Joe Biden Used Tax-Code Loophole Obama Tried to Plug

Democratic presidential candidate Joe Biden used a tax loophole that the Obama administration tried and failed to close, substantially lowering his tax bill.

Mr. Biden and his wife, Dr. Jill Biden, routed their book and speech income through S corporations, according to tax returns the couple released this week. They paid income taxes on those profits, but the strategy let the couple avoid the 3.8% self-employment tax they would have paid had they been compensated directly instead of through the S corporations.

The tax savings were as much as $500,000, compared to what the Bidens would have owed if paid directly or if the Obama proposal had become law.

There’s no reason for these to be in an S corp—none, other than to save on self-employment tax,” said Tony Nitti, an accountant at RubinBrown LLP who reviewed the returns.

“As demonstrated by their effective federal tax rate in 2017 and 2018—which exceeded 33%—the Bidens are committed to ensuring that all Americans pay their fair share,” the Biden campaign said in a statement Wednesday.

The technique is known in tax circles as the Gingrich-Edwards loophole—for former presidential candidates Newt Gingrich, a Republican, and John Edwards, a Democrat—whose tax strategies were scrutinized and drew calls for policy changes years ago. Other prominent politicians, including former President Barack Obama and fellow Democrat Hillary Clinton, as well as current contenders for the 2020 Democratic nomination Sens. Elizabeth Warren and Bernie Sanders, received their book or speech income differently and paid self-employment taxes.

Some tax experts have pointed to pieces of President Trump’s financial disclosures and leaked tax returns to suggest that he has used a similar tax-avoidance strategy.

Unlike his Democratic rivals and predecessors in both parties, Mr. Trump has refused to release his tax returns, and his administration is fighting House Democrats’ attempt to use their statutory authority to obtain them. Democratic presidential candidates have released their tax returns and welcomed criticism to draw a contrast with Mr. Trump.

Mr. Biden, who was vice president from 2009 to 2017, has led the Democratic field in polls since entering the race. He is campaigning on making high-income Americans pay more in taxes and on closing tax loopholes that benefit the wealthy.

Mr. Biden has decried the proliferation of such loopholes since Ronald Reagan’s presidency and said the tax revenue could be used, in part, to help pay for initiatives to provide free community-college tuition or to fight climate change.

We don’t have to punish anybody, including the rich. But everybody should start paying their fair share a little bit. When I’m president, we’re going to have a fairer tax code,” Mr. Biden said last month during a speech in Davenport, Iowa.

The U.S. imposes a 3.8% tax on high-income households—defined as individuals making above $200,000 and married couples making above $250,000. Wage earners have part of the tax taken out of their paychecks and pay part of it on their returns. Self-employed business owners have to pay it, too. People with investment earnings pay a 3.8% tax as well.

But people with profits from their active involvement in businesses can declare those earnings to be neither compensation nor investment income. The Obama administration proposed closing that gap by requiring all such income to be subject to a 3.8% tax, and it was the largest item on a list of “loophole closers” in a plan Mr. Obama released during his last year in office. The administration estimated that proposal, which didn’t advance in Congress, would have raised $272 billion from 2017 through 2026.

Under current law, S-corporation owners can legally avoid paying the 3.8% tax on their profits as long as they pay themselves “reasonable compensation” that is subject to regular payroll taxes. S corporations are a commonly used form for closely held businesses in which the profits flow through to the owners’ individual tax returns and are taxed there instead of at the business level.

The difficulty is in defining reasonable compensation, and the IRS has had mixed success in challenging business owners on the issue. The Bidens’ S corporations—CelticCapri Corp. and Giacoppa Corp.—reported more than $13 million in combined profits in 2017 and 2018 that weren’t subject to the self-employment tax, while those companies paid them less than $800,000 in salary.

If the entire amount were considered compensation, the Bidens could owe about $500,000. An IRS inquiry might reach a conclusion somewhat short of that.

“The salaries earned by the Bidens are reasonable and were determined in good faith, considering the nature of the entities and the services they performed,” the Biden campaign statement said.

For businesses that generate money from capital investments or from a large workforce, less of the profits stem from the owner’s work, and thus reasonable compensation can be lower. For businesses whose profits are largely attributable to the owner’s work, the case for reasonable compensation that is far below profits is harder to make.

To the extent that the Bidens’ profits came directly from the couple’s consulting and public speaking, “to treat those as other than compensation is pretty aggressive,” said Steve Rosenthal, a senior fellow at the Tax Policy Center, a research group run by a former Obama administration official.

