Skip to main content

Apparently Newt Gingrich Tried A Bush-League Version Of Mitt Romney's Carried Interest Trick

  • Author:
  • Updated:

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]


Tax on Carried Interest Moving Closer to Reality

A new proposal to tax carried interest as ordinary income was just attached to a larger tax and spending bill that could be voted on by the House as early as tomorrow.