TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, October 4, 2016

More Trump Tax News

Following up on my posts (here and here):  The Daily Beast: Art of the Steal: This is How Trump Lost $916M and Avoided Tax, by David Cay Johnston:

The big New York Times scoop that Donald Trump used $916 million of tax losses to enjoy many income tax-free years raised a question the newspaper didn’t try to answer: How did Trump do it?

Trump, the only major-party presidential nominee in four decades to keep all his tax returns secret, insists “there’s nothing to learn from them.”

Yet in one day I figured out how Trump’s advisers almost certainly arranged the massive tax losses, skipped out on a massive income-tax bill, and then fashioned a loophole with more valuable tax benefits than the already liberal tax breaks Congress gives big real-estate owners while sticking others with the bill.

Trump dumped the real costs of all this on investors who saw gold in his brand name, but who lost everything even as he was paid tens of millions of tax-free dollars.

All this came from subtle clues on the front pages of Trump’s 1995 Connecticut, New Jersey, and New York state income-tax returns. Which sums were on which lines in each state pointed to how Trump must have organized his affairs. Two of the most respected tax professors in America agree with my analysis. Edward Kleinbard of the University of Southern California and Martin J. McMahon Jr. of the University of Florida refined my view.

New York Times: The Trump Campaign’s Questionable Tax Return Justification, by Gretchen Morgenson:

Did Donald J. Trump have a fiduciary duty to keep the amount he personally owes in taxes to a minimum?

That was the argument made by the Trump campaign when asked about documents indicating Mr. Trump had declared a $916 million loss on his 1995 income tax returns, possibly shielding him from paying any taxes for 18 years. The campaign said Mr. Trump has “a fiduciary responsibility to his business, his family and his employees to pay no more tax than legally required.”

Simply put, a person who is a fiduciary must act in the best interests of another person, putting that person’s interests ahead of his or her own. But in the context of Mr. Trump’s personal tax returns, legal experts said, the argument that he has a fiduciary duty to others is, well, laughable.

“There is no such thing as a fiduciary duty as a businessman to oneself,” said Richard W. Painter, a professor of corporate law at the University of Minnesota and former chief ethics lawyer in the George W. Bush White House from early 2005 to mid-2007. “That’s called greed. And greed is not a component of the law of fiduciary duty anywhere.”

The response from the Trump camp did seem to channel Learned Hand, a federal judge who famously said, “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury.”

But it is ridiculous to add the element of a fiduciary duty to a desire to reduce a personal tax bill, said Tamar Frankel, a professor at the Boston University School of Law. “We don’t owe a fiduciary duty to ourselves,” Ms. Frankel said in an interview. “There is no such thing. We owe it to others whose money and power we hold for their benefit.”

Bloomberg:  Trump's 1995 Return Shows Good Tax Policy at Work, by Megan McArdle:

Liberal social media dissolved into an ecstatic puddle; conservative social media, at least the part that is supporting Trump, angrily denounced the Times for publishing this tripe.

Why did people see scandalous tax avoidance in this case? At issue is the “net operating loss,” an accounting term that means basically what it sounds like: When you net out your expenses against the money you took in, it turns out that you lost a bunch of money. However, in tax law, this has a special meaning, because these NOLs can be offset against money earned in other years. You can use a “carryforward” to offset the losses against income made in future years (as many as 15 future years, under the federal tax law of 1995). You can also use a “carryback” to offset those losses against income you made in past years (three in 1995, which when added to the 15-year carryforward term, gives us the 18 years the Times refers to).

To judge from the reaction on Twitter, this struck many people as a nefarious bit of chicanery. And to be fair, they were probably helped along in this belief by the New York Times description of it, which made it sound like some arcane loophole wedged into our tax code at the behest of the United Association of Rich People and Their Lobbyists. They called it “a tax provision that is particularly prized by America’s dynastic families, which, like the Trumps, hold their wealth inside byzantine networks of partnerships, limited liability companies and S corporations.”

Every tax or financial professional I have heard from about the New York Times piece found this characterization rather bizarre. ...

“If someone has a $20 million gain in one year and a $10 million loss in the second year, that person should be treated the same as someone who had $5 million in each of the two years,” says Alan Viard, a tax specialist at the American Enterprise Institute, who like all the other experts, seemed somewhat surprised that this was not obvious.

