Sunday night’s New York Times article on Donald Trump’s taxes has a great deal of content that will take time (and additional supporting detail) to digest fully. What’s more, this article is apparently just the start, as the Times says it will be publishing follow-ups that go into greater depth on particular issues. All that said, however, the following ten takeaways already appear clear.

1) Tax is the least of it. The article offers direct evidence of Trump’s impending financial liability to unknown lenders, and of pervasive conflicts of interest as president, that are of grave national security concern.

2) Trump appears to be an absolutely terrible businessman. This is a man who netted $606 million over nineteen years (from 2000 to 2018) through The Apprentice, licensing and endorsements, and investments and businesses run by others, and yet has created enormous financial peril for himself by buying prestige business properties for high prices, and then pouring cash into them without thereby generating positive net returns. Even with the cash infusions, his personally run businesses have continued to lose a great deal of money (even leaving aside depreciation deductions that might or might not be accompanied by actual declines in economic value). One therefore suspects that he is simply funding the negative cash flow, not creating new value that might pay off in the future. (Even the enhanced revenues at some U.S. properties from their being used by lobbyists have failed to eliminate the pattern of losing a great deal.)

Meanwhile, perhaps to fund the ongoing cash infusions, he has been taking out loans and making one-time asset sales that imply a danger of simply running out of money soon if there is no turnaround. The $421 million in personal liability debts that the Times says are due soon add to the impression of an approaching risk of financial breakdown. However, beyond just the financial peril that he may be facing, the pattern looks like one of recklessly and improvidently burning through one’s cash for as long as it lasts, rather than of investing prudently to create future value.

3) As a matter of net worth, Trump appears not to be rich (despite his having inherited a large fortune). The impending financial liabilities, and selling off of assets (plus taking out of loans) to keep the cash flowing is only one reason for concluding that, as a matter of net worth (as distinct, from say, lifestyle), Trump does not appear to be rich. Consider that, from 2000 to 2018, his net profit from assets – his own businesses, plus investments in businesses run by others – is only $4.2 million (the excess of his investment gains over his business losses).

This is about $220,000 per year. Just as a very general ballpark comparison, if you were earning $220,000 per year from assets that offered, say, a regular 4 percent annual return, that would imply that you were worth only $5.5 million. To be sure, we have here (a) a fluctuating asset pool rather than a fixed one, (b) personal assets (such as homes) that yield untaxed consumption value rather than business profits, (c) tax losses that may exceed economic losses, (d) consistently money-losing assets that might nonetheless be saleable for positive amounts (whether due to their liquidation value, or the view that they could make money if competently run), and possibly (e) appreciating assets (such as art or non-dividend-paying stock) that don’t throw off current taxable income. So this is not by any means an actual computation of net value. Still, however, the point remains that someone with a lot of wealth generally ought to be earning large annual returns on it, at least over an extended period.

Because we generally do not include human capital (i.e., personal earning potential) in net wealth computations, all this ignores the fact that, at least in the past, Trump has been able to make a lot of money from his name, along with his personal participation in ventures such as The Apprentice. This can be a true source of economic wellbeing, even if we exclude it from conventional wealth measures. However, his continued ability to keep doing this is unclear, reflecting not only the apparent decline of some of these income sources but also his age.

4) There is nothing wrong in principle with using true economic losses to offset the tax that would otherwise be due on gains – but it also isn’t clever tax planning. The late, great Martin Ginsburg – a famous tax lawyer and the spouse of the recently deceased Supreme Court Justice Ruth Bader Ginsburg – once jokingly described what he called the “Herman tax shelter.” The idea was that, if you need, say, a $1 million tax deduction, your fictional accountant Herman could say: “Give me $1 million, I’ll steal it from you and go to a country where you can’t reach me, and voila, you have a $1 million theft loss.”

