Tax lawyers question Gingrich's 2010 return
— -- GOP presidential contender Newt Gingrich used a popular tax strategy that enabled him to avoid paying Medicare tax on most of his 2010 income, three tax lawyers told USA TODAY.
After reviewing the 2010 federal tax return Gingrich released last week, the tax experts said he may have left himself open to an IRS challenge.
"That could be the type of return that would be flagged for an audit," said one of the experts, Robert McKenzie, a tax attorney at the Arnstein & Lehr law firm in Chicago.
The experts, who also included Bryan Skarlatos, of Kostelanetz & Fink in New York, and Martin Press, of the Gunster law firm in Fort Lauderdale, said it would be difficult to pinpoint the amount of Medicare tax that went unpaid without additional financial detail. But they estimated it could amount to tens of thousands of dollars.
In a written response to questions on Monday, Gingrich's campaign spokesman Joe DeSantis said "the salary and distribution were handled properly and legally."
He declined to allow an interview with Gingrich's tax preparer.
The questioning about the former House speaker's use of the tax strategy arose after he released his tax return in a strategic bid to pressure presidential rival Mitt Romney into doing the same. Romney, who had consistently declined to disclose his tax returns, is expected to release two years of his filings on Tuesday.
Gingrich's strategy involved a so-called S Corporation, an entity that has increasingly been used by attorneys, entrepreneurs, contractors and self-employed professionals. The IRS received 4.4 million such returns in 2010, agency records show.
The IRS defines S corporations as entities that pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. The shareholders report the income and losses on their personal tax returns and are assessed tax at their individual income tax rates.
Using an S Corporation enables filers to avoid double taxation that can otherwise occur if they received income from a regular corporation, which would face paying business taxes.
Gingrich's tax return shows his S Corporation, Gingrich Holdings, accounted for the bulk of his $3,142,066 adjusted gross income in 2010. The corporation paid him nearly $2.5 million in distributions beyond his salary and wages total of $252,500, his tax return and 2011 federal financial disclosure filing show.
Non-salary distributions from S Corporations are not subject to the 2.9% Medicare tax rate, half paid by the corporation and half by the employee.
But the IRS requires S corporations to pay "reasonable" salary compensation to employees for their services before paying non-wage distributions. That's designed to prevent the corporations from avoiding Medicare taxes by issuing disproportionate payments in distributions, rather than wages.
An IRS publication about S Corporations states that if most of the gross receipts and profits are associated with an employee's personal services, "then most of the profit distribution should be allocated as compensation."
DeSantis said the candidate's speaking engagements and television appearances produced the bulk of the payments received by Gingrich Holdings.
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