[Special] Editorial: Donald Trump's Tax Scandal

You may have seen that the New York Times dropped a bombshell on Saturday. If you missed it, allow me to share. In an article called Trump Tax Records Obtained by The Times Reveal He Could Have Avoided Paying Taxes for Nearly Two Decades, written by David Barstow, Susanne Craig and Megan Twohey, the Times leads off with this:

Donald J. Trump declared a $916 million loss on his 1995 income tax returns, a tax deduction so substantial it could have allowed him to legally avoid paying any federal income taxes for up to 18 years, records obtained by The New York Times show.

The 1995 tax records, never before disclosed, reveal the extraordinary tax benefits that Mr. Trump, the Republican presidential nominee, derived from the financial wreckage he left behind in the early 1990s through mismanagement of three Atlantic City casinos, his ill-fated foray into the airline business and his ill-timed purchase of the Plaza Hotel in Manhattan.

Tax experts hired by The Times to analyze Mr. Trump’s 1995 records said that tax rules especially advantageous to wealthy filers would have allowed Mr. Trump to use his $916 million loss to cancel out an equivalent amount of taxable income over an 18-year period.

While the idea of a millionaire or billionaire going nearly two decades without paying taxes would leave a bad taste in the mouth of anyone but the most strident Libertarian or Trump supporter, it may be more than just gaming the system ("that makes me smart," Trump quipped in response to Hillary Clinton's speculation that maybe Trump "didn't pay any federal income tax"). In fact, there might be something inherently dishonest, and possibly fraudulent, about what Trump has done.


Josh Marshall of Talking Points Memo explains:

We've known for years that the collapse of Trump's debt ridden casino empire in Atlantic City almost destroyed him more than two decades ago. He was able to wriggle through by a number of angles and connivances. But one of the biggest was that he was able to convince his lenders that they'd be even worse off if he was cleaned out and removed from the picture entirely. Convincing them that he was in essence too big or too important to fail, they took major 'haircuts' (losses) that allowed him to survive. He got others to absorb the impact of the losses, repackaged other parts and put them through bankruptcy, etc.

The key question is how much of the Atlantic City losses did Trump absorb in real terms? How much of those losses were forgiven or written off formally? And perhaps most importantly, how much of those losses were squirreled away or 'parked' in places which effectively put them in a sort of limbo or suspended animation - neither truly absorbed nor forgiven?

Here's where the Times revelation comes into play.

If you sustain real capital losses, you can apply those losses to cancel out future income/profits and reduce your tax liability. But if your losses are canceled out by debt forgiveness, the debt forgiveness is counted as income. That cancels out the losses that would provide you with the tax benefit. In other words, you can't have your cake and eat it too.

But there are many ways to be crafty and end up with both - some of those may simply be aggressive and sleazy and others may be clearly illegal. Bigly. The most obvious way would be to create some new business entity which you technically continued to owe vast sums of money to but which never actually tried to collect - in other words, you 'park' your debt somewhere it will never be heard from again. Any place on the spectrum would go a long, long way to explaining both Trump's abject refusal to release his tax returns and almost perennial audits. 

Going back to the New York Times, a June 11, 2016 article by Russ Buettner and Charles V. Bagli called How Donald Trump Bankrupted His Atlantic City Casinos, but Still Earned Millions went into details about how Trump crashed and burned in the New Jersey gaming city but still came out ahead of everyone else:

His casino companies made four trips to bankruptcy court, each time persuading bondholders to accept less money rather than be wiped out. But the companies repeatedly added more expensive debt and returned to the court for protection from lenders.

After narrowly escaping financial ruin in the early 1990s by delaying payments on his debts, Mr. Trump avoided a second potential crisis by taking his casinos public and shifting the risk to stockholders.

And he never was able to draw in enough gamblers to support all of the borrowing. During a decade when other casinos here thrived, Mr. Trump’s lagged, posting huge losses year after year. Stock and bondholders lost more than $1.5 billion.

All the while, Mr. Trump received copious amounts for himself, with the help of a compliant board. In one instance, The Times found, Mr. Trump pulled more than $1 million from his failing public company, describing the transaction in securities filings in ways that may have been illegal, according to legal experts.

The Times was not the first to report this, of course. As noted by this blog, Kevin Drum of Mother Jones quoted Timothy O'Brien, author of TrumpNation, a book which so enraged Trump he sued O'Brien for undervaluing his wealth. The case was dismissed by the Courts. Drum's quotation of O'Brien explains:

…In one fell swoop someone else became responsible for the debts that almost sank Donald…Exactly what investors thought they might get for their Trump Hotels investment wasn't entirely clear. Donald had already demonstrated that casinos weren't his forte, and investors were buying stock in a company that was immediately larded with debts that made it difficult, if not impossible, to upgrade the operations.

