Posted on 01/27/2012 2:30:38 PM PST by BMCinSC
no no no. It is not a payment at all from the capital accounts of the firm.
It is a new issue of shares, dilutive to the existing shareholders, paid out as a wage for services rendered, but not taxed to the recipient. There’s nothing else like it in the tax code that I am aware of.
so where does the equity distributed come from? thin air? there are only so many ways equity can be raised, the initial capital invested, retained earnings, and newly invested direct capital infusions. So the only portion of the capital distribution not from retained earnings are those investments from a company like bain and the original startup equity. Should they be charged a tax on their own cash invested in the business, should you pay a tax on your checking account? so that distribution should be free since it was taxed previously. now you down to initial equity and retained earning.
Maybe this can help: Its not a corporation investing. Its usually a partnership (set up by an entity like Bain, which maybe an LLC or some other type of entity as the General Partner and Limited Partners (i.e. the investors in the partnership, usually big institutions, pension funds, etc.). The compensation arrangement for the owners of the GP, like Romney, provides for participation in the profits made by the LP’s investment. 80% of the profits on the investment go to the investors and 20% of the profits go to the GP, i.e. Romney and his other Bain associates who attracted the capital from the institutions and invested it successfully for them. This 20% of profits is taxed at capital gains rates, not ordinary income rates.
All this being said, I agree with the earlier post that this is great for capitalism and perfectly legal and compliant with the applicable tax code at the time. I’m not criticizing capitalism or Romney for optimizing his net after tax returns legally. I started this post because I have heard pro-Romney radio personalities and other proponents/talking heads repeat the statement that ‘the capital that he used to make his gains in 2010/2011 were previously taxed at full, ordinary rates (upwards of 40%) or even taxed twice at the corporate level’ — which I am fairly sure is not true. I just don’t appreciate misrepresentations of the facts by so-called experts blabbing on the tubes.
your right only to the extent that the pension funds may have been funded with pre-tax profits. How ever if that is the case I’m sure they would be taxed on the back end, thus its a wash. So I still go back to where were the invested funds from in the tax stream, and where were the funds for the capital distributions from in the tax stream.
Can you build a scenario under which the investment funds were not taxed before, or will be taxed in the future(at income rates). I don’t see it.
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