Posted on 03/01/2004 1:27:13 AM PST by kattracks
WASHINGTON -- Sen. John Edwards got through last Thursday night's debate in Los Angeles, as he has his entire presidential campaign, without being asked an embarrassing question. How can he explain setting up a dummy corporation to avoid paying an estimated $290,000 in Medicare taxes in the two years before he ran for the Senate? It would be an embarrassing question for a self-described populist inveighing against privileges for the rich and powerful.
There were plenty of opportunities for Sen. John Kerry to bring this up during the debate's extended discussion of health care. Some of Kerry's key advisers worked on the 1998 North Carolina Senate campaign won by Edwards, when this issue was raised. But with Kerry on the brink of collecting a majority of delegates to guarantee the Democratic presidential nomination, he does not want to risk trouble with negative campaigning against his sole remaining serious opponent.
However, it is inconceivable that President Bush's crack researchers are not aware of the massive tax loophole utilized by Edwards, who is the clear consensus choice to be Kerry's vice-presidential running mate. Democrats, relishing thoughts of the attractive and charismatic Edwards face to face against Dick Cheney in debate, must ponder a better answer to the Medicare tax question than the senator gave six years ago.
At 9 a.m. on June 28, 1995, articles of incorporation were filed with the North Carolina Secretary of State for John R. Edwards, P.A. (professional association), of Raleigh, N.C. The new corporation was authorized to issue 100,000 shares of common stock -- all owned by Edwards, who is its only employee. This is a classic Subchapter "S" corporation devised to shelter income, mainly for professionals such as lawyers (and also syndicated columnists, but not me). It is one of the last loopholes left in the Internal Revenue Code, and it is a big one.
Edwards put his own little corporation to good use in his last two years as a multi-millionaire personal accident lawyer before becoming a full-time politician. He paid himself salaries of $600,000 in 1996 and $540,000 in 1997, on which he paid Medicare taxes. As the sole stockholder, Edwards received dividends of $5 million for each of those years -- all of it free from Medicare taxes. That saved the future senator around $290,000.
Republican Sen. Lauch Faircloth, facing defeat in 1998 by Edwards, charged that his challenger "has avoided paying taxes, shortchanging seniors." Edwards shot back with a response of a young man who had proved himself a virtuoso in pleading before juries: "I have paid every dime of Medicare taxes I owe and am required to pay by law. If Lauch Faircloth wants to make negative personal attacks, he needs to do it to my face in debate."
Faircloth, a self-made and largely inarticulate businessman, was not about to take on silver-tongued Johnny Edwards in debate -- and Edwards knew it. Whether his tax avoidance was perfectly legal, however, remains unknown in the absence of an IRS audit. The government's position is that dummy corporations such as John R. Edwards, P.A., must pay its sole employee a "reasonable" salary. Tax practitioners told me that paying a $1.1 million salary out of $11.1 million net income may not pass the "reasonable" test.
Manipulating the IRS code to maximize his personal wealth comes at the peak of a campaign where Edwards has raised himself from the lowest of also-rans to become a strong runner-up by propounding his concept of "two Americas" -- including one America where the rich play dirty tricks on the other America. In an early presidential debate in Columbia, S.C., last May 3, he promised "a better life for our families" that would be "based on the values of hard work and responsibility, not accounting tricks and corporate greed."
There is no record that Edwards, during his six years in the Senate, ever even considered legislation to close the giant loophole of the personal corporation. He must know that loophole well, because he is a lawyer who took advantage of it. He has not been seriously challenged on this so far, but surely will if he is put on the ticket in Boston this summer.
©2003 Creators Syndicate, Inc.
So, if you collect $10,000,000 in ordinary income you pay federal, state AND Medicare taxes on the entire amount. However, if you pass the income through a Subchapter S corporation and pay yourself $100,000 in ordinary income and $9,900,000 in dividends you avoid paying Medicare taxes on the dividends because dividends are not subject to Medicare taxes.
The issue here is: is that legal? It sure isnt ethical.
You're right, he was a pretty entertaining old chap, but Novak's right - he came off as dumb as a box of rocks.
The Sub S Corporation issues a K-1 to Edwards, classifying the smaller amount ($600,000) as salary, and the larger amount ($5,000,000) as Trade and Business Income. The salary shows up on his W-2 and the Trade and Business Income shows up on his Schedule E. A neat dodge of the Medicare tax. In Edwards tax bracket, both salary and Schedule E income are taxed at the same rate.
Novak has only one thing wrong; Sub S corporations do not pay dividends. The distributions are classified as I explained above.
Less exalted people have gotten prosecuted for this particular tax dodge.
What is it about my previous statement that you don't understand? Let me repeat, his marginal tax rate on both ordinary income and Schedule E income are identical. If they were not, why in the world do you think he is doing this? The pure pleasure of paying more tax?
I don't know about the tax treatment... it has been too long since I studied tax law. I can, however, suggest another reason "why in the world" Edwards would set up his practice as a corporation. It's a liability issue; for example, if he is sued for malpractice, then it can (I think) protect some of his personal assets. There is, of course, something called "piercing the corporate veil" to get at personal assets, but it can be an uphill battle as I understand it. Oftentimes a corporation is set up for liability issues as much as tax ones.
Then there is the matter of the income streams from the corporation: classifying roughly 10% of the income to salary (subject to Medicare tax) and 90% to Trade & Business Income (not subject to the Medicare tax) is prima fascia evidence of a tax scam because there is such a huge disparity. For each $1 million dollars reclassified this way, Edwards saved $29,000.
By the way, I checked my facts with a CPA before posting on this issue. Its not some amateur spouting off.
Gail, I'd vote for you, but never for Edwards. :)
Health care corruption bump.
Wonder if he every got this straighten out??
I doubt it and it's a good thing to tara him with,right out of the shoot. :-)
bump
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