The Trump Indictment, Tax Law, And Conway Twitty

New York Times, A Surprise Accusation Bolsters a Risky Case Against Trump:

The unsealed indictment against former President Donald J. Trump on Tuesday laid out an unexpected accusation that bolstered what many legal experts have described as an otherwise risky and novel case: Prosecutors claim he falsified business records in part for a plan to deceive state tax authorities.

For weeks, observers have wondered about the exact charges the Manhattan district attorney, Alvin L. Bragg, would bring. Accusing Mr. Trump of bookkeeping fraud to conceal campaign finance violations, many believed, could raise significant legal challenges. That accusation turned out to be a major part of Mr. Bragg’s theory — but not all of it.

“Pundits have been speculating that Trump would be charged with lying about the hush money payments to illegally affect an election, and that theory rests on controversial legal issues and could be hard to prove,” said Rebecca Roiphe, a New York Law School professor and former state prosecutor.

“It turns out the indictment also includes a claim that Trump falsified records to commit a state tax crime,” she continued. “That’s a much simpler charge that avoids the potential pitfalls.” ...

Mr. Bragg also introduced yet another theory, accusing Mr. Trump of falsifying business records as a way to back up planned false claims to tax authorities. “The participants also took steps that mischaracterized, for tax purposes, the true nature of the payments made in furtherance of the scheme,” Mr. Bragg wrote in the statement of facts that accompanied the indictment. ...

it is also a crime to submit false information to the state government. At another point Mr. Bragg seemed to put forward an alleged plan to lie to tax authorities — an intention to say Mr. Cohen had earned income for “legal services performed in 2017” to launder what was in reality a repayment — as a stand-alone offense.

In addition to covering up campaign-finance crimes committed in 2016, Mr. Bragg said: “To get Michael Cohen his money back, they planned one last false statement. In order to complete the scheme, they planned to mischaracterize the repayments to Mr. Cohen as income to the New York state tax authorities.”

In the courtroom, the prosecutor Christopher Conroy accused Mr. Trump of causing the Trump Organization to create a series of false business records, adding that he “even mischaracterized for tax purposes the true nature of the payment.”

That prosecutors cited the possibility of planned false statements on tax filings struck some legal specialists as particularly significant, given the speculation over how bookkeeping fraud charges would rise to felonies.

“The reference to false tax filings may save the case from legal challenges that may arise if the felony charges are predicated only on federal and state election laws,” said Ryan Goodman, a law professor at New York University.

Jack Bogdanki (Lewis & Clark), Is Trump Like Conway Twitty?:

I don't know diddly about New York State tax law, but on the assumption that it's a lot like federal tax law, which I do know something about, I'm still wondering how mislabeling the payments to the lawyer, Michael Cohen, would have helped Trump on his taxes. Specifically, I am wondering, wouldn't he have been able to deduct the hush money even if he told the truth about what it was? ...

 I'm not seeing anything in the federal tax law that specifically denies a business deduction for a hush money payment to a private person. Now, of course, to take a deduction, there has to be a connection to your trade or business, but couldn't Trump show that? By paying off Daniels, McDougal, and the doorman, he arguably would have avoided damage to his campaign, and to his brand. Presumably he has made a lot more money as President and former President than he would have made if he had lost to Hillary Clinton.

Paying money to protect your business reputation may give rise to a tax deduction. There have been several prominent cases in which the IRS has challenged such deductions, but the government's success rate in these cases is less than 100 percent.

One case they lost involved country singer Conway Twitty, whose real name was Harold Jenkins. He opened a chain of restaurants named Twitty Burger, and they bombed. To avoid damage to his reputation in the music industry, he paid the investors back, even though he didn't have to, as a legal matter. The Tax Court allowed Twitty a business deduction. The judge wrote, in part:

Although, as [the IRS] argues, the chances of a successful lawsuit against Conway Twitty by any of the investors or the Securities and Exchange Commission was remote we agree with [Twitty] that the possibility of extensive adverse publicity concerning [his] involvement with the defunct corporation and the consequent loss of the investors' funds was very real. We do not believe it is necessary for us to find that adverse publicity emanating from Conway Twitty's failure to repay the investors in Twitty Burger would have ruined his career as a country music singer. Rather, we need only find that a proximate relationship existed between the payments and [Twitty's] business. We find that such relationship exists. 

Given this precedent, it's hard for me to see how Trump would have been denied a deduction for hush money payments, even if he told the truth about them. Now, again, that's under federal tax law, not New York State tax law. But I'm not coming away with a good feeling about the prosecution's position here.