Mr. Nitti said he uses a “call in sick” rule for his clients trying to navigate the reasonable-compensation question: If the owner called in sick, how much money could the company still make?

“The reasonable comp standard is a nebulous one,” Mr. Nitti said. “This is pretty cut and dried. If you’re speaking or writing a book, it’s all attributable to your efforts.”

The IRS puts more energy into cases where the business owners pay so little reasonable compensation that they owe the full Social Security and Medicare payroll taxes of 15.3%, Mr. Nitti said.

In a statement released Tuesday along with the candidate’s tax returns, the Biden campaign noted that the couple employs others through its S corporation and calls the companies a “common method for taxpayers who have outside sources of income to consolidate their earnings and expenses.”

The Sycophant and the Sociopath

Donald Trump specializes in spectacular breakups.

First there was Ivana. Then there was Marla. Now comes trouble in paradise with Kim.

.. This time, it wasn’t just lust, betrayal and secrets splayed across Page Six. This time, it was in Congress, part of an investigation that could lead to legal jeopardy for the Trumps or impeachment for the president.

.. In his testimony, Michael Cohen called himself a “fool” when it came to Trump. “I ignored my conscience and acted loyal to a man when I should not have,” Cohen said. A fool for love, held in thrall by Trump. How could anyone be held in thrall by such a sleazy goofball, much less offer to take a bullet for him or make 500 threats on his behalf?

.. “It seems unbelievable that I was so mesmerized by Donald Trump that I was willing to do things for him that I knew were absolutely wrong,” said Cohen in his “Goodfellas” accent, adding that being around the “icon” was “intoxicating.”

“Mr. Trump is an enigma,” Cohen said. “He is complicated, as am I.”

Actually, Trump is simple, grasping for money, attention and fame. The enigma about Trump is why he cut off his lap dog so brutally that Cohen fell into the embrace of Robert Mueller and New York federal prosecutors. Trump is often compared to a mob boss, but Michael Corleone would never turn on a loyal capo, only on one who had crossed him.

The portrait Cohen drew of Trump was not surprising. It has been apparent for some time that the president is a con man, racist, cheat and liar. (See: Jared Kushner security clearance.)

What was most compelling about the congressional hearing was the portrait of the sadistic relationship between the sycophant and the sociopath.

Trump’s claim that he didn’t violate campaign finance law is weak — and dangerous

The case against the president would be far stronger than the case against John Edwards was.

This all suggests Trump could become a target of a very serious criminal campaign finance investigation. In response, Trump has offered up three defenses. His first was to repeatedly lie. For quite some time, he flatly denied knowledge about the $130,000 payment to Stormy Daniels. But now he seems to be acknowledging that he knew (since his personal company reimbursed Cohen for the payment, he ought to). Now Trump and his acolytes have turned to two other excuses: They point to an earlier case involving former senator John Edwards to argue that what Trump did wasn’t a crime; and they say, even if it was a crime, it wasn’t a biggie — there are lots of crimes, so what, who cares.

The former is a very weak legal argument, and the latter a dangerous one. Indeed, the campaign finance violations here are among the most important ever in the history of this nation — given the razor-thin win by Trump and the timing of the crimes, they very well may have swung a presidential election.

Begin with the Edwards case. The former senator from North Carolina and two-time Democratic presidential candidate was charged in 2011 with multiple campaign finance felonies in connection with payments that one of Edwards’s supporters made to a woman with whom Edwards had an extramarital sexual relationship. Prosecutors alleged that this money was paid, with Edwards’s knowledge, to influence the election, and therefore that the payments were illegal campaign contributions. When the case went to trial, the jury hung on most counts and acquitted on one, which Trump’s defenders point to for support.
But the case is actually harmful for Trump — especially what the judge ruled. Edwards repeatedly argued that the payments were not campaign contributions because they were not made exclusively to further his campaign. The judge rejected this argument as a matter of law, ruling that a payment to a candidate’s extramarital sexual partner is a campaign contribution if “one of” the reasons the payment is made is to influence the election.

As a legal matter, that aspect of the Edwards case is what matters now — and it’s damning for Trump. It provides a precedent that other courts could follow in any prosecution arising out of the hush-money schemes Trump paid: The president could face criminal charges for conspiring with Cohen to make the payments because the evidence shows the payments were made, at least in part, for campaign purposes. As for what the jury concluded in the Edwards case, there’s good reason to believe that the evidence in a criminal case against Trump would be much stronger.

