The Edwards loophole

Robert Novak

3/1/2004 12:00:00 AM - Robert Novak

WASHINGTON -- Sen. John Edwards got through last Thursday night's debate in Los Angeles, as he has his entire presidential campaign, without being asked an embarrassing question. How can he explain setting up a dummy corporation to avoid paying an estimated $290,000 in Medicare taxes in the two years before he ran for the Senate? It would be an embarrassing question for a self-described populist inveighing against privileges for the rich and powerful.

There were plenty of opportunities for Sen. John Kerry to bring this up during the debate's extended discussion of health care. Some of Kerry's key advisers worked on the 1998 North Carolina Senate campaign won by Edwards, when this issue was raised. But with Kerry on the brink of collecting a majority of delegates to guarantee the Democratic presidential nomination, he does not want to risk trouble with negative campaigning against his sole remaining serious opponent.

However, it is inconceivable that President Bush's crack researchers are not aware of the massive tax loophole utilized by Edwards, who is the clear consensus choice to be Kerry's vice-presidential running mate. Democrats, relishing thoughts of the attractive and charismatic Edwards face to face against Dick Cheney in debate, must ponder a better answer to the Medicare tax question than the senator gave six years ago.

At 9 a.m. on June 28, 1995, articles of incorporation were filed with the North Carolina Secretary of State for John R. Edwards, P.A. (professional association), of Raleigh, N.C. The new corporation was authorized to issue 100,000 shares of common stock -- all owned by Edwards, who is its only employee. This is a classic Subchapter "S" corporation devised to shelter income, mainly for professionals such as lawyers (and also syndicated columnists, but not me). It is one of the last loopholes left in the Internal Revenue Code, and it is a big one.

Edwards put his own little corporation to good use in his last two years as a multi-millionaire personal accident lawyer before becoming a full-time politician. He paid himself salaries of $600,000 in 1996 and $540,000 in 1997, on which he paid Medicare taxes. As the sole stockholder, Edwards received dividends of $5 million for each of those years -- all of it free from Medicare taxes. That saved the future senator around $290,000.

Republican Sen. Lauch Faircloth, facing defeat in 1998 by Edwards, charged that his challenger "has avoided paying taxes, shortchanging seniors." Edwards shot back with a response of a young man who had proved himself a virtuoso in pleading before juries: "I have paid every dime of Medicare taxes I owe and am required to pay by law. If Lauch Faircloth wants to make negative personal attacks, he needs to do it to my face in debate."

Faircloth, a self-made and largely inarticulate businessman, was not about to take on silver-tongued Johnny Edwards in debate -- and Edwards knew it. Whether his tax avoidance was perfectly legal, however, remains unknown in the absence of an IRS audit. The government's position is that dummy corporations such as John R. Edwards, P.A., must pay its sole employee a "reasonable" salary. Tax practitioners told me that paying a $1.1 million salary out of $11.1 million net income may not pass the "reasonable" test.

Manipulating the IRS code to maximize his personal wealth comes at the peak of a campaign where Edwards has raised himself from the lowest of also-rans to become a strong runner-up by propounding his concept of "two Americas" -- including one America where the rich play dirty tricks on the other America. In an early presidential debate in Columbia, S.C., last May 3, he promised "a better life for our families" that would be "based on the values of hard work and responsibility, not accounting tricks and corporate greed."

There is no record that Edwards, during his six years in the Senate, ever even considered legislation to close the giant loophole of the personal corporation. He must know that loophole well, because he is a lawyer who took advantage of it. He has not been seriously challenged on this so far, but surely will if he is put on the ticket in Boston this summer.