TaxProf Blog

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

Wednesday, November 2, 2016

Why Donald Trump May Never Pay Federal Income Tax Again

Trump (2016-3)Daily Beast: Why Donald Trump May Never Pay Federal Income Tax Again, by David Cay Johnston:

The alleged billionaire, last known to have paid up in 1977, may not have to until 2042—if then.

Donald Trump can enjoy income tax-free living for the rest of his life, my new analysis of his tax documents shows, adding to the reasons the Republican nominee for president should make his tax returns public before voting ends next Tuesday.

Thanks to a diligent team of New York Times reporters, we learned Halloween night that Trump’s top-notch tax advisers warned in 1991 that his extremely aggressive tax strategy to convert nearly a billion dollars of taxable income into tax losses would likely be rejected in an IRS audit. But, as we shall see, there was little risk Trump would be audited (doubly ironic, given how he’d used supposed audits to justify becoming the first post-Watergate presidential candidate who hasn’t released tax returns).

The documents in The Times confirm what I told readers a month ago about how Trump transformed taxable income into tax avoidance on a grand scale. Since then, numerous tax practitioners and professors have written their own essays applying the same line of analysis first published in my Oct. 3 column, headlined “Art of the Steal.”

That column drew on three pages of 1995 state tax return summary sheets leaked to The Times and the New York Daily News. In its initial report, The Times said that Trump could use $916 million of net operating losses or NOLs shown on those documents to eliminate income taxes for up to 19 years.

What I can now report is that Trump is not restricted to using or losing his tax losses over 19 years but can offset income for as long as he lives. Based on his 1995 income, Trump could enjoy 47 years of income-tax-free living. That would cover Trump until 2042, when he would turn 96.

But even that understates the situation. As a real estate owner Trump can acquire still more tax losses under liberal rules set by Congress—rules Trump lobbied for—that apply only to full-time managers of their own investment real estate. This means Trump could enjoy a much larger income than the $19 million he reported on his 1995 Connecticut nonresident tax form in future years and still pay no income taxes.

Because of the documents in the latest Times report, it is now beyond question that Trump benefitted from an opinion by Justice Clarence Thomas in a 2001 Supreme Court case infamous in tax circles because it approved the creation of tax losses out of thin air. [Gitlitz v. Commissioner, 531 U.S. 206 (2001)]

New York Times editorial, Avoiding Taxes, Trump-Style:

Donald Trump’s claim that he was smart for figuring out how not to pay federal income taxes was obnoxious when he said it, at least for the millions of Americans who pay their fair share. Now we learn that he was able to avoid some of those taxes decades ago with a tactic that is illegal now and was highly dubious even then. ...

The latest disclosures about Mr. Trump’s taxes also further undercut the argument that he is uniquely qualified to fix what he has called a rigged system. Why would a man who has spent most of his professional life avoiding the shared responsibility of taxes all of a sudden care about helping others, especially those less fortunate?

https://taxprof.typepad.com/taxprof_blog/2016/11/why-donald-trump-may-never-pay-federal-income-tax-again.html

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Comments

Really, the upshot of all this stuff about Trump's taxes in the 1990's is that the professional politicians of the Republican and Democratic Establishments did a bad job of writing the tax laws. All Trump did was to pay the tax the tax code required of him. It's unfair to blame him for not volunteering to pay extra. As far as I know, Hillary Clinton hasn't volunteered to pay extra taxes either.

Posted by: Eric Rasmusen | Nov 2, 2016 7:21:54 PM

Obsession with Trump's taxes is a sure sign of mental illness. The life of a nation and the safety and security of it people is threatened. Not by Trump.

Posted by: Diogenes | Nov 3, 2016 5:23:57 AM

Eric,

Interesting concept, voluntarily paying more in taxes. I'm sure many households do so, by not taking every deduction they're entitled to, either knowingly or not. But there is a provision in the law where direct gifts may be made to the U.S. government via the Treasury Department for the purpose of reducing the national debt:

https://www.law.cornell.edu/uscode/text/31/3113

However, from what I've read the DOT has received less than $1 million per year over the past 20 years through this provision. So, despite a number of very wealthy high profile individuals begging to have their taxes raised, few if any ever unilaterally put their money where their mouth is. The Warren Buffett Bluff comes to mind: I recall he promised a few years ago to match $ for $ any extra taxes paid by sitting U.S. members of Congress, knowing full well that he's far wealthier than 95% of them...

Posted by: MM | Nov 3, 2016 7:03:51 AM

Especially by Trump.

Posted by: William J. Brown | Nov 3, 2016 9:33:09 AM

Eric Rasmussen seems to embrace Mankiw Morality, named for the Harvard economics professor and GWBush economic adviser who said that, of course, savings and loan executives stole from the companies they ran because not doing so when the rules make it possible would be irrational.

Market economies are based on trust and integrity, not gaming. I teach my students that no illegal act is worth it and that no matter what the cost never ever do anything that violates your moral values even if it is legal. Better to quit and keep your integrity intact than ever comprise your ethics.

If Rasmussen wants future generations to reject market economics or move to the kinds of rules found in European socialism he should keep following his line of reasoning, that not only does anything go but it is not at all reasonable to write about such matters.

Maybe the professor also embraces Romney’s “quiet rooms” theory, that inequality (which I have shown is largely the product of government policy) should not be discussed in public, but only in private.

Rasmussen’s reasoning above and in other TaxProfBlog comments seems to be that in a democratic society, where we each of has the opportunity (and I would say the duty) to determine our public policies, it’s not really appropriate to discuss them (unlike say using a tax shelter) in public and why not criticize those who do so in a serious way? Does Rasmussen really believe in what the movie Pleasantville mocked as the “nonchangeist” view of the world? And if not then why does he have such jaundiced reactions to exposing matters such as a tax dodges so egregious that Republicans in Congress changed the law to stop it.

The device Trump (and others) used had no economic substance. Not some thin veneer of economic substance, but none. Period. Full stop.

Trump took for himself the economic losses sustained by others. That is, the losses were used twice. Trump also lobbied for another provision in the law for which only a tiny fraction of the top 1% qualify. That’s not the same as a deduction of general applicability.

In addition, Trump benefitted from getting NJ state government to take his side against his bankers (68 of the 70 were out of state banks) in 1990.

So this situation is not comparable to taking a deduction for charitable giving, like the 25% of AGI my wife and I gave away in cash last year. And of course I have for decades written about how the mortgage interest deduction inflates housing prices and is an upside down subsidy so while lawful, revising it makes sense and I have shown various ways to do this. But again, those are widely available provisions, not targeted ones.

My second favorite Twitter hashtag applies here and I hope that Professor Rasmussen embraces it, taking the high road in his thinking and teaching: #IntegrityMatters.

Posted by: David Cay Johnston | Nov 6, 2016 6:28:17 AM