Romney has disclosed a substantial individual retirement account (IRA) that, as the Wall Street Journal first noted, could have made offshore investments that circumvented an obscure U.S. tax called the Unrelated Business Income Tax (UBIT).
One benefit of an IRA is that its holder is allowed to defer taxation on deposited income until it's drawn upon during retirement. In the meantime, the deposits buy investments that can easily return much more than other types of savings vehicles. But there are some things an IRA can't do without being taxed right away. An IRA can't finance investments with debt, and, in the United States, it can't invest in entities that lever up, without being hit by the UBIT.
But if an IRA invests in an offshore fund, and that fund levers up, it can avoid the UBIT altogether. And at 35 percent that's no small tax to get around, according to multiple tax experts.
When first questioned about this on the call, Romney's trustee noted, "Governor Romeny's IRA is not structured in the Caymans, it's not located in the Cayman's. It's tax deferred just like your IRA, and my IRA."
But in a followup, I asked if his IRA had invested in any offshore entities that would have made it subject to the UBIT if those entities were located on U.S. soil. Romney's staff has yet to provide the answer.
Though most private equity funds do use leverage, it's possible that Romney's IRA hasn't been used to avoid the UBIT at all. If he and his aides can demonstrate that, or state so unequivocally on the record, it will put one key controversy surrounding his tax advantages to bed.