David S. Miller, a tax attorney with Cadwalader, Wickersham & Taft LLP in New York, told PolitiFact that tax-exempt entities, including IRA accounts, sometimes invest through Cayman Islands corporations to reduce their U.S. taxes. “Congress did not deliberately allow tax-exempts to reduce their U.S. taxes by investing through Cayman Islands corporations,” Miller said. “However, the practice is widespread and the IRS has approved of it.”
On this basis Politifact ruled that it is True the Caymans are a tax haven, and Mitt Romney has money there.
In last week’s Presidential debate, Mitt Romney pointed out that the Illinois General Assembly Retirement System, in which Barack Obama participates, also invests in a Cayman Islands fund, managed by U.S. adviser Advent International. According to Politifact, however, this claim is only “Mostly True,” again based on comments from Mr. Miller:
Miller offered this analysis: “There is no evidence that the fund helped the Illinois pension fund avoid any taxes – in this respect, the Illinois pension fund would have been treated identically had the fund been organized as a domestic (U.S.) partnership. However, the fact that it was organized as a Cayman partnership might have allowed some taxable investors to defer some tax on foreign (non-U.S.) portfolio companies purchased by the Fund.”
First, it might be relevant for PolitiFact to disclose that, the same week in July that Mr. Miller was confirming Obama’s claim that the Cayman Islands are a tax haven, he was writing a check to Obama’s re-election fund. According to opensecrets.org, Miller contributed $250 to Obama on July 10, 2012. This followed a $500 contribution to Democratic Congressman Jerrold Nadler and a $200 contribution to Democratic Connecticut Senate candidate Susan Bysiewicz. No contributions to Republicans are listed.
Second problem. There is no basis whatsoever for his insinuation that the Caymans are a tax haven when used by Bain but not when used by the Illinois state pension. Now admittedly, his two statements in this regard are literally true.
In his July analysis he is quoted as saying “Congress did not deliberately allow tax-exempts to reduce their U.S. taxes by investing through Cayman Islands corporations,” Miller said. “However, the practice is widespread and the IRS has approved of it.” This is indisputably true — and equally applicable to the Bain / Romney and Illinois / Obama investments.
However, in the most recent PolitiFact factcheck he says that “there is no evidence that the fund helped the Illinois pension fund avoid any taxes – in this respect, the Illinois pension fund would have been treated identically had the fund been organized as a domestic (U.S.) partnership.”
I don’t doubt that this is true as well. Why would there be evidence in an SEC filing that a strategy saves taxes? But the fact is the two funds provide precisely the same mechanism for minimizing U.S. taxes.
[Warning: Tax geekery ahead.] In my daytime job I am a tax lawyer who specializes in offshore investment funds (finally, a controversy I am competent to weigh in on!). The Caymans’ partnerships in each fund function as “blockers.” They shield U.S. tax-exempt investors from taxable income they would otherwise be exposed to under the “debt-financed” income rules of the unrelated business income tax. Section 514 of the Internal Revenue Code generally subjects U.S. tax-exempts to tax if they realize income from assets acquired with debt. This rule is the only reason a U.S. tax exempt would invest in a U.S. private equity fund via an offshore feeder fund such as a Caymans partnership.
The only possible justification for stating that the Bain Cayman’s partnership avoided U.S. taxes while the Illinois one doesn’t is if the Bain fund uses borrowing to acquire shares while the Advent one does not. There is no basis in the publicly available documents that I have seen for reaching this conclusion. Simply put, there is no plausible reason the Illinois pension fund would invest in a U.S. private equity fund via an offshore blocker unless it is doing so to avoid the debt financed income rules of the unrelated business income tax.