Paul L. Caron

Monday, November 7, 2016

Pratt:  Two Tax Issues Disqualify Trump For The Presidency

Pratt (2016)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.

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I have a question. What is the benefit of paying the debt with equity rather than cash? Presumably if I have a debt of $100 and an asset worth $100, I could just as well sell the asset and pay my debt in cash. Seems to me the only way this would benefit me would be if I misstated the value of the asset (something that would be pretty easy to do with an asset that’s not publically traded), but wouldn’t that be Illegal? And this all begs the question of why the creditor would go along? Wouldn’t this hurt them? I can think of two possible reasons:
1. They believe the asset is distressed because I am facing a liquidity problem, and it will eventually rebound as conditions improve.
2. They can re-value the asset later and take the loss in a subsequent filling (not sure if this would be legal).
Am I off-base here?

Posted by: Todd | Dec 2, 2016 10:23:34 AM

There are only three Constitutional qualifications to be President: 1) Be a natural-born citizen of the U.S., 2) Be at least 35 years old, 3) Be a resident of the U.S. for at least 14 years.

However, there are numerous federal statutes that, if violated, disqualify an individual from ever holding public office again. Ironically, Secretary Clinton violated at least one of those, but she's not going to be prosecuted for the violation. Not sure about Mr. Trump, but anything's possible...

Posted by: MM | Nov 8, 2016 1:15:15 PM

All drivel. Why? Because there are countless more reasons (many involving clear violation of serious state and federal laws, including tax laws, over an entire adult lifetime) that demonstrate the Democrat candidate is unfit and unqualified. Many of her crimes carry as punishment the disqualification to hold public office. There is nothing about Trump's taxes which is even remotely as disturbing.

Hopefully this writing is not thought to be anything worthy of "publication" credit.

But never mind any of that. Let's just talk about mental and physical health. She loses again.

Finally, despite concern, Nixon's taxes didn't matter in the 1970's, and nobody cares about them now. But many do care now about false Forms 990 filed by the Clinton Foundation.

Posted by: Diogenes | Nov 8, 2016 4:40:01 AM

I find offensive the repeated use of the term "disqualify" for Clinton or Trump. No individual has the right to determine who is qualified or not for the Presidency. The voters decide that.

Posted by: mike livingston | Nov 8, 2016 4:16:43 AM