Edwards argued that he didn’t know anything about the payments and that, regardless, the payments in his case were intended to keep news of the affair and pregnancy from his wife — not to keep the information from voters. Trump tried the first tactic, but Cohen’s tapes eviscerated that argument. There is no reason to think that Trump’s attempt to paint these as personal payments is any less of a lie than his attempt to say he didn’t know about them.
.. Unlike with Edwards, prosecutors have noted evidence that Cohen “coordinated with one or more members of the campaign, including through meetings and phone calls, about the fact, nature, and timing of the payments.” If Cohen had made the payments as a purely personal matter for Trump, separate and apart from Trump’s candidacy, Cohen would not have consulted with the campaign about doing so. Further, Trump was first aware of threats to publish information about this affair in 2011, when his youngest child had just been born to his new wife and at the time made no offers of money to keep the news quiet. What was different in 2016 was the election.

In the Edwards case, there was a paucity of evidence. A key witness, Bunny Melon, was 101 years old and too frail to show up at trial. There were no written legal agreements providing money in exchange for silence, as there are in Trump’s case, and no threats by the mother of the child to go public immediately if the funds were not received. That’s why one juror told the media that the evidence wasn’t there to show even that Edwards intended the money to go to Rielle Hunter. In contrast, in a bombshell disclosure this week, the public learned that AMI, the parent corporation of the National Enquirer, is cooperating with the prosecution and has stated that the payments were made to influence the 2016 election. And even more worrisome for Trump, reports emerged Thursday that Trump was the third person in the very room where Cohen and David Pecker (the head of AMI) discussed the hush money payments — making it very hard for Trump to assert a non-campaign-related purpose.

Finally, all the money that changed hands in the Edwards case came from an individual. In the scheme to prevent Karen McDougal from talking about an affair she says she had with Trump, some payments originated from a corporation — AMI. The use of corporate funds to make a contribution to a presidential campaign has been illegal for decades. That makes the offense in Trump’s case significantly more serious than the charges against Edwards, or even the already serious charges Trump could face for conspiring with Cohen to make illegal and unreported individual contributions. And because the source of the payments can ultimately be traced back to the Trump Organization, prosecutors have many robust sources of evidence to comb. Those sources already suggest there were false payments (which would likely violate federal and state tax laws) and “grossing up” of Cohen’s money to account for his personal taxes. All of this may amount to consciousness of guilt and may also be a path for prosecutors to discover who authorized the payments in the first place (likely “Individual-1” or one of his children). The evidentiary record is going to reveal how involved Trump and his family was in these payments — a corporate record that was completely nonexistent with Edwards.

Trump’s legal adviser Rudy Giuliani has argued that the jury in the Edwards case vindicated Edwards, but, in fact, the jurors acquitted him on only one criminal charge and deadlocked on the others. And at any rate, as Giuliani (a former federal prosecutor before he was mayor of New York) should know, criminal jury verdicts are not legal precedents. The Edwards jury, applying the law to the particular facts of that case, did not find Edwards guilty beyond a reasonable doubt. This is 100 percent irrelevant to whether Cohen’s guilty plea proves that Trump broke the law based on very different facts.

The final Trump defense being floated, that everyone breaks the law, fares no better. As its chief expositor, Sen. Orrin G. Hatch (R-Utah), put it, “I don’t care” if the law has been broken, “all I can say is he’s doing a good job as president.” He added, “The Democrats will do anything to hurt this president. Anything.”

As individuals who have devoted their lives to nonpartisan enforcement of the law, we cannot think of a more dispiriting statement. Hatch is wrong about every aspect of this statement. The accusations against Trump come from career prosecutors in the U.S. Attorney’s Office for the Southern District of New York (otherwise known as Trump’s own Justice Department). But the more important point is this: We will rue the day a senator trotted out such callousness about federal felonies.

The whole idea of our criminal justice system is to enumerate those offenses that are so egregious that they demand serious jail time. Those felonies are the bread and butter of our criminal justice system. Of course, every criminal defendant seeks to minimize his crimes. But such defendants don’t have a cheering squad composed of United States senators. If Trump wants to argue he didn’t commit the crimes, as he used to assert in April, fine. He’s entitled to that defense. But the grievous minimization of serious campaign finance violations by members of Trump’s political party further corrode our commitment to our age-old ideal of being a “government of laws, and not of men.” If Hatch thinks too much activity has been criminalized, he is in a welcome position to change the laws as a member of the Senate. He shouldn’t denigrate the law in the process. After all, the campaign disclosure requirements at issue here were enacted by Congress (as key post-Watergate reforms after President Richard Nixon’s personal lawyer Herbert Kalmbach went to prison for paying hush money to potential witnesses out of secret cash campaign contributions).

