To convict Donald Trump on felony charges of falsifying business records under New York law, Manhattan District Attorney Alvin Bragg will have to show that the former president acted with an intent to commit or conceal another crime. In a state trial court  released on May 16, the DA’s office identified several state and federal offenses that might serve as the “other crime” in its prosecution of Trump, including one state tax offense: knowingly supplying or submitting materially false or fraudulent information in connection with a tax return. The recent filing confirms speculation—reported in the New York Times last month—that the DA’s office might invoke tax fraud allegations in its prosecution of the ex-president. But will a tax fraud theory hold water in state court?  

A tax fraud theory would allow Bragg to avoid some of the difficulties that he may encounter if he argues that Trump’s “other crime” was a violation of federal campaign finance law—the theory that has drawn the most public attention thus far. But the tax fraud theory runs into factual and legal hurdles of its own—arguably the most significant of which is the difficult-to-satisfy willfulness standard for tax crimes. Careful scrutiny of the tax fraud theory can shed light on the strategic choices that prosecutors face as the case against Trump inches slowly toward trial. All this comes with the significant caveat that the tax fraud theory may become stronger—or weaker—as the case develops and more facts come into public view. But already we can identify some of the critical questions that prosecutors will need to answer if they choose to argue that tax fraud was the all-important “other crime.” 

The Allegations

Let’s start with the now-familiar allegations in the statement of facts appended to Bragg’s indictment. According to the Manhattan DA, Trump sought to pay $130,000 to an adult film actress (whom we now know to be Stormy Daniels) to prevent her from publicizing what she says was a consensual sexual encounter. To conceal the scheme, Trump routed the payment through attorney Michael Cohen. 

In October 2016, according to the indictment, Cohen paid Daniels $130,000 through a shell corporation, with the understanding that Trump would later reimburse Cohen. It appears that Cohen and Trump Organization chief financial officer Allen Weisselberg believed that Cohen would have to include the reimbursement in income for tax purposes. On the assumption that Cohen’s marginal income tax rate would be 50%, the Trump Organization paid Cohen double the amount that Cohen had remitted to Daniels. So the $130,000 payment from Cohen to Daniels translated into a $260,000 payment from the Trump Organization to Cohen. That $260,000 was then added to other reimbursements, gross-ups, and a year-end bonus for Cohen, summing to a total payment of $420,000. The Trump Organization made payments to Cohen in 11 almost-monthly installments over the course of 2017. 

(The assumption of a 50% marginal tax rate might seem high to some, given that the top statutory federal income tax rate at the time was only 39.6%. But with the Medicare tax add-on, state and city income taxes, and various deductions and phaseouts, 50% was a very reasonable estimate of the marginal rate in 2016 and 2017 for a New York City lawyer with a high-six-figure income.) 

According to the Manhattan DA, Cohen and the Trump Organization produced a series of invoices and business ledger entries memorializing their arrangement and characterizing the payments as legal fees. The indictment alleges that Trump—by causing these records to be made—committed the crime of falsifying business records, which is normally a misdemeanor. For falsification of business records to rise to a felony under New York law, it must have been done with “an intent to commit another crime or to aid or conceal the commission thereof.” A crucial question for Bragg’s felony case against Trump, then, is whether the scheme laid out in the indictment amounted to a federal or state tax crime.

The Tax Law Framework

If Trump had paid $130,000 directly to Daniels in exchange for her silence about a sexual encounter, the tax treatment would be straightforward: the payment would have been income to Daniels, and it would not have been a deductible expense for Trump. The tax treatment wouldn’t depend on whether Trump sought to influence the 2016 election by hiding information from voters (as prosecutors have suggested) or whether his goal was to protect his family from a potentially embarrassing story (as his lawyers have argued). Campaign expenditures and family expenses are both nondeductible. And routing the payment through Cohen doesn’t transform a nondeductible campaign or family expense into a deductible business expense.

A more nuanced analysis would apply if Trump claimed that his motive was to protect the Trump brand (as a business interest) from damage, but the result almost certainly would be the same: no deduction. Although the general rule is that investments in one’s own good name can’t be written off as ordinary and necessary business expenses, the Tax Court—in unusual circumstances—has permitted taxpayers to deduct the cost of protecting their images. Perhaps most famously, the court allowed country music star Conway Twitty to deduct the cost of repaying investors in his failed burger enterprise because a “flawless financial and personal reputation” was integral to Twitty’s musical success. But it would be difficult for the twice-divorced Trump to argue that a reputation for marital fidelity was integral to the viability of his commercial ventures. If anything, the former Miss Universe owner and reality TV host had capitalized on his playboy image. In any event, Trump’s lawyers haven’t asserted that the payment to Daniels was motivated by a business purpose, so whether the payment was deductible on that ground is—for now—a non-issue.

