TaxProf Blog

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

Wednesday, October 3, 2018

NY Times: Trump Engaged in Suspect Tax Schemes As He Reaped Riches From His Father

New York Times, Trump Engaged in Suspect Tax Schemes as He Reaped Riches From His Father:

The president has long sold himself as a self-made billionaire, but a Times investigation found that he received at least $413 million in today’s dollars from his father’s real estate empire, much of it through tax dodges in the 1990s.

President Trump participated in dubious tax schemes during the 1990s, including instances of outright fraud, that greatly increased the fortune he received from his parents, an investigation by The New York Times has found.

Mr. Trump won the presidency proclaiming himself a self-made billionaire, and he has long insisted that his father, the legendary New York City builder Fred C. Trump, provided almost no financial help.

But The Times’s investigation, based on a vast trove of confidential tax returns and financial records, reveals that Mr. Trump received the equivalent today of at least $413 million from his father’s real estate empire, starting when he was a toddler and continuing to this day.

Much of this money came to Mr. Trump because he helped his parents dodge taxes. He and his siblings set up a sham corporation to disguise millions of dollars in gifts from their parents, records and interviews show. Records indicate that Mr. Trump helped his father take improper tax deductions worth millions more. He also helped formulate a strategy to undervalue his parents’ real estate holdings by hundreds of millions of dollars on tax returns, sharply reducing the tax bill when those properties were transferred to him and his siblings.

These maneuvers met with little resistance from the Internal Revenue Service, The Times found. The president’s parents, Fred and Mary Trump, transferred well over $1 billion in wealth to their children, which could have produced a tax bill of at least $550 million under the 55 percent tax rate then imposed on gifts and inheritances.

The Trumps paid a total of $52.2 million, or about 5 percent, tax records show.

The president declined repeated requests over several weeks to comment for this article. But a lawyer for Mr. Trump, Charles J. Harder, provided a written statement on Monday, one day after The Times sent a detailed description of its findings. “The New York Times’s allegations of fraud and tax evasion are 100 percent false, and highly defamatory,” Mr. Harder said. “There was no fraud or tax evasion by anyone. The facts upon which The Times bases its false allegations are extremely inaccurate.”

Mr. Harder sought to distance Mr. Trump from the tax strategies used by his family, saying the president had delegated those tasks to relatives and tax professionals. “President Trump had virtually no involvement whatsoever with these matters,” he said. “The affairs were handled by other Trump family members who were not experts themselves and therefore relied entirely upon the aforementioned licensed professionals to ensure full compliance with the law.”

The Trumps paid a total of $52.2 million, or about 5 percent, tax records show.

The president declined repeated requests over several weeks to comment for this article. But a lawyer for Mr. Trump, Charles J. Harder, provided a written statement on Monday, one day after The Times sent a detailed description of its findings. “The New York Times’s allegations of fraud and tax evasion are 100 percent false, and highly defamatory,” Mr. Harder said. “There was no fraud or tax evasion by anyone. The facts upon which The Times bases its false allegations are extremely inaccurate.”

Mr. Harder sought to distance Mr. Trump from the tax strategies used by his family, saying the president had delegated those tasks to relatives and tax professionals. “President Trump had virtually no involvement whatsoever with these matters,” he said. “The affairs were handled by other Trump family members who were not experts themselves and therefore relied entirely upon the aforementioned licensed professionals to ensure full compliance with the law.”

The investigation also draws on tens of thousands of pages of confidential records — bank statements, financial audits, accounting ledgers, cash disbursement reports, invoices and canceled checks. Most notably, the documents include more than 200 tax returns from Fred Trump, his companies and various Trump partnerships and trusts. While the records do not include the president’s personal tax returns and reveal little about his recent business dealings at home and abroad, dozens of corporate, partnership and trust tax returns offer the first public accounting of the income he received for decades from various family enterprises.

What emerges from this body of evidence is a financial biography of the 45th president fundamentally at odds with the story Mr. Trump has sold in his books, his TV shows and his political life. In Mr. Trump’s version of how he got rich, he was the master dealmaker who broke free of his father’s “tiny” outer-borough operation and parlayed a single $1 million loan from his father (“I had to pay him back with interest!”) into a $10 billion empire that would slap the Trump name on hotels, high-rises, casinos, airlines and golf courses the world over. In Mr. Trump’s version, it was always his guts and gumption that overcame setbacks. Fred Trump was simply a cheerleader.

“I built what I built myself,” Mr. Trump has said, a narrative that was long amplified by often-credulous coverage from news organizations, including The Times.

