What the Tax Returns of Former President Trump Tell Us About US Tax Law

What can be learned about US tax law from the convoluted picture of former President Donald Trump’s taxes that was revealed by a review of his personal and corporate returns that was published in The New York Times?

The first of a series of articles by The New York Times analyzing Trump’s tax returns was published on September 27, 2020, 48 hours before the first presidential debate between then-President Donald Trump and former Vice President Joe Biden. A history of shockingly low tax payments and significant legal, financial, and political dangers were highlighted in the research. The New York Times claims that from 2011 through 2017, Trump did not pay any federal income taxes, and in 2016 and 2017, he only paid $750 in taxes. In the same time frame, he took out hundreds of millions of dollars in personally guaranteed loans from unnamed lenders that are due over the course of the following four years, as well as money from licensing and TV revenues, securities sales, and large loans, all of which went into losing businesses.

Real estate investors can gain specifically from the tax code.
Strategies for lowering taxes can significantly lower taxes, but they must adhere to strict regulations.
The Joint Committee on Taxation of the Congress examines sizable IRS refunds.
Former President Donald Trump is now in a possibly dangerous financial position due to audit concerns and debt deadlines.

How did Donald Trump manage to avoid paying taxes on the more than $427 million he made between 2000 and 2018 from “The Apprentice,” licensing, and endorsements?
A “real estate professional,” or someone actively involved in the real estate business, is granted specific tax regulations and privileges that are not available to other people.
Trump might have used his real estate business’s tax losses to offset income from other sources.

Employees and taxpayers involved in other business activities typically need to net their gains and losses for each source of income separately.
The former president was only one of many people in the real estate market who have paid little to no income tax due to the special tax regulations. The information sheds light on the specific write-offs available to rich individuals, especially business owners and real estate experts, whose tax structuring can result in tax liabilities that are lower than those of average-income taxpayers.

For good reason, the former president Trump has said that he “loves devaluation.” Even when a building’s fair market value is rising over time, tax law regulations on depreciation allow the cost of construction to be written off as a “loss” over 27.5 years for residential real estate and 39 years for commercial structures.
Trump properties are held through “pass-through” (also known as flow-through) entities, which include partnerships and LLCs. This is a common industry practice for avoiding corporate taxation and allowing a partner or LLC member to report the entity’s income and deductions on their personal tax return, greatly benefiting from the latter.

Additionally, the tax code permitted taxpayers to carry back or forward net operating losses (NOLs); however, it should be noted that NOLs are only permitted to be carried forward for tax years beginning after 2020. According to The New York Times, Trump reported losses of $915.7 million in 1985, which likely countered decades’ worth of estimated $600 million in revenue from TV, branding, and investments. He paid $70.1 million in taxes from 2005 to 2007, but according to the NOL laws, he was later able to carry back NOLs to these years and get a complete refund. This refund appears to have been retrospectively disputed in the former president’s continuing IRS audit, as is explained below.

An attorney for the Trump corporation named Alan Garten questioned the Times report and labeled all or most of it as “inaccurate.” Trump, according to him, has since 2015 paid “tens of millions of dollars” in personal federal taxes. The Times speculated that Garten may not have been speaking of income taxes, but rather taxes on Social Security, Medicare, and household employees, as well as the federal alternative minimum tax (AMT). Garten also incorrectly compared using tax credits to paying taxes.

The tax projections, according to The New York Times, appeared to match Trump’s standard federal income tax obligations, albeit they may not have included the Alternative Minimum Penalty (AMT), a tax designed to stop affluent people from wiping out their tax obligations with significant losses. However, between 2000 and 2017, Trump’s total AMT was only $24.3 million; subsequent refunds seem to have decreased that sum.

Uncertain Tax-Reduction Techniques

The New York Times report described a number of operational and transactional tax allegations that the former president and his corporate enterprises could face significant audit challenges with. They also emphasized ways that business owners might lower their taxes under the provisions of the tax code.

‘Abandonment’ loss in a casino

The New York Times’ investigation shed light on certain dubious tax-reduction techniques used on Trump’s returns. The carryback of nearly $700 million in business losses claimed for 2009 appears to be responsible for the $70.1 million refund collected for the years 2005 through 2007. These losses were probably predicated on a rumor that the Trump Atlantic City casino company had been “completely abandoned.”

If Trump received nothing in exchange for giving up his stake in the company, they would be legal. Trump got 5% of the successor company’s stock, according to bankruptcy court records, which would have disallowed any abandonment loss and limited his deduction to a $3,000 loss for the year.

Consulting Fees, Employee Benefits, and Gifts

Undefined “consulting fees,” which are present throughout the forms, would point to a typical method for lowering business revenue and taxes. Questions were raised over the deduction of Ivanka Trump’s $747,622 in consulting fees. Ivanka shouldn’t have been paid as a consultant, or as an independent contractor, as she works for the Trump corporation.

