The Facts on Sen. Scott’s Claim That Biden Is a ‘Tax Cheat’ – FactCheck.org

After President Joe Biden took a veiled swipe at him during the State of the Union address, Sen. Rick Scott released an ad labeling Biden a “tax cheat.” Biden was first scrutinized in 2019 for using what one nonpartisan expert described as an “aggressive” but not illegal tactic on his 2017 and 2018 tax returns to avoid paying a Medicare tax.

The White House is employing a new defense of that tax maneuver, one it says the IRS blessed, though some tax experts remain unconvinced.

Scott fired off his “tax cheat” allegation in an ad after Biden jabbed Republicans during the State of the Union, saying, “Instead of making the wealthy pay their fair share, some Republicans want Medicare and Social Security to sunset. I’m not saying it’s a majority.”

The line drew catcalls from some Republicans, including Rep. Marjorie Taylor Greene, who shouted “liar.” As we wrote, the president has exaggerated Republican support for a proposal from Scott that said: “All federal legislation sunsets in 5 years. If a law is worth keeping, Congress can pass it again.” Scott — who was chairman of the National Republican Senatorial Committee —has said his aim is to “fix” but not eliminate the programs.

In a tweet the day after the State of the Union, Scott claimed Biden lied about Republicans wanting to cut Social Security and Medicare — though Biden only said that “some Republicans” want to sunset the programs, which is what Scott proposed.

“Joe Biden just cut $280 billion from Medicare, and we know about his 80,000 new IRS agents,” Scott says in the ad. “But what you don’t know is that Joe Biden also cheated on his taxes and got away with it. Biden improperly used a loophole to dodge half a million dollars in taxes that should have gone to Medicare. And Now that Biden has ripped off Medicare for half a million dollars, he wants to close the loophole and raise your taxes. … Biden should resign.”

The claims about cutting $280 billion from Medicare and funding “80,000 new IRS agents” are misleading, as we have written repeatedly in previous posts. We’ll explain why later, but we wanted to first address the claim that Biden is a “tax cheat.”

Biden’s S Corporations

The issue of Biden’s taxes was first raised by the Wall Street Journal in July 2019 when Biden was running for president, shortly after Biden released federal and state tax returns for 2016, 2017 and 2018 on his campaign website.

At issue was the amount Joe and Jill Biden claimed as salary in two S corporations — CelticCapri Corp. and Giacoppa Corp. — for their book and speech income after Biden had left the vice presidency. People who set up S corporations still report their flow-through income on their personal tax returns and pay taxes on that income at their individual income tax rate. However, S-corporation owners can avoid paying an additional 3.8% Medicare tax on income designated as profits rather than salary, so long as they pay themselves “reasonable compensation.” The 3.8% Medicare tax is levied on high-income earners as part of the Affordable Care Act.

According to their 2017 and 2018 returns, of the roughly $13.3 million in combined revenue from the S corporations in those years, the Wall Street Journal says less than $800,000 was paid to the Bidens in salary, or less than 6%. As a result, they avoided paying a 3.8% Medicare tax on the vast majority of the S corporation income. They still paid pass-through individual income taxes on the profit and salary amounts.

Whether that amounts to “reasonable compensation” pushes into a bit of a gray area in tax law, Kyle Pomerleau, a senior fellow at the American Enterprise Institute, told us in a phone interview.

“I don’t think that there is any hard and fast rule,” Pomerleau said. “There’s a lot of leeway here,” and plenty of incentive for high-income earners to underestimate their wages relative to profit to lower their tax obligation.

Had all of the S corporation income been recorded as salary, or had the Bidens simply paid the taxes directly — instead of routing book and speech income through S corporations — the Wall Street Journal said they could have owed as much as $500,000 more in Medicare taxes for those years.

In the Wall Street Journal’s 2019 article, Steve Rosenthal, a senior fellow at the Tax Policy Center, called the Bidens’ tactic “pretty aggressive.”

Rosenthal told us he stands by that characterization.

“The Bidens apparently routed their book and speech income through S corporations,” Rosenthal said. “After doing so, they characterized much of this income as profits, and little as compensation. As a result, they avoided the 3.8 percent Medicare tax on their profits. Many view routing income for services through an S corporation as a ‘loophole.’” 

