Romney as Director Saw Marriott Use Tax Shelters

By Jesse Drucker - Feb 23, 2012 4:16 AM GMT+0700

Mitt Romney has long had close ties to hotel operator Marriott International Inc. (MAR) The candidate for the Republican presidential nomination, whose full name is Willard Mitt Romney, was named after the chain’s founder, J. Willard Marriott, a friend of his father. He joined the company’s board in 1993, and has served on it for 11 of the past 19 years, including six as chairman of the audit committee.

During Romney’s tenure as a Marriott director, the company repeatedly utilized complex tax-avoidance maneuvers, prompting at least two tangles with the Internal Revenue Service, records show. In 1994, while he headed the audit committee, Marriott used a tax shelter known to attorneys by its nickname: “Son of BOSS.”

A federal appeals court invalidated the maneuver in a 2009 ruling, siding with the U.S. Department of Justice, which called Marriott’s transaction and attempted tax benefits “fictitious,” “artificial,” “spectral,” an “illusion” and a “scheme.” Marriott had argued the plan predated government efforts to close such shelters.

Employing another strategy, Marriott legally avoided hundreds of millions of dollars in income taxes thanks to a federal tax-credit program criticized and allowed to expire by Congress. Marriott has also shifted profits to a Luxembourg shell company. During Romney’s years on the board, Marriott’s effective tax rate dipped as low as 6.8 percent, compared with the federal corporate statutory rate of 35 percent.

Oversight Role

Romney’s business experience is the cornerstone of his presidential campaign. Opponents have focused on his leadership of the investment company Bain Capital LLC and his personal income tax rate of 13.9 percent. As a Marriott director, his responsibilities included oversight over the tax planning conducted by management, according to a company statement.

Romney’s position as chairman of the board’s audit committee for six years gave him and the other members responsibility to review financial reporting, according to Marriott’s annual proxy filings. Members of that committee review “the results of internal and external audits, the accounting principles applied in financial reporting, and financial and operational controls,” according to the company proxy filed covering his first year heading that committee.

Romney, 64, regularly attended the meetings of the audit committee and board, said Gilbert M. Grosvenor, who overlapped with Romney for more than nine years on the Marriott board and also sat on the audit committee.

‘Accurate and Fair’

As the committee chairman, Romney examined the financial statements, “certainly deeper than we did as members,” recalled Grosvenor, a former president and chairman of the board of the National Geographic Society. Romney was “trying as much as possible to make sure they were accurate and fair.”

The audit committee “would have been certainly informed” of the IRS dispute stemming from the Son of BOSS transaction, said Grosvenor, 80, who lives in Virginia. “It certainly came before the board, that’s for sure.”

Such transactions can have a direct impact on the company’s financial results, putting them squarely in the purview of the audit committee, said Lynn E. Turner, former chief accountant of the U.S. Securities and Exchange Commission and a managing director at LitiNomics Inc., an economic and forensic consulting firm. “You have responsibility to oversee financial reporting and that includes getting into tax aspects. If you’re not compliant with the IRS, that also turns out to be a financial reporting issue,” he said.

‘Accordance’ With Code

Andrea Saul, a Romney campaign spokeswoman, declined to answer written questions about Romney’s role at Marriott. “For details of Marriott’s tax planning, we refer you to Marriott,” she said.

“Tax planning is conducted by the company’s management and is, like all aspects of our business, subject to board oversight,” said Thomas O. Marder, a Marriott spokesman. “Marriott only engages in transactions that we believe are in accordance with the tax code and that we think will create shareholder value.”

In 2004, Marriott’s tax planning drew the ire of Senator John McCain. Marriott received hundreds of millions of dollars in federal tax credits meant to promote so-called synthetic fuel through a business purchased by Marriott in 2001 while Romney sat on the board’s audit committee.

“One of the greatest beneficiaries of this tax shelter -- and that is all that it is, a tax shelter -- is a very profitable hotel chain: Marriott,” McCain said at the time. He called the program an “expensive hoax” and a “scam.” Congress let the subsidy expire in 2007 because of perceived abuses. McCain, a Republican, endorsed Romney in January.

Campaigning for Cuts

During the presidential campaign, Romney has called for lower taxes almost across the board. He wants to reduce the corporate tax rate to 25 percent from 35 percent; end the estate tax; end taxes on corporate profits reported offshore; cut the top personal income tax rate to 28 percent and eliminate taxes on investment income for people with adjusted gross income below $200,000.

In its “Believe in America” jobs plan released last year, the Romney campaign criticized federal policy for fostering corporate tax avoidance: “Corporations, for their part, are subject to rules and regulations that all too often encourage tax gamesmanship while discouraging reinvestment in the American economy.”

Son of BOSS

Romney’s first stint on Marriott’s board lasted from 1993 to 2002, when he stepped down before running for and serving as Massachusetts governor. For all but the last year he was a member of the audit committee, which he headed from 1993 to 1998. During his time on the committee, Marriott implemented the Son of BOSS shelter attacked by the Department of Justice, bought a synthetic fuels business reliant on tax credits criticized by Congress as a tax shelter and took deductions that eventually led to a $220 million settlement with the IRS on another issue.

He rejoined in 2009 and left again early last year. He earned $380,788 from Marriott in those final two years, during which the board met in person eight times.

Restore our Future, a political action committee raising money to support Romney’s campaign, has received $1.5 million in contributions from J.W. Marriott Jr., the company’s chief executive officer and son of the founder, and his brother Richard, making them among the so-called Super PAC’s biggest contributors. The brothers hosted a Romney fundraiser last year.