Consultant fees do not have withholding taxes deducted from them like employee salaries do. However, they must be realistic, market-value amounts in order to be deducted. Ivanka might have been able to evade any tax burden even though a consultant is required to file taxes and pay them. Ivanka may have had enough real estate losses from her career as a real estate agent to defray the payment. The IRS might bring up another matter as a result of this fee deduction. The fee, which is significantly more than the yearly gift tax exemption of $15,000 for 2020, may be questioned by officials who claim that it was actually an asset transfer to a family member for whom the transferor owes gift tax.

Personal vs. Business Expenses

Despite the fact that not all of Trump’s company expenses were covered, the article pointed out several costs that would have been classified as nondeductible personal expenses. According to the article, the IRS can refuse to deduct expenses for grooming for TV appearances and planes used for personal travel. The New York Times questioned whether the amount includes fees spent to attorneys to represent Donald Trump, Jr. in investigations and the former president’s personal legal settlements to acquire nondisclosure agreements from litigants because deductions for legal fees are recorded as a flat sum.

Investing or living there?

Additional problems emerged with the Trump Seven Springs home development in Bedford, New York. Although Donald Trump referred to the house as an investment and wrote off the $2.2 million in property taxes as a business expense, Forbes noted that Eric Trump had classified the property as his personal residence. The $10,000 cap on state and local tax deductions applies to personal dwelling property tax deductions.

Estimated value of a conservation easement

The IRS might look into a $21.1 million charitable deduction from 2015 for a conservation easement, one of four that forgo the right to develop a portion of the Seven Springs estate. Such a deduction is intended to account for the drop in a property’s fair market value following a donation. If a conservation easement protects the natural beauty of the donor’s remaining land, tax experts question whether it genuinely raises real estate values. The value claimed for the Seven Springs easement may be contested in light of the widely documented concerns about purportedly self-serving anomalies in values of Trump properties for various purposes.

IRS and Never-Ending Audit

The size, scope, and aggressive tax stances taken by Donald Trump, some of which are legitimate and some of which are dubious, would naturally necessitate a thorough audit. Both the IRS and Trump’s legal team would likely vigorously argue their cases. But it’s noteworthy how long the Trump audit took. The interplay of loss carrybacks and carryforwards may be at least partially to blame for the need for unusual extensions of the statute of limitations for years that could be impacted by the resolution of claims in later periods.

According to the New York Times, the $70.1 million refund for the years 2005–2007 was reportedly forwarded to the Congressional Joint Committee on Taxation (JCT) for review by the Committee’s unbiased, knowledgeable professional staff only after it had been paid—and not before. The timing indicates that the IRS either made a tentative agreement with the Trump company for at least one tax year or that it did not immediately fight the refund claim. But it seems like the conversations between JCT personnel and IRS authorities are still going on. Both the IRS and the Trump attorneys may be uneasy about the prospect that the JCT team, the same body that examined President Nixon’s taxes in 1974 and determined that some deductions were invalid, may disagree with the suggested refund.

The conclusion

The New York Times’ investigation indicates that former President Trump did make hundreds of millions of dollars over the past few decades, with the majority coming from “The Apprentice” and licensing fees. However, the Trump real estate business also generated significant losses, with the exception of Trump Tower and interests in two properties jointly owned and run by Vornado.

Trump’s liquid holdings seem to be quite restricted since his “Apprentice” income has essentially ended, licensing fees are dropping, and the majority of his securities investments have been sold—all while significant real estate operational losses are growing. Additionally, there are legal and reputational concerns raised by apparent discrepancies between his tax return losses and federal financial records of annual income in the hundreds of millions.

The former president may be saddled with massive responsibilities given his deteriorated financial situation. He will be held personally accountable for $421 million in loans that have personal guarantees, the majority of which mature in the coming years. His vulnerability to lenders uncannily mirrors his 1990s bankruptcy predicament. The Times also predicted that his federal tax bills might be more than $100 million.

Ordinary voters, who pay considerably more than $750 in monthly income tax, may be alarmed by stories of Donald Trump’s tax evasion and impending financial vulnerabilities, which could undermine his self-described reputation as a successful, savvy businessman.

Donald Trump has lost the election and is no longer the president. However, there is concern about how the investigations and the former president’s enormous financial exposure, which he denied—as well as his refusal to acknowledge his potential vulnerability to his unnamed lenders—will affect whether there were any conflicts of interest while in office.

The New York Times’ explanation of the opportunities that the tax code offers wealthy business owners to legally avoid taxes—opportunities that are unavailable to average taxpayers—could generate widespread support for tax reform in the years to come, even more so than its revelations about dubious tax practices.

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