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Doing Penance for John Edwards’ Sins: Provision Could Hit “Skilled” S Corp Owners

Long before John Edwards became known as a well-coiffed skirt-chasing weasel, he was a well-coiffed successful trial lawyer. He was successful enough to afford good tax advice, so he conducted his law practice in an S corporation.

Back in the old days, professional practices were conducted as sole proprietorships or general partnerships, reportable as self-employment income, subject to the 15.3% self-employment tax up to the FICA base (currently $106,800), and to the 2.9% Medicare portion of the tax to infinity.


When state laws allowed professionals to incorporate, attorneys and accountants quickly noticed that income on S corporation K-1s is not subject to self-employment tax. This makes S corporations a popular way to run a professional practice. The professionals take a “reasonable” salary out of the business (subject to employer and employee FICA and Medicare tax) – enough to not raise IRS eyebrows – and take the rest out as S corporation distributions with no employment tax.

John Edwards did well by this. His law practice generated millions dollars of K-1 earnings in excess of his salary, saving him hundreds of thousands of dollars in payroll and self-employment tax.

Now that he has been reduced to a wealthy target of mockery, Congress is ready to crack down on the John Edwards S corporation tax shelter. The annual “extenders” bill has a provision – almost as absurd as Edwards love life – that will hit professional S corporation K-1 income with self-employment tax. The SE tax will apply when the “principal asset” of the S corporation is the “reputation and skill” of three or fewer professionals – defined for this purpose as “services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.”

Congress doesn’t muss its hair worrying about how taxpayers in multi-owner S corporations are supposed to figure out whether its “principal asset” is the “reputation and skill” of three or fewer owners. However it works, this provision is too late to hurt John Edwards — his reputation isn’t much of an asset anymore.

Joe Kristan is a shareholder of Roth & Company, P.C. in Des Moines, Iowa, author of the Tax Update Blog and Going Concern contributor. You can see all of his posts for GC here.

Accounting News Roundup: FASB, IASB May Be Overachieving on Convergence; PwC Wants Your Fat; Who’s Betting on Legal Internet Gambling? | 05.19.10

FEI Implores FASB, IASB to Slow Down [Compliance Week]
Financial Executives International is concerned that the FASB and IASB have gotten a little too ambitious in their convergence efforts and has written a letter to the Boards’ respective Chairmen that basically says, “Easy, tiger.”

Everyone knows that those knowitalls at the G-20 were insisting the accounting rule mavens to make convergence happen by next summer but FEI is trying to take pragmatic approach to this:

Arnold Hanish, chairman of FEI’s Committee on Corporate Reporting, said in his letter to the two boards the group is concerned about the “unprecedented volume as well as the complexity of proposed standards” that the two boards are developing. The committee fears the vast scope and aggressive timeline for the proposals will not allow adequate analysis of how the rules will work, which will lead to implementation problems and amendments further down the line.

In other words, this isn’t quantum mechanics, but it’s not Fisher Price either. Mr Hanish did his best to remind Bob Herz and Sir David Tweedie just how overambitious this little project is:

Our member companies are extremely concerned with the 10+ Exposure Drafts (EDs) that are in final stages and will be released for public comment through the third quarter of 2010. During any single period in time in its 38-year history, the FASB has had no more than 3 or 4 significant EDs out for public comment.

FEI doesn’t seem convinced that this unprecedented overachieving by Herz and Tweeds is going to result in the “one set of high quality standards.” They would prefer that hte Boards get this right the first time so they don’t have to slap the proverbial duct tape all over the efforts later.

Cabbies, Accountants Look to Chip-Fat Fuel on Cost, Environment [Bloomberg]
PricewaterhouseCoopers’ London office is trying to do its best for the environment by using local chip-fat converted into biodiesel to supplement its energy needs:

PwC is seeking local sources for 45,000 liters of biodiesel to meet one quarter of its monthly office fuel needs, said Jon Barnes, head of building and facilities services at the firm.

“I’m trying to locally source used chip fat from restaurants,” he said. “It’s a pretty pointless exercise of using biofuel if it’s been all round the world on a ship.”

Sounds like a bang-up idea but P. Dubs is always looking for an angle, “Having a renewable source for some of PwC’s office’s energy needs could help the company sell its services to clients wanting to do the same.”

House Holds Hearing Today on Tax and Internet Gambling [TaxProf Blog]
The House Ways & Means Committee is holding a hearing today to kick around the possibility of legalizing Internet gambling here in the US of A (and taxing it, of course). It kicks off at 9:30 am ET and with any luck, you’ll be legally losing your mortgage payments for the 2010 football season.

