Did Trump skirt gift tax laws last year?

Law schol­ars David Herzig and Brid­get Craw­ford on gift taxes

The Washington Post Sunday - - OUTLOOK - Twit­ter: @pro­fes­sor­tax @ProfBCraw­ford

Pres­i­dent Trump clearly doesn’t want to re­lease his in­come tax re­turns to the public. Mem­bers of the public and com­men­ta­tors have pro­gressed through stages of out­rage, spec­u­la­tion and ac­cep­tance that they’ll never see the goods, while oth­ers have made at­tempts to pry the doc­u­ments free (such as pro­posed leg­is­la­tion in New York and other states that would re­quire pres­i­den­tial can­di­dates to re­lease their re­turns). But Trump’s most press­ing tax prob­lem may come from some­where else en­tirely: a pre-elec­tion trans­fer of prop­erty to a com­pany con­trolled by his son that could run afoul of the IRS.

Ac­cord­ing to a re­cent story by ProPublica and the Real Deal, in April 2016, a lim­ited li­a­bil­ity com­pany man­aged by Trump sold two con­do­minium apart­ments to a lim­ited li­a­bil­ity com­pany man­aged by Eric Trump. They were on the 13th and 14th floors of a 14-story, full-ser­vice, door­man build­ing at 100 Cen­tral Park South in Man­hat­tan. This is a prime Mid­town neigh­bor­hood, yet the sale price for each condo was just $350,000. Al­though the con­di­tion and square footage of apart­ments 13G and 14G are not read­ily known, a pop­u­lar real es­tate web­site shows that G-line apart­ments on both the fifth and eighth floors are one-bed­room, one-bath units of just over 500 square feet. Two years be­fore the Trump trans­ac­tion, apart­ment 5G sold for $690,000. Maybe the two units in ques­tion were in ter­ri­ble shape, but two months be­fore the sale to Eric Trump’s LLC, they were ad­ver­tised for $790,000 (on the 13th floor) and $800,000 (on the 14th floor), ac­cord­ing to ProPublica.

If a sale be­tween a par­ent and child is for fair mar­ket value, it does not trig­ger a gift tax. But if a par­ent sells two ex­pen­sive con­do­mini­ums to his son at a highly dis­counted price, for ex­am­ple, then the par­ent makes a tax­able gift in part. In that case, the seller must pay a gift tax of up to 40 per­cent. (In this case, that might have run the pres­i­dent some­where in the neigh­bor­hood of $350,000.)

Each tax­payer has a $5.49 mil­lion life­time ex­emp­tion (a mar­ried cou­ple has a com­bined $10.98 mil­lion ex­emp­tion), mean­ing you can give away that much money with­out in­cur­ring the tax. To claim that a trans­ac­tion is cov­ered by the ex­emp­tion, though, you must file a gift tax re­turn. Well-ad­vised wealthy in­di­vid­u­als typ­i­cally fully use their $5.49 mil­lion ex­emp­tion by mak­ing gifts to fam­ily mem­bers as soon as they have the as­sets to do so.

So if Don­ald Trump sold the apart­ments to his son’s com­pany for less than fair mar­ket value, he needed to file a gift tax re­turn, even if he wanted to claim that the sale was not tax­able be­cause of the ex­emp­tion. The gov­ern­ment wants to know what gifts peo­ple make, be­cause gifts are taken into ac­count when deter­min­ing the value of a per­son’s tax­able es­tate at death. If Trump had al­ready used his ex­emp­tion, he would owe gift tax on the dif­fer­ence be­tween the fair mar­ket value of the apart­ments and the amount paid by Eric Trump.

It’s pos­si­ble the pres­i­dent filed the right pa­per­work. But with­out a full re­lease of his tax re­turns, the avail­able ev­i­dence sug­gests he hasn’t. Ac­cord­ing to New York City prop­erty records, Trump paid $13,000 in state and lo­cal trans­fer taxes for these two sales. That is the cor­rect amount for a sale be­tween strangers. But if he paid state and lo­cal trans­fer taxes, that means he didn’t treat the trans­fers as gifts. And on the real es­tate forms filed in New York, Trump didn’t check any of the boxes in­di­cat­ing that these were sales be­tween rel­a­tives or sales of less than the en­tire prop­erty. It would seem, then, that he treated the trans­ac­tions as if they were sales for fair mar­ket value to a stranger.

Since Trump did not cast the trans­ac­tions as gifts for state and lo­cal tax pur­poses, it is al­most cer­tain that he did not do so for fed­eral gift tax pur­poses, ei­ther. In our com­bined 40 years of ex­pe­ri­ence as tax lawyers, we are un­aware of a sit­u­a­tion in which a tax­payer would re­port a trans­ac­tion as a fair mar­ket value be­tween strangers on the state level (and thus in­cur real es­tate taxes) but treat it as a gift at the fed­eral level (and thus in­cur an additional tax). It’s fair to in­fer that Trump didn’t fol­low the rules.

Will­ful fail­ure to file a tax re­turn, in­clud­ing a gift tax re­turn, is a mis­de­meanor, pun­ish­able by a $25,000 fine, im­pris­on­ment of up to one year or both. Fraud­u­lent fail­ure to file — mean­ing an overt act of eva­sion — may el­e­vate will­ful fail­ure to a felony. That car­ries a fine of up to $100,000, im­pris­on­ment of up to five years or both, along with the costs of prose­cu­tion. Ac­cord­ing to in­ter­nal guid­ance pro­vided by the IRS to its agents, fac­tors in­di­cat­ing po­ten­tial fraud in­clude re­peated con­tacts by the IRS, fail­ure to co­op­er­ate with IRS agents or em­ploy­ees, knowl­edge of the fil­ing re­quire­ments, of­fer­ing im­plau­si­ble or in­con­sis­tent ex­pla­na­tions, sub­stan­tial tax li­a­bil­ity, and re­fusal or in­abil­ity to ex­plain fail­ure to file.

Pres­i­den­tial in­come tax re­turns are sub­ject to manda­tory au­dit. The IRS can de­cide whether Trump’s trans­fers were truly gifts. If they were, which seems likely, Trump’s fail­ure to file a gift tax re­turn opens him up to penal­ties and fines, or even crim­i­nal charges. Per­haps such a charge wouldn’t go any­where, since the pres­i­dent must con­sent to be­ing in­dicted by a fed­eral pros­e­cu­tor. But tax law would per­mit them. David Herzig, the Michael and Dianne Swygert re­search fel­low at Val­paraiso Univer­sity School of Law, is cur­rently a vis­it­ing pro­fes­sor at Loy­ola Los An­ge­les School of Law. Brid­get Craw­ford is a pro­fes­sor at the Elis­a­beth Haub School of Law at Pace Univer­sity.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.