The bad arguments being floated in Trump’s defense are emblematic of a deterioration in respect for the rule of law in this country. The three of us have deep political differences, but we are united in the view that our country comes first and our political parties second. And chief among the values of our country is its commitment to the rule of law. No one, whether a senator or a president, should pretend America is something less.

Republicans, Don’t Fool Yourselves — Donald Trump Is in Serious Trouble

In response to the emerging evidence that Donald Trump directed and participated in the commission of federal crimes, all too many Republicans are wrongly comforting themselves with political deflection and strained legal argument. The political deflection is clear, though a bit bizarre. The recent wave of news about Trump’s porn payoffs is somehow evidence that investigators and critics are “shifting focus” from the Russia investigation to alleged campaign-finance violations.

It’s almost as if the campaign-finance news is taken as some sort of evidence that Mueller’s core investigation is faltering, so the media and investigators have to find something to use to attack Trump.

But the campaign-finance investigation has little to do with Mueller. It’s run by the U.S. Attorney’s Office for the Southern District of New York, and — besides — what do we want federal prosecutors to do when they discover evidence of unrelated crimes when engaged in a different investigation? Let bygones be bygones? Or refer that evidence to the proper jurisdiction — as Robert Mueller’s office did — for further investigation and potential prosecution?

.. The current wave of news reports is largely driven by court filings, and those court filings don’t represent a shift in law-enforcement focus on Trump but rather an arena of additional inquiry. The sad reality is that the Trump operation was a target-rich environment for any diligent investigator.

.. The Edwards prosecution failed not as a matter of law but of fact. The prosecution simply didn’t produce sufficient evidence to prove its case. Here’s Conway, Katyal, and Potter on the contrasts between the Edwards and Trump cases:

A key witness, Bunny [Mellon], was 101 years old and too frail to show up at trial. There were no written legal agreements providing money in exchange for silence, as there are in Trump’s case, and no threats by the mother of the child to go public immediately if the funds were not received. That’s why one juror told the media that the evidence wasn’t there to show even that Edwards intended the money to go to Rielle Hunter. In contrast, in a bombshell disclosure this week, the public learned that AMI, the parent corporation of the National Enquirer, is cooperating with the prosecution and has stated that the payments were made to influence the 2016 election. And even more worrisome for Trump, reports emerged Thursday that Trump was the third person in the very room where Cohen and David Pecker (the head of AMI) discussed the hush money payments — making it very hard for Trump to assert a non-campaign-related purpose

..So far, the best available evidence indicates that Trump’s commitments to Stormy Daniels didn’t exist “irrespective” of his campaign but rather because of his campaign. That’s Michael Cohen’s assertion. That’s AMI’s assertion. The affairs were relatively old — and so was the threat to his family — but the payments were new, rendered at a crucial time in a very close presidential contest.

.. Moreover, Cohen has indicated that prosecutors have a “substantial amount of information” that corroborates his testimony. And what is that information? Well, as the Wall Street Journal has already reported:

Mr. Trump was involved in or briefed on nearly every step of the agreements. He directed deals in phone calls and meetings with his self-described fixer, Michael Cohen, and others. The U.S. attorney’s office in Manhattan has gathered evidence of Mr. Trump’s participation in the transactions

Here is the fundamental reality, Republicans — there is already far more evidence of legal culpability against Trump than ever existed against Edwards, and a federal judge permitted the Edwards case to go to trial. It is true that, if Trump does eventually face indictment, a different judge may have a different view of the law, but if Trump is counting on a favorable legal ruling, he’s playing a dangerous game indeed.

.. Campaign-finance law is constructed from the ground up to require candidate transparency and guard against corruption. Thus, it is purposefully very hard for candidates to find a way to legally and quietly use substantial sums of money to cover up dirty deeds. In his essay, Smith argues, “Indeed, it is quite probable that many of those now baying for Trump’s scalp for illegal campaign contributions would be leading a charge to prosecute Trump for illegal ‘personal use’ of campaign funds had he made the payments from his campaign treasury.”

That’s likely correct — and evidence that campaign-finance law is working as intended. In other words, if you’re a campaign-finance lawyer, and a candidate asks your advice on how to buy the silence of a porn star and hide that payment entirely from the American people, your best response should be, “Have you considered not running for office?”