[...]

…Just a few months after Trump Hotels absorbed the Taj, Donald sold his last Atlantic City casino, the Castle, to the public company. That is, Donald sold his own casino, with all of its heavy debts, to a public company he controlled. The $490 million price tag for the Castle was about $100 million more than analysts thought it was worth…sending the company's stock into a nosedive from which it never recovered.

O'Brien's commentary was not just limited to his book. Indeed, O'Brien published an editorial on May 12, 2016, with Bloomberg News. entitled I Saw Trump's Tax Returns. You Should, Too." As part of the aforementioned lawsuit, O'Brien had access to Trump's financial records, including his tax returns, as part of the discovery process. However, the documents were under protective order, so O'Brien is legally not allowed to disclose what he learned. Nevertheless, he coyly threw some ideas out there, hinting at the scandal which is now breaking, not to mention the charity controversies (which have been reported by David Fahrenthold of the Washington Post) and the Russian conflict of interest. Like some mythical story about a man who knows all the answers but cannot speak, O'Brien could only drop hints, but his hints have already proven to be prophetic,  In O'Brien's own words:

1) Income: Trump has made the size of his fortune a centerpiece of his presidential campaign, implying that it’s a measure of his success as a businessman. He has also correctly noted that the income shown on his tax returns isn’t a reflection of his total wealth. Even so, income is a basis for assessing some of the foundations of any individual’s wealth -- and would certainly reflect the financial wherewithal of the businesses in which Trump is involved.

After Fortune’s Shawn Tully dug into Trump’s financial disclosures with the Federal Election Commission and an accompanying personal balance sheet his campaign released, he noted in March that Trump “appears to have overstated his income, by a lot, which could be the reason he has so far tried to avoid releasing his returns.” Tully said that Trump apparently boosted his income in the documents by conflating his various businesses’ revenue with his personal income. Trump didn’t respond to Tully’s assessment, but he could clear up all of that by releasing his tax returns.

2) Business Activities: Trump has long claimed that his company, the Trump Organization, employs thousands of people. He has also criticized Fortune 500 companies for operating businesses overseas at the expense of jobs for U.S. workers. Trump’s returns would show how active he and his businesses are globally -- and would help substantiate the actual size and scope of his operation.

3) Charitable Giving: Trump has said that he’s a generous benefactor to a variety of causes -- especially war veterans -- even though it’s been hard to find concrete evidence to support the assertion. Other examples of major philanthropic largess from Trump have also been elusive. Trump could release his tax returns and put the matter to rest.

4) Tax Planning: There’s been global attention focused on the issue of how politicians and the wealthy use tax havens and shell companies to possibly hide parts of their fortunes from authorities. If released, Trump’s returns would make clear whether or not he used such vehicles.

5) Transparency and Accountability: Trump is seeking the most powerful office in the world. Some of the potential conflicts of interest or financial pressures that may arise if he reaches the White House would get an early airing in a release of his tax returns.

We know that Donald Trump failed hard in Atlantic City, bringing down many people's fortunes in the process. We also know that, even before the 1990s, Trump used business losses to avoid paying federal income taxes. It's not really up for dispute that Trump is a genius at salvaging himself from his horrible business transactions and investments. What is more interesting is whether Trump found a way to allow other people or businesses to inherit his financial losses while simultaneously convincing the federal government to allow him to claim those same losses in order to avoid paying personal income tax. To quote Allan Sloan of The Washington Post's Wonkblog ("The Most Shocking Part of Donald Trump’s Tax Records Isn’t the $916 Million Loss Everyone’s Talking About"):

I’m guessing, but I can’t tell for sure — there’s not enough information — that the loss has to do with the collapse of his empire. I don’t understand how Trump, who had very little of his own cash invested in his projects in the 1990s but did personally guarantee part of their debt, could end up with tax losses of that magnitude. They’re almost certainly paper losses rather than out-of-pocket losses.

If that is indeed the case, we are not only looking at a repugnant example of a wealthy person avoiding paying taxes while working and middle class people pay their fair share. No, we may well be looking at a scheme which could have criminal implications for Trump, or at least, criminal implications for a normal person not running for president. It would be quite the scandal if a major party candidate faced prosecution for his actions, which would deeply harm the reputation of American democracy and free elections. Therefore, it's hard to believe Trump would not find a way to use the system to his advantage one more time.