Tax Lawyer's Blog

The New York Times continues the tax gotcha game. In this version, one Paul Sullivan¹, a man whose sole qualification for writing about taxes and business is that he has history degrees from Trinity College and The University of Chicago, attempts to attach the label of tax-avoider to Newt Gingrich (emphasis is mine):

Our colleague Paul Sullivan has written an interesting piece that looks at the tax implications of Newt Gingrich’s having set up his speaker and consulting business as an S corporation:

That corporate structure offered him some tax savings, but an S corporation is usually meant for businesses, often family-held, that make and sell products. It is not often used by someone whose income comes from writing books, giving talks and doing consulting work.

Did I read that correctly? “[A]n S corporation is usually meant for businesses… that make and sell products?”

Well, there it is, folks, proof positive of what I suspected all along: Learning about Crispus Attucks, the Boston Tea Party and Cold Harbor is not the ideal foundation for a career as a tax analyst.

Let’s get Mr. Sullivan up to speed, shall we?

The great majority of service businesses (including, but by no means limited to, lawyers, CPAs, painters, investment planners, doctors, and, yes, consultants and authors) file their tax returns under the S corporation rules. The only reason, other than sheer ignorance, that Sullivan could have for suggesting that it is “unusual” for an author and consultant like Gingrich to operate out of an S corporation is that the suggestion comports better with the image he wants to portray of Newt Gingrich as a privileged fat cat who manipulates the tax system to his advantage.

Had Mr. Sullivan done the hard and rigorous research one used to expect of a New York Time’s journalist and actually visited the IRS website, he would have found this blurb by Kelly Luttrell of SOI Tax Stats about the prevalence of S corporations:

Source: IRS SOI Stats

If 62% of all corporations are S corporations they are not comprised solely or even predominately by “family-held business that make and sell products.” I can assure you, from the sheer number of S corporations and from mine own experience with small businesses and their tax structures, that the 62% includes many, many authors, consultants and others who do not sell a physical product.

I guess this is what happens when you employ a history major to opine on taxes. Next thing you know the Times will hire a theater critic to wax philosophical about all things political. Oh, wait, it already has; his name is Frank Rich.

Postscript:  To be fair, I urge you to read Sullivan’s entire post Advantages and Risks of Gingrich’s Tax Strategy. He does a pretty decent job of explaining the issues surrounding S corporation compensation. However, he does a poor job of explaining the various types of entities and their tax consequences. He is wrong, for instance, when he says that Gingrich’s tax strategy of limiting his Medicare tax would not work in a Limited Liability Company (LLC). It would work in an LLC if the LLC opts to be treated for tax purposes as an S Corporation, as many, if not most, LLCs do.

Footnotes:

¹  Sullivan posts his resume on his blog thereby making a compelling public case for his qualification as tax analyst (sarcasm above and emphasis below are mine):

Paul Sullivan writes the Wealth Matters column for The New York Times. His articles have appeared in Conde Nast Portfolio, The International Herald Tribune, Barron’s, The Boston Globe, and Food & Wine. From 2000 to 2006, he was a reporter, editor and columnist at the Financial Times.

His first big story for the FT was a profile of the author Kurt Vonnegut based on a train ride they took from Springfield, Massachusetts to New York City. His last piece for the FT was Vonnegut’s obituary.

Paul lives in Stamford, Connecticut, with his family—two members of which are former guide dogs. He received degrees in history from Trinity College and the University of Chicago.

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