Paul L. Caron

Friday, November 4, 2016

More On Trump's $916 Million Of NOLs

Trump (2016-3)Following up on this week's posts:

Politico Morning Tax, Making Sense of Trump’s Maneuvers:

Ed Kleinbard, the former Joint Committee on Taxation chief of staff, said there was a reason few people were correctly guessing how Trump was able to list a $916 million loss on 1995 state returns. “None of us thought that the reason that Trump would have avoided discharge indebtedness income would have been a partnership equity-for-debt argument," said Kleinbard. "The reason none of us thought of that is because no such exception existed."

But Robert Willens, who said he worked on those kind of deals two decades ago, said they were more common than people might have thought — landing in that gray area where practitioners didn’t know whether it was allowed or not. “I'm a little surprised that the law firm gave such a weak opinion to him and his people back then,” Willens said about an opinion letter that Trump’s people received. “Because at the time I think we were a little more confident that the technique worked.”

The take from Steve Rosenthal of the Urban-Brookings Tax Policy Center, who’s quoted in the Times piece: “We have no evidence that Trump broke any laws but, at a minimum, he seems to have aggressively stretched the law to avoid reporting taxable income of hundreds of millions of dollars from restructured loans.”

Steven M. Rosenthal (Tax Policy Center), Protecting Trump's $916 Million of NOLs:

In the early 1990s, Donald Trump owned and operated several casinos and other enterprises that borrowed -- and lost -- a staggering amount of money. Trump's creditors ultimately bore most of those losses, but Trump himself deducted large amounts of interest, depreciation, and operating expenses.

Trump's losses added up and carried forward to total $916 million of net operating losses by 1995, according to a story published last month by The New York Times. And Trump worked hard to protect those NOLs, even when seeking debt relief from his creditors, as the Times reported November 1.

Normally, taxpayers do not recognize income when they borrow funds. The logic is that although they increase their assets, their obligation to repay the debt increases their liabilities by the same amount. However, if taxpayers later are relieved of all or part of their obligation to repay, they generally must report the difference as cancellation of indebtedness (COD) income.

Documents filed in the bankruptcy court suggest that Trump aggressively stretched the law to sidestep hundreds of millions of dollars of taxable income from restructuring his public debt. He excluded the income despite reservations expressed by his own lawyers. Had he reported that income, he would have lost about half of his $916 million of NOLs, based on the limited information available to the public. It's unclear whether the IRS ever challenged his position.

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