TPM reader "MB" is a private equity professional and offers one plausible-sounding way in which Romney could have paid very low federal income tax rates (i.e. <10% per year) during the 2002-2009 period. 

The concept is called a "tax-neutral buyout." Basically, Romney's partners at Bain Capital entered into a structured takeover where they bought out Romney's shares over a period of years. So, Josh Marshall asks, wouldn't income from those shares be taxed as capital gains at the 15% rate? Not so fast, says MB. There are literally dozens of ways to shield capital gains from taxation, and when those gains are related to a private equity takeover, there's at least one *really* big shelter/loophole, and that is IRA law.

Romney cut a retirement deal with his partners to buy out his shares in the Bain Capital management company. Where it could be zero is if Romney had previously contributed his shares of the Bain Capital management company that he controlled 100% of into his IRA over the years. [...]

 

The management company shares are generally considered to have relatively nominal value (i.e. you can conceivably put them into an IRA) as there generally isn’t a lot of (or any) income/revenue associated with them — however, since the management company owns the brand name and controls the funds and all hiring/firing/compensation decisions (within Bain Capital), if Romney’s partners wanted to continue using the name “Bain Capital” and take over control of the private equity firm and funds in the future, they would have to buy back Romney’s shares over a period of several years for hundred+ of millions of dollars. This is not uncommon in private equity firms undergoing an ownership transition. Since these shares (could) have been contributed to an IRA over the years, the Romney’s income 2002 to 2009 would largely be from his partners at Bain buying back shares that he’s already contributed to his IRA, and just like any trading you do in your IRA, the sale of these shares would be tax free until after he turns 65 (and/or withdraws from said IRA) and he’d pay zero income taxes on that. So, if he had transferred 50% of his Bain management co. shares to an IRA, if he was being paid $20M per year to have those shares bought back, his tax rate would be a blended 7.5%. If the management company shares were held overseas or had overseas blocker entities, it is conceivable it could be even lower than that. Also, he could use his taxable shares as charitable gifts and his non-taxable IRA shares as tax free income.

MB points out Romney's non-denial denials. Reid's suggesting that Romney paid $0 in income taxes, but Romny is always careful to fire back that he paid "lots of taxes." He's not, in other words, actually saying that Reid is wrong.

On the question of Reid's "imaginary friend," is it conceivable that Reid found some Deep Throat figure from Bain Capital with first-hand knowledge of any tax-neutral buyout deal? Mais oui!

It is plausible that a Bain investor (a Limited Partner) would know the details of a tax-neutral Romney buyout from his Bain partners. Limited Partners (pension funds, endowments, foundations, etc.) that have millions invested in Bain Capital would demand to know the economic details of the transfer of control from Romney to his partners. Why? Because if the remaining partners were unhappy and departed, then the Bain Capital investors would have millions of dollars committed to a fund whose managers are no longer there to invest the money. Hence the rhetoric “name the source.”

Obviously any such individual divulging information like that to Reid could be violating "ironclad confidentiality agreements," and so risking serious liability thereby. But the fact remains that any partners/counterparties to Romney's retirement plan (or their staff) could indeed have detailed tax information about the plan. It isn't as if only Romney's CPA could know this stuff.

It's all sheer speculation. But unlike all the over-the-top claims that Reid is lying, it is plausible speculation. These are common tax shelter strategies in private equity transfers. But as we've all learned recently, speculation - even plausible, grounded speculation - that is unsupported by public records is exactly the same as lying, so I guess that makes this a pants on fire diary.