Trump’s Bookkeeper: How Prosecutors Could Easily Prove Tax Crimes for Hush Money Reimbursements

Entertaining though it may be, The Untouchables gets a lot of details wrong. For instance, the gangster who handled the financial part of the operations, Frank Nitti, did not end up “in the car,” but instead ruled the Chicago mob after Al Capone went to jail. There was one detail the movie did get right, though: the key importance of bookkeepers in tax fraud prosecutions. As thoroughly reported here at Just Security on Friday, the President’s hush money payments may also put his bookkeeper in the spotlight. As they seem to do so often, the President’s own words have put himself in potential legal jeopardy, this time for tax fraud. And Allen Weisselberg, the Trump Organization bookkeeper who reportedly has been answering questions from federal prosecutors, will be the key in any successful tax fraud prosecution.

First, just a quick review of the facts that put a potential tax fraud indictment on the table. Readers recall, I’m sure, that the President has admitted (and then denied, and then admitted…) paying for the silence of two women with whom he allegedly had sex. These payments were delivered by Trump Organization fixer and campaign associate Michael Cohen, who in turn was compensated by the Trump Organization. Allegedly, an executive at the organization directed firm employees to bill these payments as “legal expenses;” Cohen is an attorney.

Most commentary has focused on the possibility that these arrangements suggest the President may have committed a campaign finance offense, but the President’s defense to that accusation is exactly what leaves him most vulnerable to a tax fraud prosecution. The campaign finance angle is that the payments comprised unreported campaign contributions, since they were intended to protect his candidacy from damaging revelations. If prosecutors can show that was his purpose, and that he knew it was unlawful to do so, they can establish the elements of a campaign finance offense.

In my view, Trump’s key defense to the campaign finance charge would focus on his purpose in making the payments. There’s a strong circumstantial case to be made that candidate Trump knew secret mistress payoffs could be crimes: he tweeted about the John Edwards prosecution for the same general sort of conduct, and was broadcast saying he had talked to lawyers after reading about that case. So his best shot is to say simply that he paid not to influence the election, but instead for personal reasons, such as to avoid hurting his wife. The timing, in October of 2016, makes that argument challenging, but he might say that he knew the timing would drive press coverage that would be especially hurtful or that it was his accusers who dictated the timing.

But down that road lies tax fraud. The problem is that if the payments were indeed personal, they were not deductible business expenses. In all likelihood, when Weisselberg created an account entry listing the payments as “legal expenses” for the Trump Organization, that entry resulted in those costs being deducted from the Organization’s income (as with many things Trump, it would of course be useful to see the tax returns themselves). Although Trump probably no longer signs the Organization’s tax returns, and so likely did not himself lie on the 2016 return, he could be guilty of conspiring with others to fraudulently reduce the Organization’s taxes. The payments likely also should have been taxed to Trump personally as de facto distributions of profits; whether they are reported as such on his personal tax returns is also an interesting question for investigators.

Just as with the campaign offenses, mental state is critical to tax offenses, and so it is here that Weisselberg will be critical. Ignorance of the law actually is an excuse for tax crimes. Because the tax code is so complex, taxpayers can’t be convicted of most tax offenses unless they undertake a “voluntary, intentional violation of a known legal duty.” Cheek v. U.S., 498 U.S. 192, 201 (1991). Proving that defendants actually knew what they were doing was wrong is the most challenging part of almost any tax prosecution.

Professional tax advisors are crucial to many successful prosecutions. When a business entity is involved in a potential tax crime, its bookkeepers, accountants, and tax lawyers are in a vise. The business owner is going to point the finger at her advisors, saying that she relied on their advice. They are the ones who presumably know best what the tax law requires. Any misstatement by the advisors thus puts them in great legal jeopardy. Even if the advisor escapes prosecution, intentional missteps are likely to end her tax advising career.

And so what usually follows is that the tax advisor tells the government (and, if necessary, later testifies) that the business owner lied to her own advisors. If the advisor was faithfully following the law as it applied to the facts as she knew them, she is innocent of any tax crime.

That is the key for Trump’s potential legal jeopardy. Testimony that the business owner lied to her own advisors is usually highly damning. The bookkeeper is there to help you run your business, a prosecutor will point out. Why would you mislead or lie to her? It must be because you thought she would stop you from claiming what you wanted to claim. And if you knew your bookkeeper wouldn’t go along, you must know that your tax position is bogus. A defendant’s misleading statements, even if not outright lies, to her own advisors are thus a classic way that tax prosecutors establish the defendant’s mental state.

Why would a jury believe the bookkeeper’s testimony, when she obviously has so much personally at stake in turning blame to her boss? Well, why would she ever have cooked the organization’s books in the first place? What’s in it for her? A year-end bonus for finding some nice deductions isn’t worth risking jail and career. At best, the defendant’s argument is that the bookkeeper knew of and participated in the scheme, but that’s not exactly exculpatory for the defendant either.

From the public information available, we can see this dynamic brewing in the Trump Organization case. Again, prosecutors allege (likely based on emails seized from the organization) that, following Weisselberg’s query, some Trump Organization executive directed lower-level employees to report the payments as legal expenses. Weisselberg most likely will tell those prosecutors he had no reason to doubt that characterization. So someone who knew better lied to him and the bookkeeping staff. Why? If it was to avoid mentioning the affairs to individuals less trusted than Weisselberg, why not just call the payments “campaign expenses”? The “why lie?” question therefore implies serious legal jeopardy at least for whichever executive was on the other end of the Weisselberg e-mail. According to Rudy Giuliani, the President also “talked to” Cohen about the reimbursements, which should raise questions about whether the President directed that they be covered up.

One potential sticking point is that it’s often difficult for prosecutors to argue in the alternative, at least to juries. I’ve suggested that prosecutors might allege that the President committed either a campaign-finance crime or tax fraud, depending on exactly what motivated his payments. If they were to help the campaign, campaign-finance crime; if they were for personal motives, tax fraud. Either way, the lies to or through Weisselberg help to establish the relevant individuals’ knowing wrongfulness. But some juries will balk at a prosecution framed this way. Perhaps they’ll say they can’t know beyond a reasonable doubt which intention defendant held, and refuse to convict on either, even though defendant must have committed one of the crimes.

That may not be a problem for SDNY prosecutors here, because it could be argued that both sets of facts are consistent with tax evasion. Like personal expenses, campaign contributions are not deductible. 26 U.S.C. 162(e)(1)(B). So no matter the reason the President paid his alleged former lovers, his business could not legally have deducted the expense. There is no way out of that legal corner.

[Editor’s Note: Readers may also be interested in, Martin J. Sheil’s, “Did Trump Organization Executives Cook the Books?–Tax Crimes Explained under Federal and State Law”]

Image credit: Melissa Bender 

About the Author(s)

Brian Galle

Professor of Law at the Georgetown University Law Center, former attorney in the Tax Division of the U.S. Department of Justice - Follow him on Twitter (@BDGesq).