Weekend Economists Go Out with a Boom August 24-26, 2012

[Demeter]

1. A Clue Emerges to Romney’s Gift-Tax Mystery

http://blogs.wsj.com/washwire/2012/08/24/a-clue-emerges-to-romneys-gift-tax-mystery/?mod=WSJBlog&utm_source=twitterfeed&utm_medium=twitter

One of the mysteries surrounding Mitt Romney’s taxes is how the former private-equity executive managed to get $100 million into a family trust for his children without incurring federal gift taxes.

A potential clue may be found in a previously unreported 2008 presentation made by a partner at law firm Ropes & Gray LLP, which represents the GOP presidential nominee. It focuses on how private-equity executives could minimize gift and estate taxes by giving family members some of their “carried interest” rights, a major form of compensation that entitles private-equity executives to a slice of the firm’s future investment profits.

This is complicated stuff, but bear with us even if you’re not a tax geek. Much remains unclear about Mr. Romney’s taxes given his limited disclosure and the complexity of his personal finances.

The attorney at Ropes & Gray wrote that in the 1990s and early 2000s estate-planning lawyers “commonly advised” that executives could claim a value of zero on these transfers of carried-interest rights for federal gift-tax purposes. He said the practice ended by 2005...Gifts of carried-interest rights are common, but several estate-planning attorneys at major New York firms said they are puzzled by the claim that the rights ever could have been valued at zero, particularly at an established private-equity firm. They said long-standing rules require taxpayers to value all gifts at fair-market value, or what a willing buyer would pay a willing seller...

NOW THAT'S ONE ERUPTION I'M GOING TO GET POPCORN FOR...