In his 2010 book, “No Apology” (St. Martin’s Press, 336 pages, $25.99), Romney lauded J.W. Marriott Jr.’s leadership.

Friends, Family

“For many years, as a friend and as a Marriott International board member, I’ve watched J.W. ‘Bill’ Marriott lead his company,” he wrote. “He personally visits as many as 250 hotels a year and knows a remarkable number of his longest- serving employees by name -- and not just hotel managers, but doormen, telephone operators and cleaning staff as well. He doesn’t just call them associates, he considers them such, and among the company’s corporate management ranks are people who began their Marriott careers as hourly workers.”

In late 1992, Romney joined the board of the company’s precursor, Marriott Corp. He had recently left the private equity firm he helped found, Bain Capital, to rescue and run the firm where he once worked, Bain & Co. Marriott was almost like a family company: his father, George Romney, and J. Willard Marriott were friends, according to “The Real Romney,” a 2012 biography by Michael Kranish and Scott Helman (Harper, 416 pages, $27.99).

At various points during his Marriott tenure, Romney also served on the board’s compensation and finance committees.

Triggering a Loss

In January 1994, an investment banker faxed a presentation to a longtime Marriott tax-department executive, according to a court filing. The proposal laid out how the company could use a series of newly created partnerships to trigger a tax loss without any real economic harm.

This so-called Son of BOSS shelter helped a Marriott subsidiary sell about $81 million of mortgage notes and yet report a roughly $71 million tax loss. After the IRS challenged the benefit, Marriott sued the government.

In 2008, a U.S. Federal Court of Claims judge ruled against Marriott. The company appealed and, in 2009, lost again in federal appellate court.

Marriott attorneys said in court filings that the company was using a legitimate tax-reduction strategy.

“This is pretty much the poster child for those classic early tax shelters: you use a hyper-technical reading of the tax law to obtain what are, by any standard, unwarranted tax benefits,” said Robert Willens, a tax-accounting analyst in New York who advises investors.

A version of that same strategy got others in bigger trouble. Partners at KPMG LLP counseled their clients on Son of BOSS structures, leading to a $456 million deferred prosecution agreement with the Department of Justice and causing the indictment of several former partners there, along with partners at Ernst & Young LLP. (The nickname is derived from an acronym for an earlier version of the shelter -- Bond Options Sales Strategy.)

IRS Challenged Deductions

Marriott clashed with the IRS on another issue. In 2000, 2001 and 2002 the company took $1 billion of deductions related to an employee stock ownership program from the forgiveness of principal and interest on a loan, Marriott securities filings show. The IRS challenged the deductions and, in 2007, Marriott agreed to pay about $220 million in income taxes, excise taxes and interest to the Treasury and various states.

Marriott has no outstanding disputes with the IRS, said Marder, the company spokesman.

Synthetic Fuels

“All years through 2009 have been closed,” he said. “The IRS is in the process of finishing its 2010 audit and has raised no new issues that have not been resolved.”

Another tax-avoidance strategy that prompted criticism took advantage of a federal tax credit for synthetic fuels. The government offered companies the opportunity to claim potentially lucrative subsidies for attempts to turn coal into unconventional fuel.

In 2001, Marriott bought four synthetic fuel plants to use the credit. Companies could get the benefit by producing fuel after they sprayed coal with various substances, regardless of environmental improvement from the procedure. The process gave rise to a derisive nickname for the subsidy: “Spray and pray.”

Such credits cut Marriott’s tax bill sharply. In 2002, its first year receiving the benefit, Marriott legally claimed $159 million of such credits, cutting its effective tax rate to 6.8 percent. That’s far below the U.S. federal statutory corporate rate of 35 percent. The following year, the tax credits more than eliminated Marriott’s federal income-tax provision and helped the company report a negative income-tax rate.

Luxembourg Subsidiary

Faced with criticism from McCain and others, Congress let that tax credit expire at the end of 2007.

Marriott has also cut its taxes by legally sending profits overseas, in part through a Luxembourg subsidiary created in 2008 called Global Hospitality Licensing S.à.r.l., which reported having a single employee.

The unit collected $229 million in revenue in 2009, primarily from royalty, licensing and franchise fees letting hotel owners and operators use various Marriott brand names. It also owns rights to license the brand name for Ritz-Carlton, owned by Marriott. These transactions help Marriott attribute profits from those brands to the offshore subsidiary instead of to the U.S. parent company, where they would be taxed at the 35 percent federal income-tax rate.

The profit generated by the offshore unit is unclear because the page containing its income statement is missing for its only two public annual reports from 2009 and 2008, according to the Luxembourg corporate registry.

In 2010, foreign operations cut 3.7 percentage points off Marriott’s effective tax rate. In 2011, they cut just under a percentage point off the rate, according the company’s annual report. As of the end of 2011, the company had $451 million in offshore earnings on which it hadn’t paid any U.S. federal income tax. Multinationals have been lobbying Congress and the White House for a tax holiday to return such profits to the U.S. Until companies bring those profits home, the taxes are deferred indefinitely.

Romney has said he wants to end altogether the federal income-tax obligation for such offshore profits, a change his campaign promises will begin on day one of his administration.

To contact the reporter on this story: Jesse Drucker in New York at jdrucker4@bloomberg.net

To contact the editor responsible for this story: Dan Golden at dlgolden@bloomberg.net