Paul L. Caron

Wednesday, January 2, 2019

Shaviro: The Tax Consequences Of Donald Trump's Reimbursement Of Michael Cohen For Payments To Stormy Daniels

TCDDan Shaviro (NYU), Tax Issue Re. Donald Trump, Michael Cohen, and Stormy Daniels:

A reporter on the national beat recently asked me whether Trump might be guilty of tax fraud if he deducted the payments of $35,000 per month that he was making, for some period, to reimburse Michael Cohen, for paying $130,000 in hush money to Stormy Daniels. The payments reportedly included a gross-up for the income tax consequences to Cohen, under the assumption that he would include them without deducting the hush money payment. ...

The key tax issue is, what would have been Trump’s legitimate business reason for deducting the payments to Cohen? Clearly there would be tension between Trump’s (1) saying it was just personal, hence not a campaign finance violation, and yet also (2) treating it as deductible (if he did).

But here's an odd aspect of it. Suppose we posit that Trump is a long-time criminal who sought the presidency for multiple reasons, but in part as a money-making scheme that would give him opportunities to defraud the U.S. government and the American people by – just to give a partial list – violating the emoluments clause, putting foreign policy up for sale, having the U.S. government pay fees to his businesses, serving the interests of foreign governments that were giving him a lot of money, and so forth. To the extent that he was seeking to maximize the profits from his preexisting business by becoming president, illegal payoffs to Michael Cohen to help him win the election might be viewed as an expense of this business.

Among the relevant tax law doctrines here is the one holding that one can't deduct as business expenses the costs of seeking to enter a new line of business. So, just as law students can't deduct law school tuition (but an established lawyer may be able to deduct expenses of paying for continuing legal education), Trump in 2015-2016 couldn't properly deduct the costs, such as paying off Cohen, of seeking the presidency, if we consider his seeking public office to involve entry into a new business.

But insofar as he was merely seeking to advance his preexisting criminal career by running for president, the case for the business deduction is strengthened.

In short, I think a strong argument against viewing deduction of the amounts paid by Trump to Cohen for silencing Stormy Daniels as improper (whether or not as meeting the mens rea requirement for tax fraud) relates to the view that Trump incurred these costs as part of an ongoing course of criminal activity, of which his political career is merely a continuing part. Kind of like Michael Corleone moving the family business to Las Vegas.

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Even if personal, it's nothing more than a denial of a deduction, and possibly an accuracy-related penalty. No criminal charges likely, and nothing his supporters are likely to care about. Much ado about nothing. But then audit every Congressperson in the same manner, and watch the political fireworks!

Posted by: ruralcounsel | Jan 7, 2019 3:41:39 AM

What about the origin of the claim test? Isn't the origin of this claim a personal matter, thus precluding the deduction?

Posted by: R Jason | Jan 3, 2019 6:51:15 AM

There is very little evidence that voters care about any of this.

Posted by: Mike Livingston | Jan 3, 2019 2:10:57 AM