Accounting News Roundup: Alaska Union Criticizes Lost Data Deal with PwC; Levin Appointed to Ways & Means Chair; E&Y Received £35m in Audit Fees from BP | 03.05.10

First things first: Don’t forget that it’s National Employee Appreciation Day 2010. [GC]

Public employees union criticizes data loss deal [AP via CNBC]
Remember how PricewaterhouseCoopers lost the records of 77,000 Alaska public employees and retirees? PwC, trying to be a standup corporate citizen, took responsibility for the slip-up and promised those affected all kinds of stuff including identity theft protection, credit moty freezes. Hell, they said they would even reimburse any losses that occurred due to identity theft.

Shockingly, that wasn’t good enough for some people. The Alaska State Employees Association is pretty bent out of shape about the deal the state took and wants them to go back and get more. MORE. MORE!

Specifically, it wants the affected people to be automatically enrolled into the firm’s credit protection services, instead of being required to opt-in. The union also questioned why those services will only be available for a minimum of two years, though consequences of the data loss may pop up long after the services expire.

“We think that’s shortsighted to put a two-year period on it,” said union business manager Jim Duncan. “It doesn’t adequately protect our members or retirees.”

Alaska’s Department of Law is perfectly okay with the deal and if they could have gotten P. Dubs to give everyone lifetime guarantees, by God, they would have. But it wasn’t in the cards, “[Assistant attorney general Ed Sniffen] characterized it as a generous settlement that the Department of Law is pleased with. And unless new information indicates the parties weren’t negotiating in good faith, renegotiation is unlikely.”

Besides, if an employee becomes an identity theft victim, they can still sue PwC for damages. And that’s really what this country is all about; the ability to blame someone else and sue their ass.

Levin To Chair Tax-Writing Ways And Means Panel [AP via NPR]
Representative Sander M. Levin (D-MI) will serve as the new Chair of the House Ways & Means Committee after Charlie Rangel gave up the Chairmanship under pressure for ethics violations.

Mr Levin represents the 12th district in Michigan and has served in Congress since 1982 and is the older brother of Senator Carl Levin (D-MI).

Levin takes the gavel after House Speaker Nancy Pelosi initially appointed Pete Stark of California. It’s entirely possible that Speaker Pelosi realized that Mr Stark might not be the most diplomatic member of the House; he has a history of just saying whatever comes to mind like:

• Calling Rep. Nancy Johnson (R-CT) a “whore for the insurance industry.”

• Arguing with Rep. Scott McInnis (R-CO): “You think you are big enough to make me, you little wimp. Come over here and make me, I dare you. You little fruitcake.”

• That former President George W. Bush was amused by soldiers getting their heads blown off in Iraq.

Among other things.

BP pays E&Y £54m in fees [Accountancy Age]
Now before you start screaming about the money, you should know that the fees are actually down significantly from the last two years. In ’08 E&Y got £67m and £75m in ’07. Beyond Petroleum says they’re doing things more efficiently in the ‘audit process’ and reducing tax and other services. See? Tough times all around.

(UPDATE) Accounting News Roundup: Rangel Says He’s Not Quitting as Ways & Means Chair; IRS Is Sitting on $1.3 Billion in Unclaimed Refunds; SEC Adding Muscle in New York | 03.03.10

Rangel Loses Support in House [WSJ]
You can ignore what’s written below, except the part about rent-controlled apartments.

Charlie Rangel will not be quitting (temporarily sayeth Charlie Rangel) as the Chairman of the House Ways & Means Committee. If you (read: Republicans) want him out, you’ll have to vote him out. Bad news for Chuck is that the Republicans in the House and several of his fellow Democrats are poised to do just that, “As many as 30 House Democrats could join 178 House Republicans in voting to oust Mr. Rangel as head of the Ways and Means Committee…a substantially higher number than in previous votes on his removal.”

Never mess with people when it comes to rent-controlled apartments. They’ll turn on you like Judas.

In the meeting, Mr. Rangel refused to quit as chairman of the Ways and Means Committee and instead said he’d think overnight about the matter before deciding whether to step down or face an uncertain vote.

After the one-hour meeting broke, Mr. Rangel told reporters he would stay on.

“You bet your life,” he said. Pressed further, Mr. Rangel, raising his voice, said emphatically: “Yes, and I don’t lie to the press.”

There you have it. You want Rangs out? It’ll be over his dead body. Since he’s 79, it might just come to that.

Taxpayers Have $1.3 Billion in Unclaimed Refunds [TaxProf Blog]
That’s just for 2006. California leads the charge with over $150 million, followed by Texas with $114 million, and Florida with $110 million. 1.4 million tax-hating Americans have until April 15th of this year to claim and then the money goes straight to Goldman Sachs.

SEC to beef up its NYC office in 2010 [Reuters]
Here’s a possible gig for those of you that are still looking for work. The not-so-new but constantly improving (?!?) SEC is looking to hire a few good men and women for its New York office. Having got the scratch to put a few more hands on deck, the Commission is looking for 18 people for its enforcement team and 15 for its examination staff. There’s no indication that this will solve the SEC’s “idiots” problem but maybe you can at least land a job.