“There are definitely tax provisions narrowly targeted to various industries that you could take issue with,” says Ron Kovacev, a tax partner at Steptoe and Johnson. “The NOL is not one of them.” ...

If Trump managed to pay no taxes for years, the most likely way he did this was by losing sums much vaster than the unpaid taxes. This is fair, it is right, it is good tax policy. There are many valid indictments of Trump as a candidate and as a businessman. But on the charge of unseemly tax avoidance, if this is all the evidence we have, then the grand jury would have to return … no bill.

Previous TaxProf Blog coverage:

https://taxprof.typepad.com/taxprof_blog/2016/10/more-trump-tax-news.html

Political News, Tax | Permalink

Comments

As usual with DCJ, this is politics, not legal analysis.

Posted by: mike livingston | Oct 4, 2016 4:18:05 AM

David Johnson wrote in his article:

Trump dumped the real costs of all this on investors who saw gold in his brand name, but who lost everything even as he was paid tens of millions of tax-free dollars.

All this came from subtle clues on the front pages of Trump’s 1995 Connecticut, New Jersey, and New York state income-tax returns. Which sums were on which lines in each state pointed to how Trump must have organized his affairs. Two of the most respected tax professors in America agree with my analysis. Edward Kleinbard of the University of Southern California and Martin J. McMahon Jr. of the University of Florida refined my view."

Do Professors Kleinbard and McMahon really want Johnson to be saying they “agree with my analysis”?

Posted by: Eric Rasmusen | Oct 4, 2016 8:36:00 AM

Does anybody know if the Trump Organization is 100% owned by Donald Trump? If it is, then his fiduciary duty to the corporation exists but is vacuous. If family members own some, and outsiders, then he does owe a fiduciary duty to them and the organization. He does not have a fiduciary duty to the employees to keep the corporation's taxes low, though.

Posted by: Eric Rasmusen | Oct 4, 2016 8:43:59 AM

Agree with Mike Livingston. What is wrong with negotiating with banks and getting them to write down the balance of the loans and using creative tax planning.

Posted by: Dan M | Oct 4, 2016 7:10:02 PM

Some nonsense posted above.

I did legal and tax analysis that was spot on.

I suspect Mike Livingston did not even read was I wrote in full or if he did he did not pay close attention.Not only did Kleinbard and McMahon tell me I had figured it out right, other tax law professors have since come forth to say the same thing, at least one of them on national television.

I do have a bias, but it not for any candidate. It is for the one thing that has motivated my work for a half century.

I favor integrity and honor. And my work has stood up every time to scrutiny by competitors, Congress and other legislative bodies, blue ribbon citizen panels and when it was an issue in civil and criminals trials (where I was not a party). My work saved lives, stopped many tax dodges, got criminals indicted, and sent to prison, won freedom for an innocent man after I personally hunted down an especially vicious killer and (uniquely in American history) caused a broadcaster to be forced off the air for lying in its news reports. Do you think Presidents Clinton and Biush would have changed their tax policies or Congress would have enacted laws based on my work if I didn’t have my facts bolted down solid?

That Livingston and Dan M don’t like the facts I report is their problem.

If they can show any error in my work it will be corrected promptly and forthrightly. If not I would hope they have the integrity to deal in verifiable facts, as I do, and not baseless smears.

Posted by: David Cay Johnston | Oct 5, 2016 7:54:13 AM

In response of Professor Rasmussen's question, Trump was the sole owner the last time I examined the record. (I have tens of thousands of pages of Trump documents.) His subsidiaries, more than 500 of them, usually involve Trump as general partner and a Trump entity he controls as limited partner, but now and then a tiny slice is owned day an associate who works for him.

Posted by: David Cay Johnston | Oct 6, 2016 5:23:33 AM

David, thanks for participating here. Please give us your response to item 6 at https://www.facebook.com/meganjmcardle/posts/658550547642486 where McArdle expresses skepticism about your debt parking theory. McArdle is as smart as you are, so when you two disagree I'm interested to learn more.

Posted by: AMTbuff | Oct 6, 2016 9:16:24 AM