Paul L. Caron

Monday, January 23, 2012

Newt Gingrich Used 'John Edwards Sub S Tax Shelter' to Save $50k in Medicare Taxes


Forbes, Gingrich Used Payroll Tax Ploy Often Attacked By IRS, by Janet Novack:

Newt Gingrich avoided tens of thousands of dollars in Medicare payroll taxes in 2010 by using a technique the IRS has consistently and successfully attacked. Republican Presidential candidate Gingrich and his wife, Callista, treated only $444,327 of what they got from Gingrich Holdings. Inc. and Gingrich Productions as compensation to them, while reporting a whopping $2.4 million of their earnings from these corporations as profits or dividends. Medicare taxes are levied at a rate of 2.9% on an unlimited amount of compensation and self-employment income (say, from a consulting contract, speeches or a book) but not on profits from a business.

“It appears that he is not paying his fair share of Medicare tax,’’ Robert E. McKenzie, a partner in the Chicago law firm of Arnstein & Lehr LLP concluded, in an email to Forbes, after reviewing Gingrich’s 2010 tax return. McKenzie, a past chairman of the Employment Tax Committee of the American Bar Association Tax Section and a member of the IRS’ Advisory Council, added:  “There are a multitude of cases where the IRS has successfully challenged the improper tax strategy of this candidate and his accountants. Service businesses are only allowed to distribute a fair return on investment from an S corp. as profits exempt from Medicare taxes. The remainder of profits must be paid as salary subject to a 2.9% Medicare tax levy.”

Since Gingrich released his 2010 tax return Thursday night during the Republican debate, news coverage has focused on his hefty income tax rate—he paid tax equal to 31.5% of his adjusted gross income of $3.14 million. By contrast, former Massachusetts Gov. Mitt Romney, who earned a fortune at Bain Capital and gets most  of his income from investments, acknowledged last week that he pays closer to 15%. ...

Neither a Gingrich spokesman nor his accountant returned requests for comment.

President Barack Obama reported all of his $1.4 million in 2010 book profits as subject to Medicare taxes. Still, Gingrich’s strategy, while frowned upon by the IRS, is hardly unusual. High-earning self-employed individuals have had an incentive to form S corps. and report big profits instead of big wages since 1993, when Congress lifted the cap on the amount of earnings subject to the 2.9% (combined employer and employee) Medicare tax. Back in 1998, when he was a trial lawyer, John Edwards, the former North Carolina Senator and Democratic presidential candidate who is now awaiting trial for alleged campaign violations, reported a salary of $360,000 and profits of $5 million from his S corp. law practice. Congress’ Government Accountability Office, in a report released two years ago, estimated that in 2003 and 2004, S corps. underpaid wages to their owners by $24 billion, skirting payroll taxes on that amount.

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» What do Newt and John Edwards have in common? from Roth & Company, P.C.
Besides being model husbands? They both have S corporation income that exceeds their salary -- the so-called "John Edwards Shelter."... [Read More]

Tracked on Jan 23, 2012 8:02:47 AM


First, as to Gingrich and Edward: The issue as to whether S corp dividends should be recast as W-2 wages subject to FICA is whether the payments constitute compensation. In the Edwards case (which predated most of the current body of case law and came at a time when the issue was really very murky), it was clear that much of his income was generated by his practice (thus derived from the labors of others) and that he likely had invested significant capital in the business. That may or may not be the case here.

Second, as to Romney, the issue is not whether he has treated the $375K in lecture fees in 2010 as all being subject to FICA. I'm willing to bet that the returns so reflect that result, after all, the returns were prepared by professional preparers who had to assume that they would be disclosed. Thus, purely as a defensive matter, he likely subjected the lecture income to FICA. A more interesting question is how similar income in previous years was treated.

Posted by: Stuart Levine | Jan 23, 2012 2:06:57 PM

And on Tuesday we will see how Mitt Romney handled his "very little" $375,000 speaker fee income. Did he run it through an S corp, LLC or just report it under Sched C with full Self employment tax consequences.

Posted by: David R | Jan 23, 2012 11:20:59 AM

The published cases the IRS has one on this issue have been egrigious. No salary at all or in one case $24,000. Gingrich had a salary of +250,000. I do not think there is a case of the IRS recharacterizing distributions to salary of someone who has taken more than the social securtiy max. It is true that the salary is low relative to income, but there is no hard and fast rule.

Posted by: Peter Reilly | Jan 23, 2012 8:38:16 AM

There seem to be a number of things in common between them.

Posted by: Michael Livingston | Jan 23, 2012 7:16:46 AM