Trump used now-barred tricks to duck taxes
‘Stretched’ loopholes aided him for losing other people’s funds
Donald Trump proudly acknowledges he did not pay a dime in federal income taxes for years on end. He insists he merely exploited tax loopholes legally available to any billionaire — loopholes he says Hillary Clinton failed to close during her years in the U.S. Senate. “Why didn’t she ever try to change those laws so I couldn’t use them?” Trump asked during a campaign rally last month.
But newly obtained documents show that in the early 1990s, as he scrambled to stave off financial ruin, Trump avoided reporting hundreds of millions of dollars in taxable income by using a tax avoidance maneuver so legally dubious his own lawyers advised him that the Internal Revenue Service would likely declare it improper if he were audited.
Thanks to this one maneuver — which was later outlawed by Congress — Trump potentially escaped paying tens of millions of dollars in federal personal income taxes. It is impossible to know for sure because Trump has declined to release his tax returns, or even a summary of his returns, breaking a practice followed by every Republican and Democratic presidential candidate for more than four decades.
Pushing edge of envelope
Tax experts who reviewed the newly obtained documents for the New York Times said Trump’s tax avoidance maneuver, conjured from ambiguous provisions of highly technical tax court rulings, clearly pushed the edge of the envelope of what tax laws permitted at the time.
“Whatever loophole existed was not ‘exploited’ here, but stretched beyond any recognition,” said Steven Rosenthal, a senior fellow at the nonpartisan Tax Policy Center who helped draft tax legislation in the 1990s.
Moreover, the tax experts said the maneuver trampled a core tenet of American tax policy by conferring enormous tax benefits to Trump for losing vast amounts of other people’s money — in this case, money investors and banks had entrusted to him to build a casino empire in Atlantic City.
As that empire floundered in the early 1990s, Trump pressured his financial backers to forgive hundreds of millions of dollars in debt he could not repay. While the cancellation of so much debt gave new life to Trump’s casinos, it created a potentially crippling problem with the IRS. In the eyes of the IRS, a dollar of canceled debt is the same as a dollar of taxable income. This meant Trump faced the painful prospect of having to report the hundreds of millions of dollars of canceled debt as if it were hundreds of millions of dollars of taxable income.
But Trump’s audacious taxavoidance maneuver gave him a way to simply avoid reporting any of that canceled debt to the IRS. “He’s getting something for absolutely nothing,” John Buckley, who served as the chief of staff for Congress’ Joint Committee on Taxation in 1993 and 1994, said in an interview
The new documents, which include correspondence from Trump’s tax lawyers and bond offering disclosure statements, might also help explain how Trump reported a staggering loss of $916 million in his 1995 tax returns — portions of which were first published by the Times in October.
U.S. tax laws allowed Trump to use that $916 million loss to cancel out an equivalent amount of taxable income. But tax experts have been debating how Trump could have legally declared a deduction of that magnitude at all. Among other things, they have noted that Trump’s huge casino losses should have been offset by the hundreds of millions of dollars in taxable income he surely must have reported to the IRS in the form of canceled casino debt.
By avoiding reporting his canceled casino debt in the first place, however, Trump’s $916 million deduction would not have been reduced by hundreds of millions of dollars. He could have preserved the deduction and used it instead to avoid paying income taxes he might otherwise have owed on books, TV shows or branding deals. Under the rules in effect in 1995, the $916 million loss could have been used to wipe out more than $50 million a year in taxable income for 18 years.
Trump declined to comment for this article.
“Your email suggests either a fundamental misunderstanding or an intentional misreading of the law,” Hope Hicks, Trump’s spokeswoman, said in a statement. “Your thesis is a criticism, not just of Mr. Trump, but of all taxpayers who take the time and spend the money to try to comply with the dizzyingly complex and ambiguous tax laws without paying more tax than they owe. Mr. Trump does not think that taxpayers should file returns that resolve all doubt in favor of the IRS. And any tax experts that you have consulted are engaged in pure speculation. There is no news here.”
It is unclear who first glimpsed a way for Trump to dodge a huge tax bill. But the basic maneuver he used was essentially a new twist on a contentious strategy corporations had been using for years to avoid taxes created by canceled debt.
The strategy — known among tax practitioners as a “stock-for-debt swap” — relies on mathematical sleight of hand. Say a company can repay only $60 million of a $100 million bank loan. If the bank forgives the remaining $40 million, the company faces a large tax bill because it will have to report that canceled $40 million debt as taxable income.
Tax lawyers found a way around this inconvenience. The company would swap stock for the $40 million in debt it could not repay. This way, it would look as if the entire $100 million loan had been repaid, and presto: There would be no tax bill due for $40 million in canceled debt.
‘Double dipping big time’
Trump’s tax avoidance violated a central principle of U.S. tax law, said Buckley, the former chief of staff for Congress’ Joint Committee on Taxation who later served as chief tax counsel for Democrats on the House Ways and Means Committee.
“He deducted somebody else’s losses,” Buckley said. By that Buckley means that only the bondholders who forgave Trump’s unpaid casino debts should have been allowed to use those losses to offset future income and reduce their taxes. That Trump used the same losses to reduce his taxes ultimately increases the tax burden on everyone else, Buckley explained. “He is double dipping big time.”
In any event, Trump can no longer benefit from the same maneuver. Just as Congress acted in 1993 to ban stock-for-debt swaps by corporations, it acted in 2004 to ban equity-for-debt swaps by partnerships.
Among the members of Congress who voted to finally close the loophole: Sen. Hillary Clinton of New York.