“I, personally, would not route income through an S corporation to save on Medicare taxes, but is it proper? Maybe yes, maybe no,” Rosenthal said. “The question is whether the amount allocated to compensation was ‘reasonable,’ which is a pretty loose standard. Was it illegal? No, illegal requires more extreme conduct, like the Trump Organization’s knowing violations of the tax law, which resulted in its criminal conviction for helping top executives evade taxes, including Medicare taxes.” (In 2016, Rosenthal wrote about how Trump also may have taken advantage of the S corporation rules to avoid paying Medicare payroll tax on a substantial amount of his income — the same type of accusation facing Biden.)

“Labelling tax positions is hard, as there is a wide range of aggressiveness (from lawfully exploiting a loophole to criminal fraud),” said Rosenthal, who co-wrote a blog post in January about the ambiguous terms used to describe ways to avoid or evade taxes. “I would not describe Biden as a tax cheat or a tax dodge. Biden reported his position clearly on his tax returns, which he released to the public. So, Biden did not hide anything which, to me, is important.”

“I would call this more tax avoidance than tax evasion, which is what Scott implies,” Pomerleau of AEI told us.

Biden Tried to Close ‘Loophole’

However one may characterize the Bidens’ tactic, it is worth noting, as the Wall Street Journal did, that the Obama administration tried, unsuccessfully, to close this tax “loophole.”

The technique of setting up S corporations to avoid paying payroll taxes became known as the “Gingrich/Edwards” tax loophole, as it was employed by Newt Gingrich, a former speaker of the House and GOP presidential contender, and John Edwards before he became a senator and Democratic vice presidential nominee. President Barack Obama called for closing the so-called loophole in his 2015 budget, but it never passed in Congress.

The Biden administration, too, has tried to close it. The initial House-backed version of the Build Back Better plan included Biden’s call to close the so-called S corporation loophole for those with incomes higher than $400,000. But that never made it into the scaled-back legislation that finally passed. And so what might be technically legal might also be deemed by some hypocritical for Biden to use.

Robert Willens, a tax expert and adjunct professor at Columbia University’s Graduate School of Business, said in an email that what the Bidens did is “a common tactic used by shareholders of ‘S’ corporations to reduce their medicare and payroll tax liabilities. This is done by reporting an unreasonably low amount of compensation for their services rendered to the ‘S’ corporation.”

“The I.R.S. has had great success in challenging taxpayers who employed this strategy and, to my knowledge, has never lost a case in which it was asserted that the compensation was unreasonably low,” Willens told us. “Wouldn’t you think that a business that earned approximately $10 million, in which capital was not a material income-producing factor, and in which the personal services provided by the shareholders accounts for the corporation’s success, should compensate its shareholder/employees more generously than the President’s ‘S’ corporation did? What is reasonable compensation in a case like this one is a question of fact [for the IRS or perhaps a judge or jury to decide] but it seems to be substantially higher than … the amount reported as such by President Biden.

“I wouldn’t label him a ‘tax cheat,’” Willens said. “He was simply employing a commonly used strategy and may not have even been aware of the benefits he could obtain by understating his compensation. This is just a normal, commonly employed, tax planning technique. He may have thought, in good faith, that the compensation he reported was reasonable.”

Nevertheless, back in 2019, the Biden campaign defended the tax returns, telling the Wall Street Journal: “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.”

New White House Defense

Now, however, the Biden administration is making a different argument. A White House official told FactCheck.org that during an audit of the Bidens’ 2021 tax return, “the IRS did review the S corporation income, including whether the 3.8% Medicare tax should apply. And the IRS conclusively agreed it did not apply.” (The tax returns of all presidents are supposed to be audited by the IRS while they are in office, although that did not happen in Trump’s first two years.)

“The President and First Lady fully and accurately reported their 2017 and 2018 taxes and the IRS never challenged those tax years,” the White House official said.

“Notably, this has nothing to do with the ‘S corporation loophole,’” the White House official said. “During the recent audit of the President and First Lady’s 2021 taxes, the IRS agreed that the President and First Lady’s royalty income would never be subject to the 3.8% Medicare tax, whether earned inside or outside of an S corporation, because an older federal regulation controls. Under Treas. Reg. § 1.469-2T, because the royalty income stems from the licensing of their own creative works, it’s always … characterized as non-passive income derived in the ordinary course of a trade or business. That means it should never be subject to the 3.8% Medicare tax.”

