TaxProf Blog op-ed: Trump Tax Concerns Persist, by Katherine Pratt (Loyola-L.A.):
Just 24 hours before the presidential election, concerns about Donald Trump’s payment of his tax obligations persist. Recent press coverage has focused on an issue that (at least so far, based on very limited information) probably does not disqualify him to be our president, and has not focused enough on two more fundamental tax issues that disqualify him to be our president.
In the past few days, press coverage has emphasized a technical business tax question: what specific tax strategies did Trump use to generate and preserve $916 million of net operating losses (NOLs), despite massive debt discharge, and were those strategies legally questionable? A front page November 1 New York Times article on this topic asserts that the “stock for debt swap” part of Trump’s overall tax strategy was a new tax “dodge” dreamed up by tax lawyers to avoid debt discharge income (COD) on the cancellation of debt. This characterization of such swaps as a new tax scam is inaccurate. My academic articles on corporate COD explain the long history and theory of the exception and its gradual repeal [Shifting Biases: Troubled Company Debt Restructurings after the 1993 Tax Act, 68 Am. Bankr. L.J. 23 (1994); Corporate Cancellation of Indebtedness Income and the Debt-Equity Distinction, 24 Va. Tax Rev. 187 (2004)]. Suffice it to say that “stock for debt swaps” in bankruptcy cases were relatively common in the 1980s and early 1990s. Unless there is more to be revealed, Trump’s use of the stock for debt exception to COD does not disqualify him to be president.
But Trump’s conduct regarding two other tax issues does disqualify him to be president.
First, Trump’s continuing failure to disclose his tax returns is a disqualifier. For decades, all other presidential candidates have disclosed their tax returns. As Republican Fred Goldberg (IRS Commissioner under President George H.W. Bush) argues, a candidate who refuses to disclose tax returns has not earned our trust and is not qualified to be our president.
Although Trump claims that he cannot disclose his tax returns because he is being audited, many of Trump’s tax returns are not under audit. The statute of limitations (SOL) for tax returns is generally three years (or six years if large amounts of income are omitted) from the filing date. This means that the IRS generally has three years to challenge the return and claim that the taxpayer owes additional tax for a specific tax year. In addition, a special rule extends the SOL for years to which NOLs are carried back. Once an audit begins, a taxpayer often consents to extend the SOL, to give the IRS and the taxpayer time to settle the case without a lawsuit. If a taxpayer does not extend the SOL or agree to pay extra tax, the IRS sends the taxpayer a letter that initiates a lawsuit in the US Tax Court. The upshot of this is that Trump’s tax returns for a number of years currently may be in the administrative audit process with the IRS — but they can’t ALL be in audit. In addition, it is doubtful that the IRS has audited Trump’s most recent income tax return. If, as is likely, his 2015 tax return is not under audit, Trump should disclose it. Also, he should disclose his returns for any earlier years that currently are not under audit.
Second, Fred Goldberg and fellow Republican Michael Graetz (Deputy Assistant Secretary, Tax Policy, under President George H.W. Bush) conclude that Trump likely failed to pay Medicare taxes on salary income he understated. In addition, unless Trump reported all of the salary he was paid for his services as self-employment income, he likely also failed to pay Social Security taxes. (Only disclosure of his self-employment income and other details from his tax returns could refute that conclusion.) Even minimum wage workers pay Social Security and Medicare taxes. Trump’s conduct shows that he shares the view expressed by another famous New York City business tycoon, Leona Helmsley: “only the little people pay taxes.” His avoidance of payroll taxes is an insult to law-abiding, taxpaying Americans and disqualifies him from being our president.