Accounting News Roundup: Is the ‘Era of Sloppy Accounting’ Over?; Rangel Running for Reelection; Supreme Court to Hear Skilling Appeal | 03.01.10

Companies are making fewer accounting mistakes [USA Today]
“In another potential boost to investor confidence, the era of sloppy accounting appears to be ending,” declares USA Today. Okay but perfection is unattainable people, so until machines take over for you, keep at it. In the meantime, the results presented by Audit Analytics certainly indicate that things are going in the right direction.

We don’t want to be the party pooper here but if accounting is less sloppy, i.e. more sophisticated, doesn’t that mean that the methods for massaging the accounting are also more sophisticated? Just chew on that while you check the the findings.

The article lists three reasons for the improvement in reporting:

There is steady and ongoing improvement. The number of companies with restatements and the number of restatements have declined in each of the past three years.

Mistakes are getting caught sooner. Among the companies with restatements, errors covered a period of 476 days, or less than a year and a half. That’s down 7% from 2008 and well below the 716 days, or nearly two years, of problematic numbers restated in 2006.

Restatements are less serious. Restatements reduced companies’ reported earnings by $4.6 million on average last year, down dramatically from the $7.2 million and $23.5 million hits in 2008 and 2006.

Even though it’s virtually impossible to eliminate restatements, we must admit that these are encouraging trends. Another thing to keep in mind is that accounting rules are becoming increasingly complex so it’s not like things will be on cruise control from here on out.

Defiant Rep. Charles Rangel vows reelection bid despite uproar over alleged ethics violations [NYDN]
Ethics violations be damned! The 79-year-old announced over the weekend that he would be seeking reelection. It would be his 21st term in Congress, first winning election in 1970. Even if Rangs is able to do another victory dance, holding on to his Chairmanship of the Ways & Means will be a different matter entirely. PBO has already distanced himself from Chuck and some are saying that even Nancy Pelosi is getting creeped out a little too.

Skilling Asks High Court for New Trial Minus ‘Tar and Feathers’ [Bloomberg BusinessWeek]
The Supreme Court will consider Jeff Skilling’s appeal today in the Enron scandal that he was convicted of four years ago. Skilling’s attorneys will argue that the trial should not have been held in Houston where it would have been “impossible” to get a fair trial.

Skilling’s appeal says the atmosphere in Houston when the trial began in January 2006 was one of hostility toward him, fed by unrelenting and “searing” media coverage. The appeal points to a Houston Chronicle column titled “Your Tar and Feathers Ready? Mine Are” and a local rap song, “Drop the S Off Skilling.”

The 12 jurors reflected that antipathy, Skilling contends. During pretrial questioning, three said they were “angry,” three said they had negative feelings toward Skilling or doubted his impartiality and one said that all CEOs were “greedy,” according to his appeal.

Skilling is currently doing far worse than tar and feathers (probably NBD in this day and age), serving a 24 year sentence in a Colorado prison. If the SCOTUS rules in his favor on the “jury-bias” issue Skilling would get a new trial which open old wounds and could create a media circus (we hope).

Accounting News Roundup: Rangel Chastised by Ethics Panel; Settlement Reached for Ex-Deloitte Exec on Insider Trading Charges; Madoff Auditor Sentencing Delayed | 02.26.10

Panel Admonishes Rangel for Taking Trips as Gifts [NYT]
Charlie Rangel had a Congressional ethics committee rule that he “violated gift rules” when he accepted corporate-sponsored trips to the Caribbean. While that is certainly bad news for Rangs, the committee is far from finished with its investigation as they continue their inquiries about Chuck’s “fund-raising, his failure to pay federal taxes on rental income from a Dominican villa, and his use of four rent-stabilized apartments provided by a Manhattan real estate developer.”


Following typical political grandstanding protocol, Republicans are calling for CR to step down from his post as the Chairman of the House Ways & Means Comittee:

“In this time of great economic uncertainty, struggling middle-class Americans deserve better than to have a tax cheat chairing a powerful Congressional committee that directly impacts the financial livelihoods of millions of hard-working people,” said Ken Spain, the communications director of the National Republican Congressional Committee.

Ex-Deloitte Exec Settles Insider Trading Charges [Web CPA]
John A. Foley, who “settle[d] the SEC’s charges without admitting or denying the allegations”, was trading on inside information on a number of Deloitte clients including rubber shoe factory Crocs, along with YRC Worldwide, Inc., Spectralink Corporation and SigmaTel, Inc.

The trades yielded Foely and his fellow cheaters just over $200k which would buy a helluva lot of ugly shoes.

Madoff’s New City accountant’s sentencing put off until September [LoHud]
David Friehling, the worst auditor ever, was scheduled to be sentenced today for his little part in the Madoff Ponzi scheme has been delayed until September. Friehling’s continued cooperation was the reason for the delay in sentencing. Although he faces over 100 years in prison, Judge Alvin Hellerstein told DF that his cooperation will be noted when final sentencing is determined. Presumably, that will knock it down to well under a century of doing time.