In contrast to the straightforward treatment of a payment from Trump to Daniels, Cohen’s role as a middleman introduces a twist. Documents from Cohen’s criminal case indicate that Cohen was an employee of the Trump Organization—serving as executive vice president and special counsel to Trump, until January 2017—after which point he launched his own legal and consulting practice and would have been an independent contractor with respect to Trump. Under Treasury regulations, reimbursements must be included in an employee’s gross income—and are subject to employment taxes—unless the reimbursement arrangement qualifies as an “accountable plan.” An accountable plan must satisfy specific regulatory criteria that the Cohen reimbursement doesn’t appear to meet, including a requirement that expenses be substantiated on a timely basis and a requirement that amounts in excess of expenses be returned to the employer. And as a general rule, compensation to a former employee for services performed while an employee must be treated the same as wages to a current employee. 

Thus, it appears, based on all the publicly available information, that the Trump Organization should have reported all $260,000 attributable to the Daniels payment—the $130,000 reimbursement plus the $130,000 gross-up—as wages or other compensation on Cohen’s Form W-2. The same analysis also applies to the rest of the $420,000 in payments to Cohen in 2017, which appear to represent reimbursements, gross-ups, and compensation dating to Cohen’s time as an employee. By mischaracterizing the payments as legal fees for services rendered after Cohen left the Trump Organization’s employ, the Trump Organization seems to have skirted its Federal Insurance Contributions Act (FICA) tax and wage withholding obligations. (For 2017, the employer-side FICA tax was 7.65% up to the $127,200 wage threshold and 1.45% over that.)  

If Cohen had incurred expenses and performed services as an independent contractor rather than an employee of the Trump Organization, he still would have had to include the $130,000 gross-up—and likely all $260,000—in gross income. The Tax Court has said that “reimbursements for expenses are includable in gross income, but the expenses, if deductible and substantiated, may be deducted.” In some cases, independent contractors have been permitted to exclude reimbursements entirely—rather than including the reimbursements as income and taking an offsetting deduction—but the rules for employee reimbursements are more stringent.  

The District Attorney’s comments in his April press conference last week suggest a different tax fraud theory. “[T]hey planned to mischaracterize the repayments to Mr. Cohen as income to the New York state tax authorities,” Bragg told reporters. The DA’s filing this month repeats that theory, alleging that Trump “disguis[ed] reimbursement payments by doubling them and falsely characteriz[ed] them as income for tax reasons.” As I see it, reimbursements to an employee that don’t meet the accountable plan criteria are properly characterized as income. The potential problem is that the reimbursements, along with the gross-up and bonus, should have been reported as supplemental wages to a former employee, which are therefore subject to wage withholding and employment taxes. 

With that in mind, Cohen possibly could have deducted his $130,000 payment to Daniels—paying hush money to adult film stars isn’t a typical expense of a New York attorney, but it’s arguably an ordinary and necessary expense of being a fixer. Since Cohen was an employee at the time he incurred the expense, his deduction would have been a miscellaneous itemized deduction subject to the “2-percent floor,” meaning that only a portion of the expense would have been deductible (unless Cohen had significant other miscellaneous itemized deductions). The full gross-up for taxes suggests, though, that Cohen and Weisselberg didn’t expect Cohen to deduct the payment.

Where Was the Tax Fraud?

We don’t know for sure how the Trump Organization and Cohen treated the $260,000 that represented a reimbursement for the hush money payment plus a gross-up for taxes. But if the Trump Organization characterized the payment as a legal fee to an independent contractor rather than compensation to a former employee, then it would appear to be out of compliance with its employment tax and wage withholding obligations. If Cohen paid self-employment tax on the $260,000, then the net effect would be roughly a wash from the government’s perspective, but there is no tax law principle of “two wrongs make a right” when the mischaracterizations occur on different taxpayers’ returns.

We also don’t know whether Trump deducted the portion of Cohen’s fee that reflected the reimbursement and gross-up for the hush money payment. I haven’t found a smoking-gun entry in Trump’s now-released tax filings from 2016 and 2017, but there is no specific line on a tax return for hush money payments—even if Trump did claim a deduction, it would be difficult to distinguish the payments to Cohen from all of the other business expenses reported by Trump and his entities for those years. Although Trump reported no taxable income for 2016 and 2017, extra deductions in those years would have increased his loss carryforwards and reduced his tax liability in 2018. Trump’s personal attorney, Joe Tacopina, told NBC’s Meet the Press in March that Trump did not deduct the reimbursements to Cohen. If that’s correct—and if Trump didn’t deduct the gross-up either—then a tax fraud theory would have to rest on something other than an improper deduction.

Even if the Trump Organization violated federal and state tax law—either by mischaracterizing employee compensation as a payment to an independent contractor or deducting what were nondeductible personal or campaign expenses—the tax fraud theory would face three more obstacles.

