TaxProf Blog

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

Tuesday, November 1, 2016

NY Times:  Trump’s Tax Dodge Stretched Law ‘Beyond Recognition’

Trump (2016-2)New York Times, Donald Trump Used Legally Dubious Method to Avoid Paying Taxes:

[N]ewly obtained documents show that in the early 1990s, as he scrambled to stave off financial ruin, Mr. Trump avoided reporting hundreds of millions of dollars in taxable income by using a tax avoidance maneuver so legally dubious his own lawyers advised him that the Internal Revenue Service would most likely declare it improper if he were audited.

Thanks to this one maneuver, which was later outlawed by Congress, Mr. Trump potentially escaped paying tens of millions of dollars in federal personal income taxes. It is impossible to know for sure because Mr. Trump has declined to release his tax returns, or even a summary of his returns, breaking a practice followed by every Republican and Democratic presidential candidate for more than four decades.

Tax experts who reviewed the newly obtained documents for The New York Times said Mr. Trump’s tax avoidance maneuver, conjured from ambiguous provisions of highly technical tax court rulings, clearly pushed the edge of the envelope of what tax laws permitted at the time. “Whatever loophole existed was not ‘exploited’ here, but stretched beyond any recognition,” said Steven M. Rosenthal, a senior fellow at the nonpartisan Tax Policy Center who helped draft tax legislation in the early 1990s.

Moreover, the tax experts said the maneuver trampled a core tenet of American tax policy by conferring enormous tax benefits on Mr. Trump for losing vast amounts of other people’s money — in this case, money investors and banks had entrusted to him to build a casino empire in Atlantic City. ...

[T]he opinion letters Mr. Trump received from his tax lawyers at Willkie Farr & Gallagher were far from the gold standard. The letters bluntly warned that there was no statute, regulation or judicial opinion that explicitly permitted Mr. Trump’s tax gambit. “Due to the lack of definitive judicial or administrative authority,” his lawyers wrote, “substantial uncertainties exist with respect to many of the tax consequences of the plan.”

Political News, Tax | Permalink


I suppose those years were not examined by IRS. Nope. Guess they just missed it.

Posted by: Annie | Nov 1, 2016 4:43:29 AM

I'll take MLTN all day

Posted by: taxtaxtax | Nov 1, 2016 6:55:53 AM

Wait a minute here. I was always under the impression that in a technical sense if it wasn't not illegal that you had the right to take the risk that an agency such as the IRS that had all your tax documents and could audit and take enforcement action to challenge, reverse and seek fines for illegal and wrong deductions would come after you if you were wrong. The fact that Congress had to take explicit action to close the "loophole" here suggests that there was a loophole. Trump took the risk. The IRS apparently "dropped" the ball or opted not to pursue a case against Trump. I'm not a tax guy but what am I missing here? It strikes me that the analysis to which I am responding is completely politicized moralizing and that is not what lawyers are supposed to do. For example, I have done a lot of criminal defense and I was a bit ticked when people attacked Clinton for representing a rapist early in her legal career. I actually made a decision that I would not defend rapists or child abusers if I was convinced that they "did it" but that decision was professional in large part because I wanted to "fry" such clients and couldn't keep professional objectivity. Clinton could do it and acted professionally. Here, Trump took his chances--whether the analysis was "stretched" or not and his lawyers obviously provided the option to do so but with cautionary words so he wouldn't be able to sue them.

Posted by: David | Nov 1, 2016 9:19:11 AM

The New York Times article relies on the opinion letter at (gated)

That opinion letter is for "tax considerations pertinent to a holder of a Series A Bond (a "Holder") upon consummation of the proposed Debtors' Joint Plan of Reorganization under Chapter 11...". So it talks about things like whether the bonds are debt or equity for tax purposes. The Holders are the banks, not Trump. The tax issues here are intricate and hard. Are they actually connected to Trump's taxes in any way, or just the bondholders?

The NY Times's yellow journalism claim is that in 1992 Trump got untaxed debt forgiveness income in a way that Congress made illegal in 1993 for corporations and in 2004 for partnerships like Trump's. Does this opinion letter bear on that issue at all?

Posted by: Eric Rasmusen | Nov 1, 2016 11:32:21 AM

By the way, I've several times criticized people who claim Trump had no money at risk himself and so didn't deserve his NOL deduction, since they present no evidence and if Trump's wealth was the 1.5 billion he claimed before his crash then he *did* have all the amount at risk. I happened upon some evidence of the kind I'd like to see and present it here for emulation by those who speculate that Trump didn't lose much in his crash. From the unsuccessful suit by the Taj Mahal bondholders, at :

"The prospectus accompanying the bonds estimated the completion cost of the Taj Mahal, including the payment of interest on the bonds for the first fifteen months of operation, at $805 million. It explained that, to obtain that amount, the Trump defendants were relying on the $675 million in bond proceeds, a $75 million capital contribution by Donald Trump, investment income derived from those sums, a contingent additional loan of $25 million from the Trump Line of Credit, and loans from other sources."

Thus, it seems that for this particular project, Trump had about 10% down and borrowed 90%, most of it via high-interest bonds. The court case says the interest rate premium was 14%, compared to 9% for high-quality bonds. Does anyone know how much he put down on his other ventures, and how many there were? Probably not, in which case they are just guessing in their claims.

Posted by: Eric Rasmusen | Nov 1, 2016 11:35:35 AM

Well, we don't really know what the IRS did or didn't do. We know his personal returns were audited, and we can probably assume nothing went to court, but there's a lot of unknowns in there. Since he hasn't released his returns, and anyone else who would know is probably either legally or ethically barred from discussing it or doesn't have any incentive to disclose, we're left with what information we do have and a bunch of speculation.

Posted by: poorlaetitia | Nov 1, 2016 12:11:45 PM

What is "wasn't not illegal?" You lost me.

Posted by: Publius Novus | Nov 1, 2016 12:43:36 PM

How dare an evil Republican use tax dodges designed to line the pockets of righteous Democrats.

Posted by: Jay Dee | Nov 2, 2016 5:51:07 AM