Newt Gingrich’s Tax Problem

by Pejman Yousefzadeh on January 22, 2012

It’s far worse than Mitt Romney’s–who has done everything above board, by all accounts. And Gingrich deserves far more grief for his tax issues than Romney ever has:

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. 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.”

Read the whole thing. As the article makes clear, there is nothing unusual about this particular tax strategy; lots of people try what Gingrich and his wife try. But that doesn’t make it acceptable, and if the IRS turns its attentions to what Gingrich has done, he will almost certainly have to pay back taxes, with interest.

  • Jeffrey Collins

    Look, I’m a senior tax manager at a fairly good sized firm. I’ve seen this issue a lot.

    Not only is there nothing unusual about it; there’s also not necessarily anything wrong with it. The issue of “reasonable compensation” for S corp shareholders is incredibly complicated and there are TONS of cases about this issue. The fact of the matter is that in many cases this is perfectly acceptable planning technique.
    There are LOTS of cases where the courts have upheld similar planning techniques. 

    Whether a given scenario falls within the law requires a detailed understanding of the taxpayer’s situation (and that of his company). While this certainly could be a problem, it could also be nothing at all. Any attorney (or anyone else) who claims to know one way or the other by “reviewing the tax return” is full of it. There’s just no way you can know without a lot more information.

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