Certainly a handful of journalists and biographers, notably Wayne Barrett, Gwenda Blair, David Cay Johnston and Timothy L. O’Brien, have challenged this story, especially the claim of being worth $10 billion. They described how Mr. Trump piggybacked off his father’s banking connections to gain a foothold in Manhattan real estate. They poked holes in his go-to talking point about the $1 million loan, citing evidence that he actually got $14 million. They told how Fred Trump once helped his son make a bond payment on an Atlantic City casino by buying $3.5 million in casino chips.

But The Times’s investigation of the Trump family’s finances is unprecedented in scope and precision, offering the first comprehensive look at the inherited fortune and tax dodges that guaranteed Donald J. Trump a gilded life. The reporting makes clear that in every era of Mr. Trump’s life, his finances were deeply intertwined with, and dependent on, his father’s wealth.

By age 3, Mr. Trump was earning $200,000 a year in today’s dollars from his father’s empire. He was a millionaire by age 8. By the time he was 17, his father had given him part ownership of a 52-unit apartment building. Soon after Mr. Trump graduated from college, he was receiving the equivalent of $1 million a year from his father. The money increased with the years, to more than $5 million annually in his 40s and 50s.

Fred Trump’s real estate empire was not just scores of apartment buildings. It was also a mountain of cash, tens of millions of dollars in profits building up inside his businesses, banking records show. In one six-year span, from 1988 through 1993, Fred Trump reported $109.7 million in total income, now equivalent to $210.7 million. It was not unusual for tens of millions in Treasury bills and certificates of deposit to flow through his personal bank accounts each month.

Fred Trump was relentless and creative in finding ways to channel this wealth to his children. He made Donald not just his salaried employee but also his property manager, landlord, banker and consultant. He gave him loan after loan, many never repaid. He provided money for his car, money for his employees, money to buy stocks, money for his first Manhattan offices and money to renovate those offices. He gave him three trust funds. He gave him shares in multiple partnerships. He gave him $10,000 Christmas checks. He gave him laundry revenue from his buildings.

Much of his giving was structured to sidestep gift and inheritance taxes using methods tax experts described to The Times as improper or possibly illegal. Although Fred Trump became wealthy with help from federal housing subsidies, he insisted that it was manifestly unfair for the government to tax his fortune as it passed to his children. When he was in his 80s and beginning to slide into dementia, evading gift and estate taxes became a family affair, with Donald Trump playing a crucial role, interviews and newly obtained documents show.

The line between legal tax avoidance and illegal tax evasion is often murky, and it is constantly being stretched by inventive tax lawyers. There is no shortage of clever tax avoidance tricks that have been blessed by either the courts or the I.R.S. itself. The richest Americans almost never pay anything close to full freight. But tax experts briefed on The Times’s findings said the Trumps appeared to have done more than exploit legal loopholes. They said the conduct described here represented a pattern of deception and obfuscation, particularly about the value of Fred Trump’s real estate, that repeatedly prevented the I.R.S. from taxing large transfers of wealth to his children.

“The theme I see here through all of this is valuations: They play around with valuations in extreme ways,” said Lee-Ford Tritt, a University of Florida law professor and a leading expert in gift and estate tax law. “There are dramatic fluctuations depending on their purpose.”

The manipulation of values to evade taxes was central to one of the most important financial events in Donald Trump’s life. In an episode never before revealed, Mr. Trump and his siblings gained ownership of most of their father’s empire on Nov. 22, 1997, a year and a half before Fred Trump’s death. Critical to the complex transaction was the value put on the real estate. The lower its value, the lower the gift taxes. The Trumps dodged hundreds of millions in gift taxes by submitting tax returns that grossly undervalued the properties, claiming they were worth just $41.4 million.

The same set of buildings would be sold off over the next decade for more than 16 times that amount. ...

All told, The Times documented 295 streams of revenue that Fred Trump created over five decades to enrich his son. In most cases his four other children benefited equally. But over time, as Donald Trump careened from one financial disaster to the next, his father found ways to give him substantially more money, records show. Even so, in 1990, according to previously secret depositions, Mr. Trump tried to have his father’s will rewritten in a way that Fred Trump, alarmed and angered, feared could result in his empire’s being used to bail out his son’s failing businesses.

Of course, the story of how Donald Trump got rich cannot be reduced to handouts from his father. Before he became president, his singular achievement was building the brand of Donald J. Trump, Self-Made Billionaire, a brand so potent it generated hundreds of millions of dollars in revenue through TV shows, books and licensing deals.

