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Gingrich ploy skirts Medicare taxes

The GOP candidate classified millions as profits, not regular compensation, avoiding tens of thousands in Medicare tax. The IRS has won court challenges of this common tactic.

By MSN Money Partner Jan 23, 2012 2:56PM

This post is by Janet Novack of Forbes.com.

 

http://www.forbes.com/?partner=msneditFormer House Speaker Newt Gingrich avoided tens of thousands of dollars in Medicare payroll taxes in 2010 by using a technique the Internal Revenue Service has consistently and successfully challenged.

 

Republican presidential candidate Gingrich and his wife, Callista, treated only $444,327 of what they got from Gingrich Holdings 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 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%. (Romney said that he will release his 2010 return on Tuesday.)

The issue of Gingrich’s Medicare tax has started to attract notice from tax pros. The IRS says on its website that distributions to an S corporation owner should be treated as compensation to the extent they are associated with his personal services or services to the firm. Earnings that come from an investment of capital and equipment, or from the work of others, can be treated as profit.

 

On his July 2011 financial disclosure form, Gingrich valued his holdings in Gingrich Productions at between $500,000 and $1 million, suggesting he has far too little capital invested in the firm to justify booking $2.4 million as profit.  On Gingrich Productions' website, there is no suggestion it profits from the work of anyone other than the Gingriches. The site says: "Together, Newt and Callista host and produce historical and public policy documentaries, write books and newsletters, give speeches, record audio books, produce photographic essays, and make television and radio appearances."  (From public filings, it appears that Gingrich Holdings changed its name to Gingrich Productions last year.)

 

Neither a Gingrich spokesman nor his accountant responded to 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 corporations 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 vice-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 corporation 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.

 

The S corp strategy has no impact on income tax liability. S corps pay no corporate income tax. Instead, they pass on all their income to their owners' individual returns, where it is taxed at the top individual rate of 35%, the same as for salary. (The corporate dividends paid by C corporations, which do pay corporate tax, are currently taxed at a top individual rate of 15%, to minimize the impact of double taxation.)

 

The temptation for S corporation owners to take too little salary will grow even stronger beginning in 2013, when, as part of Obama's new health reform law, couples with compensation exceeding $250,000 (and singles with more than $200,000 in compensation) will have to pay an additional 0.9% Medicare surtax on their pay above that amount.

 

Audits of S corporation compensation issues are time consuming for the IRS. The GAO and some in Congress have looked for easier ways to curb the problem of underreported compensation. In 2010, Senate Finance Committee Chairman Max Baucus (D-Mont.) proposed raising $11 billion over 10 years by automatically imposing payroll tax on all the distributions to owners of certain "professional service" S corporations. But small-business groups and Maine Republican Sen. Olympia Snowe, the ranking member of the Senate Small Business and Entrepreneurship Committee, strongly objected and Baucus dropped the proposal.

 

More from Forbes.com and MSN Money:

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7Comments
Jan 23, 2012 11:35PM
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Insider trading, now tax evasion, no wonder politicians fight to get into office. They all come out millionaires. All with a smirk on their face and a finger to the voters.

Jan 24, 2012 9:59AM
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Gingrich name and goodwill? An oxymoron.
Jan 24, 2012 3:06PM
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So now the negative article on Gingrich is published as he goes to the front of the Republican nominees. Any pattern here by the pinko msnbc site

 

Wow. Did you want Forbes to report on this before the information was released by Gingrinch. The return information was just released the prior Thursday night during the debate. Friday, 1 business day for McKenzie to review and then comment to Forbes. Forbes publishes article on Monday, which msnbc.com then picks up.

Jan 24, 2012 12:24PM
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So now the negative article on Gingrich is published as he goes to the front of the Republican nominees.

 

Well, duh. He's busted his hump to buy a glass house, he lives in a glass house, he ought to be sure he's decently covering himself in his glass house.

Jan 25, 2012 12:05PM
Jan 26, 2012 12:58PM
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Hey someone (TNicos), how does it taste?   How does what taste?   Double talking, scam artist Gingrich's butt!  And if msnbc is such a pinko site, why are you dumb enough to read it?
Jan 24, 2012 9:17AM
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So now the negative article on Gingrich is published as he goes to the front of the Republican nominees.  Any pattern here by the pinko msnbc site.  And isn't the law based on fair compensation.  Seems like the compensation declared subject to payroll taxes was fair.  The profit premium was based on his name and that is return on goodwill.

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