The joke was that it isn’t actually beneficial to generate tax deductions by actually losing money. For example, if the tax rate that you face is 37 percent, losing $1 million that is fully deductible generates a tax saving of only $370,000. So you are still $630,000 behind from the loss after tax. For this reason, the key to effective tax shelter planning has always been to generate tax losses that substantially exceed true economic losses (which can happen legally under appropriate circumstances). Trump therefore was not doing himself any good insofar as he actually lost money that he then got to deduct. (And the Times article notes that his tax losses substantially exceeded the amount of his depreciation deductions on business property).

Trump famously said in 2016: “I love depreciation.” And well he might, given its legally authorizing deductions for supposed losses in the value of properties that may actually, so far as one knows, be gaining value the entire time. However, losses well in excess of depreciation deductions offer evidence, admittedly not definitive, of “Herman tax shelter”-type results.

A related point is that there is no tax abuse as such in using losses incurred in one year to offset taxable income earned in another year, if the tax system allows such use of the “net operating losses.”  Suppose that Taxpayer A earns zero in both Year 1 and Year 2, while Taxpayer B has a $5 million loss in Year 1 and a $5 million profit in Year 2. They have both netted to zero net income over two years (ignoring the negative time value of B’s having incurred losses before gains). So we shouldn’t mind if, in full legal compliance with the rules, B manages to avoid paying any tax in Year 2 because the loss carryforward offsets his net income for the year.

We therefore should distinguish between (a) Trump’s losing so much money over the years – be it from bad luck, bad judgment, or incompetence – and (b) his also taking a number of tax positions that, as I discuss next, appear to be questionable or even fraudulent. The real losses rightfully offset tax on the gains, insofar as using them in the way he did was legally permissible, and the adverse inferences to be drawn from them lie outside the tax system (although again, as per the fallacy in the “Herman tax shelter,” they do not reflect clever tax planning).

5) The ongoing IRS audit dispute regarding a $72.5 million loss deduction looks very bad for Trump. The Times article suggests that the key issue, for most or all of this claimed loss, is a “worthless stock deduction” from abandoning his interest in the disastrous Atlantic City casino venture. Many years ago, when I was in tax practice, I actually worked on this precise legal issue (for a corporate client of my law firm), so I am quite familiar with it. When you own equity (such as Trump’s partnership interests in the Atlantic City activity) that has lost enormous value, typically the equity constitutes a “capital asset.” If you sell it for an enormous loss, that is only a capital loss, and deduction of the loss is limited to the sum of (a) net capital gains for the year, and (b) $3,000. Disallowed losses are carried forward, but at $3,000 per year they may be worth very little, unless your income in future years includes large capital gains. But if the investment is utterly worthless and you abandon it for zero consideration, it becomes an “ordinary” loss (i.e., one that is not subject to the limits on deducting capital losses).

Trump apparently did this with his Atlantic City partnership interests, and claimed an ordinary loss that seems to have made up much or all of the $72.5 million. But he received back a 5 percent interest in the stock of the new entity. As the Times article rightly notes, this could establish that the entire abandonment loss claim was legally invalid. He would merely have sold his once-valuable asset for a large capital loss, the use of which would be sharply restricted as described above. The Times notes that losing on this issue – as it appears he should, if the stated facts are accurate and relevantly complete – would cause him to owe the IRS about $100 million, given interest on the prior refund. This leaves aside the possibility of civil or criminal tax penalties for claiming an abandonment loss despite receiving consideration back.

6) The consulting fees that Trump’s various foreign businesses paid to Ivanka Trump and others look potentially fraudulent. The Times article cites 20 percent consulting fees that foreign Trump businesses regularly deducted by reason of paying them to unnamed consultants. Some of these fees pertained to activities in which Trump’s role as an investor was ostensibly entirely passive, meaning that he wasn’t engaged in making any of the business decisions. Consulting fees also appear to have been paid to family members such as Ivanka Trump. She got consulting fees with respect to businesses for which she simultaneously worked as an executive, and thus as an employee.

