Is it legal?  No, at least not the way Bain did it.  Wilson Sonsini and many other law firms advised fund managers that conversion of management fees was a balance of tax risk and economic risk.  I don’t think any law firms made a practice of offering legal opinions to bless the fee conversions, as they would for a tax-free reorganization or securities offering.  The choice of how to structure the fund is ultimately up to the fund managers, and we don’t know what their outside counsel said.  But close analysis of the arrangement shows that fee conversions are subject to serious challenge by the IRS, and in my opinion, if challenged in court, Bain would lose.

Is Romney responsible?  In my view, yes.  He was the sole shareholder of the management company when some of the funds were created.  (Fee conversions are set up when the fund is first organized.)  This means that he was responsible (in both the legal and business sense) for determining how Bain was structuring its compensation arrangements.

What is the IRS doing about it?  We don’t know.