The Really Bad News for Donald Trump on the Michael Cohen Tape

In addition to providing more evidence that Trump knew about the Enquirer’s dealings with McDougal, which his campaign denied just before the election, it implicates other Trump Organization executives in schemes that could possibly have violated campaign-finance laws.

.. None of this hinges on the issue that Lanny Davis and Rudy Giuliani ..  whether Trump was captured saying, to Cohen, “pay with cash” or “don’t pay with cash.”

.. Federal prosecutors would surely be interested in obtaining an insider’s account of the Enquirer scheme, even if it wasn’t consummated.

.. Cohen could conceivably cut a deal with the Southern District, in which he would provide information that could also be shared with other federal prosecutors, including Robert Mueller, the special counsel.

.. Davis said to NBC News that the content of the Cohen-Trump tape “sounds like a John Edwards case.”

.. the fact that Davis is now drawing a parallel will surely set off alarm bells in the White House.

.. The other bad news for Trump is that Cohen, in making arrangements to pay off the Enquirer, doesn’t appear to have been working alone. “I need to open up a company for the transfer of all of that info regarding our friend David,”

.. “And I’ve spoken to Allen Weisselberg about how to set the whole thing up with . . . funding.”

Weisselberg is the longtime chief financial officer of the Trump Organization.

.. If what Cohen said is accurate, he appears to have discussed with Weisselberg a way to route the proposed payment to A.M.I. through a shell company set up specifically for the purpose, which is what he did in making the payment to Daniels.

.. the tape does drag Weisselberg and the Trump Organization further into the murk, which can’t be good news for the President. “Weisselberg has detailed information about the Trump Organization’s operations, business deals and finances,”

.. “If he winds up in investigators’ crosshairs for secreting payoffs, he could potentially provide much more damaging information to prosecutors than Cohen ever could about the president’s dealmaking.”

Was the Payment to Stormy Daniels a Campaign Contribution?

Some say the payment—far beyond federal campaign limits—had to have been coordinated with Trump; others say it would have been paid even if Trump hadn’t been running for office

The former chairwoman of the Federal Election Commission takes a different view than Mr. Cohen. Ann Ravel, a Democrat who served on the elections body from 2013 to 2015 said the timing and circumstances around the payment makes it “obvious” it was campaign-related.
“The real issue here is coordination,” she said. “How did Michael Cohen know about the relationship if not from either the candidate himself or the campaign?”

.. Charlie Spies, a Republican campaign attorney not involved with Mr. Trump, said the payment to Ms. Clifford is “an expense that would exist irrespective of whether Mr. Trump was a candidate and therefore should not be treated as a campaign contribution.”
He dismissed the notion that timing matters. “There is no precedent to indicate that a personal expense becomes a campaign expense simply because it is temporally close to the election,” he said.

.. The allegations in the Common Cause complaint filed with the Justice Department resemble criminal charges once faced by John Edwards, the former senator and Democratic presidential candidate. Mr. Edwards was charged in connection with $900,000 two of his donors allegedly spent to conceal an extramarital affair with a campaign worker during his 2008 campaign.

.. A defense against campaign violations linked to the payment to Ms. Clifford could be more challenging than Mr. Edwards’, some campaign-finance experts said. Unlike in the Edwards case, Mr. Cohen arranged to pay Ms. Clifford days before the election, as Mr. Trump faced questions about his treatment of women.

.. If Mr. Cohen made the payment with his own money and wasn’t reimbursed, his motive would be central to the legal analysis

.. But if Mr. Trump ultimately paid, prosecutors would have to demonstrate his intent was to prevent Ms. Daniels from damaging his campaign.

.. No law limits the amount Mr. Trump could spend on his own campaign, but if he ultimately paid Ms. Daniels to protect his candidacy, he would have had to disclose it as a campaign expenditure

.. Mr. Cohen or Mr. Trump could argue that Ms. Clifford was paid to guard against negative publicity, avoid embarrassment or keep Mr. Trump’s wife, Melania, and children from finding out about the allegations, Mr. Hasen said.

.. “Just because something isn’t true doesn’t mean that it can’t cause you harm or damage,” he said.

Freakonomics Radio: ‘Faking It’

The episode was also inspired by a fascinating passage about Barack Obama in the book Game Change. So you’ll hear from Mark Halperin, one of the book’s authors, who will explain the dilemma that had Obama faking it. You’ll also hear from Kara Newman, a kosher-keeping food writer, who comes clean on her illicit love for bacon; and from a guy we call Brian, who maintains a series of mirages about his faith and family.

John Edwards took faking it to whole new levels.