KKR and has large investments in both hedge and private equity funds, including KKR, TPG and Blackstone.  These firms make tax evasion a science by gaming residency via tax havens ranging from the Caymen Islands to the UK.

It is ironic that the chair of the Oregon Investment Council, Katy Durant, has not clarified if she is a full resident of the State of Oregon for tax purposes, not only for W-2 wages but also investment income.   Perhaps that is where tax reform should begin, that is, full disclosure regarding tax residency for public officials and for publicly traded companies a footnote that summarizes actual taxes paid, the specific type of tax whether state, federal, property, etc.  and the years to which the taxes paid apply.  This would be great information for investors, advisors like myself and other stakeholders.  In addition, it would meet the spirit of the SEC rules.

A likely impact would be fewer takeovers of companies vital to the economy, like Precision Castparts, leading to stronger local schools and services and better long term returns for investors as tax receipts stabilize.  Put another way, go home Warren.  Enough of the “big con.”

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Sondland is a major real estate developer with numerous points of intersection with real estate investments made by the Oregon Investment Council.   He was also the most ardent opponent of a convention center hotel in Portland,  fearful it would compete with his existing properties, yet when the city finally crossed a legal threshold making it a reality, Sondland proposed that his firm handle the contract.

Even though private equity and hedge funds have produced poor returns for years, the Oregon Investment Council under has dramatically increased investment in this area under Durant with TPG, KKR and Blackstone being three of the primary beneficiaries.

 

 

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In the world of chess being too aggressive at the outset, advancing too far, is perilous. For Romney, his refusal to acknowledge his aggressive financial engineering and tax avoidance strategies could indeed result in an open convention.  One in which the party is free to forward a higher quality candidate.

Here is a list of the facts surrounding the Reid Romney dispute:

1)  On July 20, 2012 I published a blog post noting for the first time that Mitt Romney has not filed the required 990-T form and paid the related UBIT tax with his 2010 tax return, nor has he made this required filing in prior years.   This filing is essential for tax exempt accounts, including IRAs, if they contain related business interests, what I call leveraged transactions in Romney’s case since Bain is an LBO firm.

Remarkably, these 990-T filings are all publicly available by law.  One need only write to the IRS, specify the taxpayer, and within 30 days you will receive a reply if these 990-T filings have been made.   My request regarding Romney applied from 1992-2011, 19 years, and the IRS confirmed none had been filed.

2)  On July 31, 2012 Harry Reid made a claim to the Huffington Post that Romney paid no taxes for more than 10 years.  While Romney may claim that he paid “lots of taxes,” Reid is technically correct in that he has failed to pay taxes on the largest share of his wealth, what is believed to be an IRA worth as much as $100 million, for more than 10 years.

3)  Romney’s only defense is to claim that all his Bain related IRA investments were through foreign blocker corporations, thereby using a loophole that eliminates the need to file the 990-T and pay the required UBIT tax.   Disclosing this of course proves Reid’s claim regarding him paying no taxes, even though he may have used a technically legal scheme.  It is unlikely the public will care that Romney paid other taxes when he has avoided significant required taxes on Bain deals in his largest asset, the IRA.

4)  Worse for Romney would be what is noted in the July 20, 2012 blog post, that being that many of his investments, in particular those in BCIP Trust Associates I and II, were via a Delaware Partnership, not availing him of the foreign blocker exemption.  SEC documents clearly indicate this is the case.  The most recent personal financial disclosure shows BCIP Trust Associates III in his IRA, a foreign blocker, yet previous filings show domestic partnerships.

Even more troubling for Romney would be any transfer of Bain interests from the Delaware based partnerships, non valid blockers, since domestic partnerships are fully subject to UBIT,  to foreign blocker corporations such as BCIP Trust Associates III, after the initial investment, that is re-characterizing the fundamental nature of the partnership.

5)  Prior to 2008 Bain Capital utilized a scheme involving SEP IRAs that allowed employees, including Romney, to invest in Bain deals.  My best guess is that Reid’s office asked someone at Bain to look at the July 20 blog post and they confirmed that while at Bain they also filed no 990-Ts.  What this means, since the SEP is a company sponsored plan,  is that no one likely made the required filing, including Romney.  This simply confirms my original analysis.

Reid therefore stands on sound footing with his claim and the Romney campaign is foolishly self destructing by not coming clean and clarifying the issue.

Romney should step up, say they have a problem and commit to fixing it, but this of course would cost his fellow associates at Bain a bundle in back taxes.

Observing this conflict between Reid and Romney,  Paul Volcker comes to mind.  In particular Volcker’s assertion that engineering belongs in product development, not finance.

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With all the stories on Romney’s finances, many of which resulted from my observations regarding his tax returns and investment accounts, in particular his IRA, and the interaction of the trusts, foundation and Bain Company filings, the most important story is still untold.

Here it is, the story that could likely open the Republican convention to draft a new candidate.  I have been unsuccessful in getting a major reporter to tell the story, so I guess I’ll just have to tell it myself.

I’ll lay it out in simple steps with no conclusions or opinions.  It is simply astonishing that the media has not told this story.