First, and most importantly, not all tax law violations are crimes. Criminal tax fraud—federal and state—requires “willfulness,” which the Supreme Court has defined as the “intentional violation of a known legal duty.” The former president has undermined his own case by boasting that he “know[s] the details of taxes better than anybody,” including “the greatest C.P.A.” But even if Trump knew the relevant tax rules, his lawyers might argue that at the time of the reimbursement, Trump already was president of the United States, and given his responsibilities as leader of the free world, attending to the proper tax treatment of the payments to Cohen might have simply slipped his mind. That might be negligence on Trump’s part, but criminal tax fraud requires more than mere negligence.

Second, the DA’s Office filing released on May 16 makes no mention of a possible employment tax or wage withholding violation. Having opened with the theory that the reimbursement of Cohen wasn’t “income” to the fixer, the DA’s Office would now need to switch to a different tax law theory—that the reimbursement was indeed “income” to Cohen but should have been reported as employee compensation on a Form W-2 subject to employment taxes and wage withholding. To be sure, the DA’s Office continues to maintain that it is not limiting itself to any particular theory of what “other crime” Trump might have committed. But as the prosecution progresses, it will become harder and harder for the DA’s Office to pivot away from the “not income” theory to the alternative (and in my view more viable) theory that the payment to Cohen was income to the attorney—and income that should have been reported as employee compensation. 

Third, even if Trump did commit criminal tax fraud by willfully mischaracterizing wages as non-employee compensation or by deducting hush money payments as business expenses, the Manhattan DA still would need to show that the commission or concealment of tax fraud motivated the business records falsification. One could commit another crime as a result of business records falsification without the other crime being a motive for falsification.

For example, imagine that a corporate executive drives to the office at night to make a false entry into his corporation’s business records—and that the executive is drunk at the time he makes the trip. Driving with a blood alcohol content of 0.08 or higher is a crime in New York, but no one would say that the executive falsified business records with “an intent to commit another crime.” The other crime—in this example, driving while intoxicated—was a side effect, not a goal, of the business records falsification.

Trump’s lawyers might make a similar argument if the Manhattan DA pursues the tax fraud theory. If Trump falsified business records in order to hide hush money payments from election authorities or from his own family—and, to keep the story straight, he also mischaracterized the payments for tax purposes—then arguably he is in the same boat as the drunk-driving executive in the previous paragraph. The tax fraud was a means, not an end, of his business records falsification scheme.

Trump’s lawyers would likely add that even if he did deduct the hush money payments as business expenses, the entire scheme resulted in the tax authorities collecting more—not less—in total taxes, at least in present value terms. If Trump had paid $130,000 directly to Daniels, Cohen would not have had to include the $130,000 in income. Instead, Cohen appears to have included $260,000 in income on account of the Daniels payment, resulting in approximately $130,000 in additional income and self-employment taxes. If Trump claimed a corresponding $260,000 deduction and faced the same 50% marginal rate, then the value of the deduction would have been $130,000, netting out Cohen’s additional taxes. But since Trump wouldn’t have received any tax benefit until tax year 2018 (when he used up his loss carryforwards), the whole arrangement accelerated tax revenue—to the government’s benefit. And if Trump didn’t deduct the payments, then the benefit to the government would have been even greater.

Again, the absence of a tax loss wouldn’t absolve Trump of a tax law violation. But it would pose a problem for the theory that tax fraud was a motivation for Trump’s falsification of business records. This would have been just about the silliest tax fraud scheme imaginable, because even if it had succeeded, it would have resulted in its participants paying more tax, not less. And since Cohen passed his tax costs along to Trump through the gross-up, it’s hard to see how Trump himself would have saved any money here.

To be sure, the Manhattan DA might argue that tax fraud was more central to Trump’s motivations for falsifying business records than the previous paragraphs let on. Trump’s wife Melania had to co-sign the couple’s joint returns, and Trump might have anticipated that the returns would eventually become public. Although it seems rather doubtful that Melania or anyone else would have noticed if Trump had paid $130,000 directly to Daniels without deducting it anywhere, there is arguably a sense in which the tax mischaracterization was part and parcel of a broader scheme to deceive family members and voters. And willfully filing false tax statements is a crime even if it doesn’t ultimately cost the government any money.

In sum, a tax fraud theory would be simpler in some respects than the argument that Trump falsified business records in order to conceal a campaign finance violation—the tax fraud theory wouldn’t hinge on whether Trump’s motivation was political or personal, and it wouldn’t implicate complicated questions about the interaction between federal campaign finance law and state criminal law. But the tax fraud theory has its own vulnerabilities, which may turn out to be fatal flaws. Showing that Trump not only violated but willfully violated the tax laws will be, at the very least, a steeply uphill battle.