Based on what the article says, several different types of fraud may have been involved here. Fees paid to family members who did not provide services in return would be improper deductions. Fees paid to “consultants” who were employees might be properly deductible by the business – as salary – but would potentially trigger 3.8 percent payroll tax liability by the recipient under the so-called Medicare payroll tax. Fees that were actually gifts to family members were not properly deductible, and also may have generated gift tax liability on Trump’s part that the mislabeling helped to conceal.

7) Other improper deductions that may have been claimed fraudulently. The Times article notes several different types of improper deductions for business expenses that appear to have been personal, and hence not allowable under the federal income tax. An example is the more than $70,000 paid to hair stylists in relation to The Apprentice. Tax law is quite clear that such items cannot generally be deducted unless their use is limited exclusively to the business appearance itself. For example, suppose Trump paid $500 for TV makeup, for an Apprentice shoot, and the makeup was washed off right afterwards. That likely would be deductible. However, the cost of a haircut generally cannot be deducted, even in part, because one still has the haircut after the show is over. Similarly, people who need fancy business suits for meetings with clients or customers, and who claim they would rather dress in T-shirts and jeans, cannot deduct the suits’ cost.

Similarly, the Times article raises serious questions about deductions for a residential property, described by Eric Trump as the family “compound,” on the ground that it was an investment property being held for profit. The very year after the investment designation was made, Trump claimed a deduction for a charitable easement that precluded development of much of the property. Happening just a year later (and possibly foreseen), this would only add to the difficulty of establishing the requisite profit motive.

A further instance of potential fraud relates to deducting legal fees that may have related to Trump’s 2016 presidential campaign, rather than to his business activities. This may even include the hush money payment to Stormy Daniels, if it was improperly amalgamated with actual legal fees.

Like the Times article itself, I am focusing here on federal income tax issues. However, state and local income tax liability (in New York State and New York City) is also an issue in many of the fact patterns described in the article, extending not just to amounts due but to the owing of interest and penalties.

8) Trump appears to have used substantial foreign losses to offset tax that would otherwise have been due on domestic source income. This tax use of foreign losses is legally permissible, under appropriate circumstances that may have been met here, but it raises an admittedly secondary issue about the effect of any “overall foreign losses” that he may have claimed, with respect to his money-losing foreign operations, on any foreign tax credits that he may have claimed on his U.S. tax returns. In 2017, for example, when he apparently voluntarily paid $750 in U.S. taxes – based, the Times says, on his deliberately not using all available tax credits – he and his companies paid more than $300,000 in foreign taxes to Panama, India, and the Philippines. These might ordinarily be creditable, but only to offset the U.S. tax that would otherwise have been due on net-positive foreign source income. It would be worth checking whether his returns properly treated foreign tax credits, in light of the foreign losses.

9) The 2013 Miss Universe Pageant in Moscow raises troubling issues (albeit not tax-related) about the potential funneling of cash from a Putin associate to Trump. According to the Times article, Trump and NBC, who were 50 percent partners in his Miss Universe pageants, split $4.7 million of profits in 2013, whereas they lost $2 million in 2012 and $3.8 million in 2014. A key reason for the 2013 profit was that the Agaralov family – Russian billionaires, closely tied to Putin, who later helped set up the 2016 Russia meeting about dirt on Hillary Clinton – paid in $12 million for the event and took out only $2 million. Perhaps the Agaralovs simply made a bad business investment, but it looks like it could also have been a way of funneling cash to Trump (albeit, shared by NBC) for other reasons.

10) There is an old saying that one can never detect tax fraud purely on the face of a tax return – but this comes closer than usual. – Even wholly fraudulent tax returns generally do not proclaim their fraudulence on their face. The Trump returns presumably are no exception, and much of the evidence suggesting possible fraudulence was developed in the Times article through the use of other sources. Nonetheless, with that aid, the Times article makes a powerful initial case, clearly meriting investigation, that substantial tax fraud may have occurred.

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