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Newt Gingrich Used Gimmick To Avoid Paying Taxes On Millions In Income

Former House Speaker Newt Gingrich (R) caused a stir during last week’s Republican presidential primary debate when he released his 2010 tax return and revealed that he had paid a 31.5 percent tax rate on $3.14 million in income. The release came amid widespread calls for Gingrich’s fellow candidate, former Massachusetts Gov. Mitt Romney (R), to release his own tax returns, after Romney admitted his tax rate was about 15 percent.

But further scrutiny of Gingrich’s own returns from tax experts has revealed that his tax rate should have been even higher. That’s because, according to Forbes, Gingrich dodged “tens of thousands of dollars in Medicare payroll taxes” by classifying most of his income from two companies he owns as profits and dividends, therefore avoiding the payroll tax — a technique the IRS has “consistently and successfully attacked” in the past. Newt and Callista Gingrich classified only $444,327 of their income from Gingrich Holdings and Gingrich Productions as ordinary income. Meanwhile, the other $2.4 million earned was classified as profits or dividends, meaning it was not subject to payroll taxes.

According to tax experts interviewed by Forbes, that means Gingrich is dodging taxes he likely should be paying:

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.”

As Forbes notes, the IRS has specific rules on how payments from a small business like Gingrich Holdings should be treated for tax purposes, and the amount Gingrich says he invested in his companies — between $500,000 and $1 million — is likely “far too little” to “justify booking $2.4 million as profit.” The ploy, however, is used widely. According to the Government Accountability Office, S corps. like Gingrich Holdings underpaid wages by $24 billion in 2003 and 2004, allowing owners to avoid payroll taxes.

Gingrich’s dodge of Medicare taxes, though, pales in comparison to the tax break he’d give himself should he get to the White House. His tax reform plan calls for a flat 15 percent tax rate, slashing his effective rate to 14.6 percent and giving himself a $540,000 tax break in the process.

By: Travis Waldron, Think Progress, January 23, 2011

January 24, 2012 Posted by | Election 2012, GOP Presidential Candidates | , , , , , , | Leave a comment

Newt Gingrich: “So Busy Serving His Country That He Had To Cheat The Government To Save The Government”

While candidate Gingrich has been busy focusing on the tax return failings of his opponent, Governor Mitt Romney, a report by Forbes’ Janet Novack suggests that, once again, Newt may be using a good offense to keep from having to play some serious defense when it comes to his own failure to pay up on his tax obligations.

According to Novack, “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 attacked.”

Gingrich’s primary source of income, as revealed on the one tax return he has disclosed, comes from two “S” corporations owned by Newt and his wife, Callista. S Corporations are employed as a means to allow money to ‘flow through’ to the shareholder-owner as if it were a sole proprietorship or partnership, thus avoiding taxation at both the corporate level and re-taxation at the personal level.

It is a perfectly kosher way to do business.

However, according to the law, such corporations are supposed to pay out most of its earnings as direct payments to the owner/shareholder rather than as profits or dividends which are exempted from certain tax obligations— such as the 2.9 percent of earnings which are to be paid to Medicare.

As stated on the IRS website

Reasonable Compensation

S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for the service rendered to the corporation.

The key to establishing reasonable compensation is determining what the shareholder-employee did for the S corporation. As such, we need to look to the source of the S corporation’s gross receipts.

The three major sources are:

1. Services of shareholder,

2. Services of non-shareholder employees, or

3. Capital and equipment.

There is little question that the revenues flowing through Gingrich’s companies are the direct result of the services provided by Newt and his wife, whether by way of speaking fees, book royalties, film productions, etc. Thus, it would be reasonable to expect that the preponderance of revenue coming into the Gingrich corporations would pass through directly to Mr. and Mrs. Gingrich and be subject to taxes such as the Medicare tax.

Yet, in 2010, the Gingrich corporations paid out $444, 327 as salary to Newt and Callista while reporting some $2.4 million as profit or dividends – thus allowing the Gingrichs to avoid paying the 2.9 percent Medicare tax on the bulk of their earnings.

Of course, now that Gingrich is running for president, it is unlikely the IRS will come after him as he would simply call it an attack by the Obama administration.

And while there will, no doubt, be an agreement between Romney and Gingrich not to ‘go there’ – as both are now likely to be vulnerable on their respective tax returns—expect Rick Santorum to make a fuss unless he too turns out have some tax issues.

Personally, I can’t wait to hear Newt find a way to blame this on the media.

Or maybe he’ll tell us that he was so busy serving his country that he had to cheat the government in order to save the government.

 

By: Rick Ungar, Contributing Writer, The Policy Page, Forbes, January 23, 2012

January 24, 2012 Posted by | Election 2012, GOP Presidential Candidates | , , , , , , , | 2 Comments

   

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