Besides being model husbands? They both have S corporation income that exceeds their salary -- the so-called "John Edwards Shelter."
Now that it seems that Newt Gingrich might somehow be the Republican nominee for president, his tax return has come under scrutiny. The biggest income item on the return is from an S corporation, Gingrich Holdings. His Schedule E shows top-line K-1 income of $2,478,539, offset by a $25,130 Section 179 deduction. Meanwhile, he took "only" $252,500 in salary from the corporation. His wife took another $191, 827 in W-2 wages from Gingrich Productions, Inc., which is apparently a C corporation.
That leads to this comment reported by Janet Novack:
"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."
While there are plenty of cases where taxpayers have been called to account for taking no salary or nominal salary out of their S corporations, avoiding FICA and Medicare tax, there is no "multitude" of published cases where employee-owners who took salary of at least the FICA base ($106,800 in 2010) have had to take additional salary. In fact, there are none.
The closest case I can see to the Gingrich fact pattern is Watson, a district court case right here in metro Des Moines -- and the facts aren't very close. Watson involves an accountant whose practice generated around $200,000 in income, but for which he took only $24,000 in annual salary. Even in that case, the judge only boosted his annual salary to about $91,000. An appeal of the case by the taxpayer is currently before the Eighth Circuit.
So what is the "fair share" of Medicare taxes? Warren Buffett famously takes only $100,000 salary from Berkshire Hathaway, when comparable executives draw salaries in the millions. Should he be forced to take additional salary just to pay a "fair share" of Medicare tax?
"Reasonable compensation" is a notoriously difficult area of the tax law. Traditionally the IRS has tried to go the other way, trying to reduce W-2 compensation -- reclassifying it as dividends to make the payments non-deductible to C corporations. The incentive to do so was reduced when the salary cap was removed from the 2.9% medicare tax, but I know of no case where the IRS has tried to force a C corporation to pay more compensation to collect more Medicare tax.
You can accurately say that the tax law doesn't support an employee-owner taking no salary, or a token salary, out of an S corporation. You cannot say that the FICA base is a safe harbor "minimum wage" for an S corporation shareholder, but the IRS has won no court decisions involving such taxpayers. There is a huge gray area between token salaries for S corporation employee-owners and Ken Lay-sized salaries that hasn't been litigated.
While I may like Gingrich and Edwards only a little more than a bitter ex-spouse might, the existing case law simply does not support a claim that they failed to pay their "fair share" of Medicare taxes.
The TaxProf has more.
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