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Jon Greenberg
By Jon Greenberg August 13, 2012

Barack Obama links Mitt Romney to infamous tax shelter 'Son of Boss'

Barack Obama expanded his assault on Mitt Romney’s business ethics with a new ad that connects Romney to dodging taxes.

The ad opens with a clip of Romney in an interview.

Interviewer: Was there ever any year when you paid lower than the 13.9 percent?

Romney: I haven’t calculated that. I’m happy to go back and look.

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Announcer: Did Romney pay 10 percent? 5 percent? Zero? We don’t know. But we do know that Romney personally approved over $70 million in fictional losses to the IRS as part of the notorious "Son of Boss" tax scandal, one of the largest tax avoidance schemes in history. Isn’t it time for Romney to come clean?

If you haven’t heard of it, Son of Boss was a tax dodge that swept the country in the 1990s and allowed well-heeled investors and corporations to hide billions of dollars in taxes they owed the government.

We thought we should examine this new allegation and see whether Romney truly did have a hand in advancing a spurious tax shelter.

Marriott International and Son of Boss

The substance of this claim goes to Romney’s years on the board of Marriott International. According to Bloomberg News, he joined the board of directors in 1993 and became head of the board’s Audit Committee, a position he held for six years. By this point, Romney had already established himself as a successful fund manager.

His second year on the board, Marriott took advantage of a tax reduction method that Daniel Shaviro, a tax professor at the New York University School of Law, described to us this way:

"You and I purport to give each other, say $70 million. (But these cash flows are themselves largely fictional - e.g., I ‘borrow’ from you the money that I am ‘paying’ you). I then deduct the $70 million that I paid you, and don't include the $70 million that you paid me. End of story."

Complex partnerships, financial securities and the occasional offshore accounts were used to mask reality. The method went by the name of Son of Boss, named after a similar discredited tax scheme called BOSS, or Bond Option Sales Strategy. It was marketed aggressively by tax accountants nationwide, including some of the largest accounting firms.

The Internal Revenue Service began cracking down in 2000. In 2008, the government estimated $6 billion in taxes had gone uncollected. A series of court decisions stated that the perpetrators were guilty of "subverting the legislative purpose of the tax code by engaging in transactions that are fictitious or lack economic reality simply to reap a tax benefit."

Citing court documents, Bloomberg reported that in 1994, an investment banker faxed a proposal to a senior tax attorney at Marriott. By creating new partnerships, the company could post a paper tax loss without doing itself any real financial harm. This was Son of Boss in action. Through it, Marriott reported $71 million in losses that the courts ultimately decided did not exist.

By the mid-2000s, Marriott was in court defending its use of this tax shelter. In 2008 it lost; the company appealed and lost again in 2009.

Romney’s role

The central question is, did Romney know what was going on and did he sign off? The ad relies on the opinion of two tax attorneys, Edward Kleinbard and Peter Canellos, who wrote that "Romney approved the firm's reporting of fictional tax losses." The authors go on to express their opinion that Romney had the expertise to understand the nature of the scheme and had the fiduciary responsibility to review it.

There is only one certain fact about Romney’s role at Marriott. At some point, the board would have reviewed and accepted various financial filings and audit reports that included the tax losses claimed under Son of Boss.

What we don’t know is whether the board or the audit committee specifically discussed the tax shelter itself, either before it was used or when it delivered the promised tax savings.

On this point, we have no outright denial from the Romney campaign. We asked the campaign if Romney approved the use of Son of Boss and they referred us to Marriott International.

At Marriott, Stephanie Hampton, senior director of global corporate communications told us, "None of our directors has actively initiated or coordinated the company's tax planning strategies." But this is no denial. Initiating and coordinating are not what board Audit Committees do. The ad claims that Romney approved the deal, not that he initiated it or coordinated it.

Absent a denial, we enter the hazy world of the role of corporate board audit committees in 1994. "The standards for audit committees compared to what we see now were more modest," said Joe Carcello, professor of accounting at the University of Tennessee.

Carcello told us he is skeptical that company managers would have brought this transaction before the board at all. If they did, he expects the managers would have told board members, "We vetted this with the tax lawyers and they say this is a legitimate transaction," Carcello said. "Unless the audit committee had three or four tax lawyers, they wouldn’t have any reason to question it."

Accounting experts seem to share this view, but tax lawyers have a different opinion.

The lawyers cited by the Obama campaign say by 1994, the New York State Bar had issued warnings about tax shelters of this sort. Shaviro at New York University told us there would be ample reason to question the transaction.

The company was claiming a large loss but it wasn’t actually losing any money. To Shaviro, the follow ups would be obvious: "Can this really work? Do the tax lawyers agree? Is it too good to be true?"

Linda Beale, a professor at Wayne State Law School, said, "The audit committee is the place to draw the line on improper behavior."

Romney seems to have taken his board duties seriously. Bloomberg cited a fellow Marriott board member, Gilbert Grosvenor, who said Romney examined the company financial statements closely. "Certainly deeper than we did as members," Grosvenor told Bloomberg.

Marriott International said the company "takes prudent precautions, including seeking the advice of outside professionals, to ensure our tax strategy is consistent with Federal, state and foreign tax laws and regulations." It is important to note that in 1994, the federal government had yet to crack down on these tax schemes.

Our ruling

The Obama ad says Romney personally approved $70 million in fictional tax losses through the Son of Boss tax shelter.

Marriott International used Son of Boss. At the time, the illegality of the scheme had not been proven in court, but the nature of it was clear to all participants.

Romney was head of Marriott’s audit committee at the time. Experts disagree on whether the corporate board would have known about the deal and had the chance to question it. The company neither confirmed nor denied that the board approved the transaction. At some point, the board would have approved filings that included the fraudulent losses, but it’s unclear whether Romney specifically favored the tax move.

The statement includes a measure of truth but ignores important context. We rate it Half True.

Our Sources

Obama for President, Son of Boss, August 9, 2012

CNN, Did Romney enable a company’s abusive tax shelter?, August 8, 2012

Bloomberg, Romney as audit chair saw Marriott Son of Boss shelter defy IRS, February 22, 2012

PolitiFact, Harry Reid says anonymous source told him Mitt Romney didn’t pay taxes for 10 years, August 6, 2012

Email interview with Peter Canellos, former chair of the New York Bar Association Tax Section, August 9, 2012

Email interview with Edward Kleinbard, professor, Gould School of Law, University of Southern California, August 9, 2012

Email interview with Daniel Shaviro, professor of taxation, New York University School of Law, August 10, 2012

Email interview with Linda Beale, associate professor, Wayne State Law School, August 10, 2012

Interview with Joe Carcello, professor of accounting, University of Tennessee, August 10, 2012

Email interview with W. R. Knechel, director, International Center for Research in Accounting and Auditing, University of Florida, August 10, 2012

Email interview with Stephanie Hampton, senior director of global corporate communications, Marriott International, August 10, 2012

Robert Sommers, Son of Boss - Abusive Tax Shelter Transaction

University of Pennsylvania Wharton School, Tax Shelters: Exotic or Just Plain Illegal?, March 8, 2006

Jade Trading v US, United States Court of Federal Claims, 80 Fed. Cl. 11; 2007 U.S. Claims LEXIS 405; 2008-1 U.S. Tax Cas. (CCH) P50,112;100 A.F.T.R.2d (RIA) 7123

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Barack Obama links Mitt Romney to infamous tax shelter 'Son of Boss'

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