Constructing that image required more than Fred Trump’s money. Just as important were his son’s preternatural marketing skills and always-be-closing competitive hustle. While Fred Trump helped finance the accouterments of wealth, Donald Trump, master self-promoter, spun them into a seductive narrative. Fred Trump’s money, for example, helped build Trump Tower, the talisman of privilege that established his son as a major player in New York. But Donald Trump recognized and exploited the iconic power of Trump Tower as a primary stage for both “The Apprentice” and his presidential campaign. ...

In a statement to The Times, the president’s spokeswoman, Sarah Huckabee Sanders, reiterated what Mr. Trump has always claimed about the evolution of his fortune: “The president’s father gave him an initial $1 million loan, which he paid back. President Trump used this money to build an incredibly successful company as well as net worth of over $10 billion, including owning some of the world’s greatest real estate.”

Today, the chasm between that claim of being worth more than $10 billion and a Bloomberg estimate of $2.8 billion reflects the depth of uncertainty that remains about one of the most chronicled public figures in American history. Questions about newer money sources are rapidly accumulating because of the Russia investigation and lawsuits alleging that Mr. Trump is violating the Constitution by continuing to do business with foreign governments.

But the more than 100,000 pages of records obtained during this investigation make it possible to sweep away decades of misinformation and arrive at a clear understanding about the original source of Mr. Trump’s wealth — his father.

Here is what can be said with certainty: Had Mr. Trump done nothing but invest the money his father gave him in an index fund that tracks the Standard & Poor’s 500, he would be worth $1.96 billion today. As for that $1 million loan, Fred Trump actually lent him at least $60.7 million, or $140 million in today’s dollars, The Times found.

And there is one more Fred Trump windfall coming Donald Trump’s way. Starrett City, the Brooklyn housing complex that the Trumps invested in back in the 1970s, sold this year for $905 million. Donald Trump’s share of the proceeds is expected to exceed $16 million, records show.

It was an investment made with Fred Trump’s money and connections. But in Donald Trump’s version of his life, Starrett City is always and forever “one of the best investments I ever made.”

https://taxprof.typepad.com/taxprof_blog/2018/10/ny-times-trump-engaged-in-suspect-tax-schemes-as-he-reaped-riches-from-his-father.html

Tax | Permalink

Comments

(1) "Tax schemes" and "dodges" are attack terms for legal tax planning and deductions.
(2) The crime is that persons, probably within the New York revenue department, are leaking confidential tax matters of Trump family members from decades ago and long past the statute of limitations. That undermines the integrity and confidence in our tax system. There should have been some lessons learned from IRS abuses under Obama. Make that the focus of an investigation.
(3) I wouldn't trust the NYT analysis on complex tax matters, especially on the president's family.

Posted by: Woody | Oct 3, 2018 6:34:51 AM

"I am shocked- shocked- to find that gambling is going on in here!" -- Capt. Louis Renault, Casablanca.

Posted by: Publius Novus | Oct 3, 2018 7:29:50 AM

Note that the NYT failed to redact Donald Trump's social security number from the photo they published on the front page. Talk about aiding and abetting identity theft.

Posted by: ruralcounsel | Oct 3, 2018 9:32:54 AM

The Times has a regular procedure: i. Write a "news story”about Trump that isn't news, ii. Write a "news analsyis”immediately condemning him, ii. Wash, spin, repeat. I don't expect more from Trump himself, but I expect more from The Times.

Posted by: Mike Livingston | Oct 3, 2018 10:10:46 AM

New York Times: " There is no shortage of clever tax avoidance tricks that have been blessed by either the courts or the I.R.S. itself."

Question: If both the courts and IRS "bless" it, who is being "tricked?"

The New York Times is embarrassing itself.

Posted by: NW Tax Prof | Oct 3, 2018 5:22:52 PM

What are they proposing be done here? Dig up Fred Trump and sue his corpse in court?

Posted by: MM | Oct 4, 2018 6:41:57 PM

"Note that the NYT failed to redact Donald Trump's social security number from the photo they published on the front page. Talk about aiding and abetting identity theft."

Actually, that SS number was publicized several years ago by "Anonymous" (the hacker). The SSA has probably issued a replacement SS number since then.

Posted by: John Saunders | Oct 5, 2018 6:24:01 AM

Politico speculates that the documents came from Fred Trump's nephew and family historian John Walter.
https://www.politico.com/magazine/story/2018/10/07/trump-new-york-times-tax-evasion-221082

Posted by: Dave C. | Oct 9, 2018 12:17:39 PM