The official said royalties made up “the lion’s share of income in 2017 and 2018 and it represents all S Corp income during the presidency.”

The ‘S corporation loophole’ has never applied to the Bidens, the official said, “since they’re licensing their own creative works.”

Rosenthal and Willens aren’t buying the argument.

Rosenthal said the White House’s argument might make sense in 2021, when “Biden presumably devoted all his attention to the Presidency.” Because of that, Rosenthal said, “Biden could reasonably argue that the distributions from his S corporation” in 2021 — about $62,000 — “were not subject to self-employment taxes.” In that year, he said, Biden could argue that he received royalties and other income from his S corporation “effectively as an investor, not as an author.”

“They can’t take that argument back to 2017 and 2018,” Rosenthal said.

In 2017 and 2018, after Biden left the vice presidency, he was essentially in the business of writing books and making speeches, Rosenthal said.

Willens also disputed the White House argument, saying that while it is sometimes the case that “royalties constitute portfolio income, rather than passive income,” that’s not the case with the Bidens as “the royalties are derived in the ordinary course of licensing such property. Royalties are presumed to be so derived if the person receiving such royalties ‘created the property.’”

The question, Rosenthal said, is why, when it was doing the 2021 audit, didn’t the IRS go back to 2017 and 2018 and require the Bidens to make an adjustment.

White House spokesman Andrew Bates said the IRS did consider the 2017 and 2018 filings, though it did not formally audit those returns.

“During the first routine audit of this administration, tax years 2017 and 2018 were discussed with the IRS, who examined the finances of the s-corporations going back to their inception in 2017,” Bates said. “They challenged nothing.”

Rosenthal would like to know why, and he said that if he were the chairman of the House Ways and Means Committee, he would seek IRS records related to discussions of the 2017 and 2018 returns and the S corporations to find out why the IRS didn’t think an upward adjustment was warranted.

But it is probably too late for the IRS to try to recoup any money. The IRS typically has three years to go after someone’s back taxes. Given that the Bidens amended their 2018 returns in July 2019, the three-year window would have closed last July.

“Yes, it’s too late for the I.R.S. to audit those tax returns since the statute of limitations has long passed,” Willens told us.

Medicare ‘Cuts’ and IRS Agents

As for the other claims in Scott’s ad, this isn’t the first time Scott has said the Inflation Reduction Act passed by Democrats would cut Medicare by $280 billion. But as we have written, that’s misleading. The law seeks to lower prescription drug costs by allowing Medicare to negotiate some prescription drug prices.

The Medicare provisions would reduce federal deficits by about $300 billion over 10 years. But as the Committee for a Responsible Federal Budget explains, “While these policies do reduce the cost of Medicare, they do so by lowering prescription drug costs, not by cutting benefits. In fact, we estimate the policies as a whole would improve benefits by lowering premiums and out-of-pocket costs — including through a $2,000 annual cap on out-of-pocket costs.”

Scott is also wrong about the law including money for 80,000 new IRS “agents.” As we have written, the law does include roughly $79 billion for the IRS over 10 years, but most of the new hires it pays for will replace retiring or departing workers and most new positions would be in customer service, the Treasury Department told us. Some hires would be tax enforcers, but their focus would be auditing high-income earners to make sure they pay the taxes they legally owe the government, administration officials have said.

We should note that while Scott didn’t characterize the new IRS hires as an “army” that could “carry guns” (as Trump once did), the senator’s TV ad shows an IRS agent firing a weapon at a gun range. Only IRS “special agents” in the Criminal Investigation division are law enforcement officers who are authorized to carry guns.

What’s ironic is that immediately after criticizing Biden for hiring new IRS enforcement agents, Scott then criticizes Biden for avoiding some Medicare taxes. Going after high-income taxpayers who underreport salary in S corporations to avoid Medicare taxes is exactly the kind of thing new IRS agents might do.

“The IRS is completely outgunned,” Rosenthal said, referring to the small number of IRS revenue agents confronting a large amount of underreported taxes.

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