1)  While head of Bain Capital, Mitt Romney set up a SEP-IRA pension plan that allowed employees to invest in Bain deals.  Mark Maremont of the WSJ did a fine story on this.

2)  IRAs are tax exempt and like other tax exempts must file a special return, a 990-T, if they are invested in leveraged transactions.  This is as straightforward as requiring employers to pay unemployment insurance for employees as part of periodic payroll transactions.  The purpose of the 990-T is to recognize the UBIT or Unrelated Business Income Tax, the rate of which approximates the corporate rate of 35 percent.

Congress adopted this approach for obvious reasons in that if an investor was getting tax exempt income in an IRA, let’s say interest income on a leveraged debt offering, and on the other side of the fence the borrower was taking large interest expense deductions, the net impact would be a double deduction and a grossly dysfunctional tax system.

3) Bain Capital is a leveraged buyout firm in which employees invested in numerous “Bain Deals” via their IRA accounts.  These investments are leveraged and clearly subject to UBIT tax.  Other leading private equity firms do not allow employees to invest in their own deals via IRA accounts.

4)  All 990-T returns, including those relating to IRAs, are by law public.  One need only make a request to the IRS.  In April, I made such a request for Bain and 12 top executives, including Romney, for their SEP IRAs covering the period 1992-2007.  The IRS responded none had been filed.  In addition, I also confirmed no filings were made from 2008-2011 with respect to the new Bain Capital Pension Plan set up by Ropes and Gray in which the official retirement age is 23 (not a misprint).   Maremont of the WSJ also reported on this “unusually young” retirement age.

5)  The only way to escape the 990-T requirement and UBIT tax is to make the investment through a foreign blocker corporation.   Domestic corporations are fully subject to the UBIT and leading law firms are very careful in structuring partnerships to account for this, that is, making sure such investments go through a foreign blocker corporation.

6)  Edgar Online is a public corporation ticker, EDGR, effectively controlled by Bain Capital via a convertible bond issue.  SEC filings clearly indicate this control, summarized in Edgar Online’s executives own words.

Edgar Online is in the business of summarizing  SEC data in user friendly formats that are widely used in the financial and media world.  Many leading databases including Lexis Academic, which is available in most public libraries, use Edgar Online.  One need only search for Mitt Romney using the Lexis Academic database, while specifying a search database of “SEC Filings” from 1/1/2000-12/31/2003 to see a list of references.

7)  In but one example, on February 13, 2000, SMTC Corp, ticker SMTX, filed a 13G report on behalf of Bain Capital.  Under section Item 2a, Name of Filing Person, it specifically states that BCIP Trust Associates II is a Delaware partnership, not a foreign blocker corporation.   This form also states Romney is the sole shareholder of Bain Capital and the only “control person” capable of declaring a special dividend.

8)  ERISA rules require pension plans to be trusts.  For example, if I want to set up a pension plan for Joe’s Consulting with TD Ameritrade, the title for each participant’s account would be Joe’s Consulting Pension Trust FBO followed by the employee name.  For example, Joe’s Consulting Pension Trust FBO Jane Doe would be one employee and Joe’s Consulting Pension Trust FBO Mitt Romney would be another.  The reason is to make absolutely certain each employee’s assets are held in and protected by a separate trust, which is required by ERISA rules.

In Romney’s IRA, note that he is not invested in BCIP Associates II but rather BCIP “Trust ” Associates.  The key word “trust” is a calling card for the IRA.  This can be seen in his recently filed 2012 Personal Financial Disclosure Statement.  Note that the most recent filing shows BCIP Trust Associates III, not II.  Trust III is identified as a foreign blocker in SEC filings yet in previous filings Romney was in Trust II and its predecessor, both domestic Delaware Corporations.

9)  The 13G filing regarding SMTC Corporation on behalf of Bain, referred to in item 7 of this analysis, specifically says BCIP Trust Associates II is a Delaware Corporation, not a foreign blocker.

If this SEC filing is accurate, and it certainly is, then not only Romney, but many other Bain employees have failed to file the required 990-T returns and pay the necessary UBIT tax.   Other leading private equity firms, including KKR and Blackstone, do not allow employees to invest in company deals via retirement accounts for good reason.  Perhaps Bain just got too greedy, consistent with its fees being 50 percent higher than the industry average.

There is a whole cottage industry of law firms that advise tax exempt investors on how to avoid UBIT by using foreign blocker corporations.  These clients include leading endowments such as Harvard and Yale, foundations such as the Gates Foundation and public pensions.

Romney says he trusts his advisors, yet that was clearly a mistake.  They have failed him in not only setting up a valid blind trust, but also a credible investment approach for a Presidential candidate.  See February 22, 2012 blog post for related material and comparison to Bill Esrey, former CEO of Sprint.

More importantly, if these filings made by one of Bain Capital’s portfolio companies, SMTC, and summarized via another entity they effectively control, Edgar Online, are accurate, then Romney is indeed involved in a massive tax fraud and by nature disqualified from being a viable candidate for President.

This is not complicated and hopefully someone will elevate it from the obscurity of a blog to where it belongs, front page top right above the fold on a Sunday.

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