Donald Trump, tax scammer extraodinaire
A big, dirty secret from Donald Trump’s tax returns has been exposed
By Max Ehrenfreund November 1 at 5:24 PM
washingtonpost.com
Unlike past presidential nominees, Donald Trump has declined to release his complete tax returns, which has fostered fervid speculation about what they might contain — especially since the New York Times published a few pages from Trump's 1995 tax documents last month.
Those documents suggested that the Republican nominee could have avoided paying taxes on as much as $916 million in income. The question was how he could do so legally. Experts had put forward a range of intricate theories, and the new documents disclosed by the Times on Monday point to one explanation for how Trump sheltered the bulk of that money.
It appears Trump gave his creditors shares of his failing businesses to avoid taxes on hundreds of millions of dollars they granted him in debt relief, a practice that has since been explicitly outlawed, the Times explained.
In short, “He made it up,” said legal scholar Edward Kleinbard of the University of Southern California.
Some had missed Trump's maneuver, Kleinbard said, because they did not think that it would have been allowed at the time.
“The reason nobody thought of it is that nobody thought that it existed,” Kleinbard said. “The real surprise here is that he apparently got away with it.”
Trump declined to comment for the Times's story.
In a letter published by the Times, lawyers warned the New York businessman that his strategy would be legally risky. He was audited by the Internal Revenue Service, which has not commented on the result of its investigation.
The details of Trump's reported maneuver are somewhat complicated, but the essential idea is fairly straightforward. The documents reviewed by the Times suggest Trump worked around a couple of basic principles of U.S. taxation.
The maneuver began when Trump's businesses borrowed money from banks to purchase the Plaza Hotel in New York and his casinos in Atlantic City. Neither Trump nor his businesses owed taxes on the cash infusion because the tax code doesn't consider debt to be taxable income.
For instance, when someone takes out a mortgage, the money is not counted as income, even though the bank has just given the borrower hundreds of thousands of dollars. Mortgages do not actually make borrowers better off, because the borrowers are expected to return the money eventually.
“We don’t tax proceeds on borrowing, because you’ve also assumed a liability,” said Steven M. Rosenthal, an attorney at the Tax Policy Center. “Your net position hasn’t changed.”
If the bank forgives the loan, however, then the amount that is forgiven does count as income under federal law. A canceled debt is equivalent to a gift from the bank, and it is subject to income taxes.
That is what happened to Trump. When the casino and hotel investments failed catastrophically, Trump's businesses declared bankruptcy, and his creditors were forced to forgive much of the debt.
“He borrowed other people's money and spent it in spectacular fashion,” Rosenthal said.
From the point of view of Trump's income, it all came out in the wash. He had lost a lot of money, but he had also persuaded the banks to write down what he owed them — a gift that largely wiped out his losses.
Trump then claimed on tax returns that he had lost the money, but he did not acknowledge the income in the form of canceled debts. He likely did not have to pay taxes on that money — which totaled at least $425 million, Rosenthal estimates based on his review of the documents obtained by the Times.
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