COUNTERCOLUMN: All Your Bias Are Belong to Us

Well, I guess the numbnuts at the New York Times aren't up to the job, so once again its up to me to set the record straight.

The Times breathlessly accuses Edwards of creating a "tax shelter" (note the loaded term) which enabled him to "avoid paying" $591,112 in Medicare tax.

So what was the "tax shelter" these reporters are referring to?

An offshore limited partnership in an online gambling operation?

No.

An international scam to generate foreign tax receipts out of all proportion to income in order to take fraudulent advantage of the foreign income tax credit?

No.

A transaction designed to allocate all gains in an enterprise to a tax-indifferent partner (say, a 501(c)(3) organization, while retaining all later losses for himself?

No.

Does anyone in the New York Times editorial chain even know what a "tax shelter" is?

No.

So what, exactly, is the tax shelter the New York Times is playing 'gotcha' with?

John Edwards, a high profile professional in a business with significant potential for malpractice liability...

wait for it...

owns an S corporation.

That's it. That's all.

And that generated a big-assed story in America's Newspaper of Reckless, with its clueless political reporters having to bother to ask "is it ethical?"

Yes, it's ethical. It's more than ethical. S corporations are a standard practice in law firms, medical practices, accounting firms, and other professional practices.

And the New York Times wasted a lot of ink in an incompetently pursued nonstory.

Why is it incompetent?

1.) The use of the loaded term "tax shelter" is absolutely inappropriate in a nonprofessional publication, where the lay reader associates that term specifically with abusive practices. Had the reporter used the less loaded, and more descriptive and accurate term "S Corporation" from the start, the 'tax shelter' meme probably would not have gotten off the ground in the blogosphere. Edwards' reputation is needlessly tarnished, when Edwards, in this case, hasn't done anything wrong.

2.) There is no discussion whatsoever of why an S corporation is an absolutely appropriate business structure for many practices of Edwards' law firm's size and scope--especially if he has no plans to take the company public or expand the number of partners beyond 75.

Reason #1: One of life's most delicious ironies is this: Lawyers are frequently themselves hit with malpractice lawsuits. Further, Edwards' net worth alone makes him an attractive target for lawsuit sharks and professional plaintiffs. The S corporation is one of the few structures which would have allowed Edwards to separate his own personal assets from those of the corporation. The others are the C corporation, which is probably too involved for Edwards' needs, and the Limited Liability Company. So the S Corp. and the LLC were really the only two practical choices for this purpose (A limited liability partnership would only have insulated Edwards from the acts of his partners. It would not have protected him from lawsuits targeting his own actions as a partner.)

Reason #2: Pass-through taxation. Here's where a whole bunch of conservative bloggers are about to step on their cranks: Remember a couple of years ago when Bush was pushing a tax cut on corporate dividends? One of the arguments for the dividend tax cut was that it was unfair to tax a corporation at the corporate level, and then hit the shareholder with an additional tax when the dividends became income.

Double taxation is a bad thing, right?

So what would Edwards, or anyone else in his shoes, do to avoid it? Start an S corporation. S corporations offer 'pass-through' taxation. The corporation doesn't pay taxes--the tax liability flows through to the partners or shareholders. If the business takes a loss, Edwards can deduct the loss against other income. Sounds reasonable to me. If we didn't allow, say, doctors, to deduct the business expenses and any losses of fledgeling, startup private practices against other income, then precious few doctors would start up private practices. Especially in fields that required a large E & O insurance premium in the first year, or where expensive equipment was needed.

Partners in an S corporation are taxed on S corporation profits whether or not they recieve any dividends. So it's hard to play games with distributions.

And yes, the structure enabled Edwards to skip paying Medicaid taxes on dividends. Why? Because dividends aren't wages! What's so hard to figure out about that???

Did people want Edwards to take his entire allotment in salary instead of dividends? That would be frigging stupid! NOBODY would do that. Not even a bloody SAINT would do that. Because if he wanted to set up a 401(k) or other pension program at work, if he paid himself too much in salary, he could run afoul of top-heavy provisions and disqualify himself from contributing. Oooh, THERE'S a responsible man taking care of his family.

Of course, this level of analysis is beyond the Newspaper of Retard, which--having set up the mental association with tax cheats, prefers to abandon the nonstory of their own creation in favor of chasing color quotes about ballet lessons and chicken fingers.

Enough people shun public office already. When ignorant reporters start raising ethical questions about a common, legitimate and ethical business entities, the bar is raised unrealistically high. You effectively rule out private sector entrepeneurs from public office.

What do you think the chances are that these two W-2-collecting reporters ever tried to start a business of their own?

Quash this story when you see it. It's nonsense.

Splash, out

Jason