If you’re into this sort of thing you can go read Mitt Romney’s tax returns and learn (on page 5 of the 2011 return) that he is in the “independent artists, writers, performers” business, which seems about right. (But which one?) You can also learn that he’s doing okay, financially-wise, and some more specific stuff; tantalizingly, you can’t get a good picture of his returns on assets because his financial disclosure forms are so meaninglessly bucketed. Most crucially, you can learn that he paid about a 15% tax rate on his take last year. There is a lot you can think about this. Some of it revolves around the badness of taxing capital gains at a lower rate than labor income, which, whatever, not my beat. Some of it revolves around the badness of taxing private equity labor income as capital gains, which, I mean, I’m sympathetic to, but also not my beat, but in any case this income is actually capital gains. Like, Mitt wasn’t working at Bain Capital last year. He was just sitting around, doing his “independent artist/writer/performer” thing, collecting money from the other money that he got 20 years ago. That’s what capital gains is. Anyway.

If you’re really into this sort of thing you can also go read Newt Gingrich’s tax return, but you won’t, because the numbers on it are smaller and where’s the fun in that? But USA Today of all people actually went and read it and they found … maybe tax fraud? That was unexpected:

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.

And it would be a shame if someone were to draw attention to that by posting it on the internet.

Actually the issue is sort of interesting:

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.

Fair enough. You might think “hmm, $250k is about the amount that a reasonable person would pay for Newt Gingrich’s services, tops” but actually “reasonable” is a bit of a term of art there, and key question is actually how much of the revenue of the S-corp came from Newt’s personal efforts (here, most of it) and how much of it came from other employees’ efforts and/or return on or of invested capital, in connection with which you might be interested to know that:

“The general rule of thumb they’ll usually apply is they don’t view anything greater than a 20% return on investment as reasonable. The rest should be paid as salary,” said McKenzie.

Also there’s not obviously a lot of invested capital here so that $2.5mm probably represents a Citadel-on-the-rebound level of returns.

There are again various things to think but one obvious one is:
(1) okay,
(2) man does work for company,
(3) man receives money from company for that work,
(4) man characterizes that money as something other than payment for his work to avoid some taxes,
(5) where have I heard that before?

Newt seems to have been getting Regular Tax Advice, Super-Aggressive Edition. Clearly he should be getting Private Equity Tax Advice, Pretty Vanilla Edition. That I think goes something like this:
(1) sell shares in Gingrich Productions, or whatever it’s called, to some shareholders, for like $1,
(2) LBO it back using Newton Square Venture Funding III LLP, for like $1.50,
(3) give yourself carried interest in NSVFIIILLP,
(4) profit!

Avoiding a paltry 2.9% Medicare tax is the least of the benefits of this approach. You also get to treat your carried interest distributions as capital gains rather than ordinary income – whereas Gingrich’s S-corp distributions, while they avoid Medicare, are still treated as ordinary income and so are subject to a much higher tax rate than Romney’s take from Bain Capital. And as for that whole “any return greater than 20% is unreasonable” thing – that’s, like, the minimum return for private equity. (In theory!) So you’re golden paying most of the money out in carry and very little of it in salary.

Somehow I suspect this wouldn’t work. For one thing, for best results, you’ll probably want someone to stump up some actual capital for your little LBO fund; part of why private equity carry is treated as capital gains rather than compensation is that it’s splitting partnership income with actual cash-contributing LPs. Perhaps you could go design a more complicated structure to get Gingrich that tax shielding. I don’t know. I just think it’s kind of fun to see regular human tax structuring going up against private equity tax structuring – and see the regular human version be both more questionable legally and far less financially successful.

Romney’s Tax Return Inflames Debate Over 15% Investment Rate [Bloomberg]

Tax lawyers question Gingrich’s 2010 return [USA Today]

Related?: How to Dodge a Carried Interest Tax Hike? [NetNet]

24 comments (hidden for your protection)
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Comments (24)

  1. Posted by Gues | January 24, 2012 at 6:50 PM

    Investment income is not the same thing as a capital gain…

  2. Posted by Bugs | January 24, 2012 at 7:37 PM

    It's tough being witty about tax avoidance.

  3. Posted by Matt's Tax Guy | January 24, 2012 at 8:22 PM

    Matt, your 2nd list skipped step 3.5 of PE deals in which "business pays corporate level tax on the income of the business (normally as a C Corp, so actually more total taxes than Newt is paying on his S Corp)"

  4. Posted by Used to Be Sire | January 24, 2012 at 8:26 PM

    I have thought, from time to time, that I am the King of the Bullshitters, but the more I read about this Newt guy, the more I'm ready to give up the throne.

    -Former King of the Bullshitters

  5. Posted by trojan_ | January 24, 2012 at 8:38 PM

    if dwight schrute wins the presidency, the world really will end in 2012

  6. Posted by Dickhead | January 24, 2012 at 9:02 PM

    what % of capital gains realized by investors do you think represents taxed, undistributed income?

  7. Posted by UBS Commodities MD | January 24, 2012 at 9:02 PM

    Wait, you think that really might happen? Time to go long beet futures!

  8. Posted by LOL Wat? | January 25, 2012 at 12:14 AM

    "I think it would be better if we split up. I know you're a little groggy now from the cancer surgery meds but I have a speech to do on family values and I just can't take the pressure of the emotions I have for you and others as well as championing the Silent Majority's need to take back our country and return dignity and morality to Congress."

  9. Posted by Learn taxation | January 25, 2012 at 1:15 AM

    Well let's see, if I invest in a start-up business at $1 total valuation and I exit it a few years down the road at 11x P/E when it is making $1 in pre-tax income… the answer is 35%, Alex.

    Not to mention that in the meantime the taxed, distributed income got double-taxed as ordinary income when dividends were paid.

    Any more questions, dickhead?

  10. Posted by Chief | January 25, 2012 at 5:44 AM

    Keep your ugly fuckin' goldbrickin' ass out of our beeches community

  11. Posted by Homer | January 25, 2012 at 9:03 AM

    Dude, Matt, the day I found out I passed the CFA Level 1 I did shit at work all day, but you have written like triple your normal output. I'm impressed

  12. Posted by Bob | January 25, 2012 at 10:22 AM

    hmmm… so if I actually pay my taxes, I'm getting fucked on this one

    -guy who isn't very sophisticated

  13. Posted by Guest | January 25, 2012 at 10:35 AM

    What does Dwight Schrute have to do with this?

  14. Posted by Merchant Refugee | January 25, 2012 at 11:13 AM

    I don't care about Newt's or Romney's tax returns. Anybody but Barack. If we have another BHO term, we are doomed.

    Repeal Dodd-Frank
    Repeal Sarbanes-Oxley
    Reimpose Glass-Steagall

  15. Posted by Anon Corp Dev Guy | January 25, 2012 at 2:27 PM

    Joke Briefer, care to take this one?

  16. Posted by whisker biscuit | January 25, 2012 at 4:39 PM
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    Why didn't he hold on to Cambpell Soup or Celegene for more than a year? He could have paid less tax that way. Seems like he just jelly of Mitt.

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