Originally published on Forbes.com.
The New York Times has gotten a hold of copies of President Trump’s tax returns (or tax return data) up to 2017. Of course, we would expect that the 2019 return is having the finishing touches put on it. Executive editor Dean Baquet explains that they are not releasing the raw data:
We are not making the records themselves public because we do not want to jeopardize our sources, who have taken enormous personal risks to help inform the public.
Who Is Studying This?
I am very pleased that they made that decision since I would have felt an obligation to go through it myself. I would have had to choose between being miserable or guilty.
So “a team of New York Times reporters has pored over this information”. I don’t know if the team includes any more reporters than the three listed on the byline – Russ Buettner, Susanne Craig, and Mike McIntire. There is no indication that they embedded a couple of CPAs or enrolled agents on the team, which is what I tend to think you would need to do the job thoroughly and really understand it – maybe some forensic accountants like Mary L Trump should have hired.
I Liked The Graphics
They did add Keith Collins and Gabriel J.X. Dance to produce a really great graphic side piece – Charting An Empire: A Timeline Of Trump’s Finances. You should definitely check that out.
The authority on that sort of thing is Edward Tufte author of The Visual Display of Quantitative Information. He responded to my inquiry about whether the graphs would rate a chapter in his book with more general commentary.
Thanks for your good note, but I would never mention the guy in my new book. Have used, however, some first rate Covid-19 graphics from The Financial Times, which early on in the Pandemic led the way on worldwide comparisons of cases and deaths.
I’m pretty sure “the guy” is our President.
One of the things that I did not learn until later in life is that there are many very intelligent people who cannot look at a column of numbers and have it mean anything to them. I would have loved a spreadsheet presentation of the twenty-odd years of returns with line number references, but that is probably just me and a few hundred thousand others.
Main Story Is Disappointing
The main story, Long-Concealed Records Show Trump’s Chronic Losses And Years Of Tax Avoidance, is kind of disappointing. In some ways, the headline shows the problem with their perspective. “Long-Concealed”- As a CPA I am fanatical about protecting confidential client information. I have nightmares about inadvertently letting something out. But I don’t think of that as “concealing”.
More to the point they are disclosing that it appears that President Trump has flat out been losing a lot of money – hemorrhaging cash-, which we are supposed to be shocked at. And he has not been paying much if anything in the way of taxes which if the previous is true is not that shocking.
In a side highlight piece by David Leonhard, there is a sort of odd comparison.
In 2017, the average federal income rate for the highest-earning .001 percent of tax filers — that is, the most affluent 1/100,000th slice of the population — was 24.1 percent, according to the I.R.S.
Over the past two decades, Mr. Trump has paid about $400 million less in combined federal income taxes than a very wealthy person who paid the average for that group each year.
Presumably that .001 % group is not static. I really don’t see the point of the comparison. Maybe there are a few people who were in it every year for decades, but I doubt it is many.
Shocked, Shocked
On the underpaying tax theme the reporters seem to be on something of an Easter egg hunt trying to find little tidbits that will excite us.
Even while declaring losses, he has managed to enjoy a lavish lifestyle by taking tax deductions on what most people would consider personal expenses, including residences, aircraft and $70,000 in hairstyling for television. (Emphasis added)
Now they tell us that they have obtained “tax-return data extending over more than two decades”. The graphs show 2000 to 2018, which is odd because they say they did not get the 2018 return. Regardless, apparently somebody went to the trouble of digging the hairstyling for television out of that morass and toting it up to be $70,000. Is that a lot?
Trump was in The Apprentice for 14 seasons and he is on television in a lot of other contexts. If the hairstyling is just for The Apprentice, that works out to about $400 per episode. I reached out to my filmmaker friend Jonathan Schwartz of Audacious Media. He told me that if the styling was taking place on the set with union stylists, it is perfectly reasonable.
Two Inconsistent Narratives
The fundamental problem with the main story is that it is presenting two contradictory narratives. One is of a very successful person who is managing to not pay any income taxes. The other is of someone whose fortune is melting away.
Ultimately, Mr. Trump has been more successful playing a business mogul than being one in real life…..
The picture that perhaps emerges most starkly from the mountain of figures and tax schedules prepared by Mr. Trump’s accountants is of a businessman-president in a tightening financial vise.
Most of Mr. Trump’s core enterprises — from his constellation of golf courses to his conservative-magnet hotel in Washington — report losing millions, if not tens of millions, of dollars year after year.
If that is what is going on i.e. he is losing his fortune, then he should not be paying very much if anything in income taxes. It is an income tax. Generally you don’t pay when you are going backwards. So if he is going backwards and not paying, that is the way it is supposed to work.
And sometimes you are allowed to carry your losses back (The law keeps changing back and forth on that) and forward. In its coverage of Trump the Times has tended to imply something sinister about NOL carryforwards.
Is It Trump Or The System?
If we want to look at the Trump as masterful dodger narrative, the question would be whether there is anything extraordinary about him given what he is involved in. In his capacity as commercial real estate master of the universe, there is nothing inconsistent with being successful and not paying much in the way of income tax.
The limitation on excess business losses enacted as part of TCJA and suspended as part of the CARES Act illustrates that principle. I had someone with expertise in that area speculating that Trump donates his presidential salary so that he can maintain the real estate professional status required to deduct some of his losses. I discuss that concept here.
Let’s Get Technical
The part of the story that is most intriguing to me is about the $70.1 million refund claim.
The dispute may center on a single claim that jumps off the page of Mr. Trump’s 2009 tax return: a declaration of more than $700 million in business losses that he had not been allowed to use in prior years. Unleashing that giant tax-avoidance coupon enabled him to receive some or all of his refund.
The material obtained by The Times does not identify the business or businesses that generated those losses. But the losses were a kind that can be claimed only when partners give up their interest in a business. And in 2009, Mr. Trump parted ways with a giant money loser: his long-failing Atlantic City casinos.
The same day, he notified the Securities and Exchange Commission that he had “determined that his partnership interests are worthless and lack potential to regain value” and was “hereby abandoning” his stake.
The language was crucial. Mr. Trump was using the precise wording of I.R.S. rules governing the most beneficial, and perhaps aggressive, method for business owners to avoid taxes when separating from a business.
A partner who walks away from a business with nothing — what tax laws refer to as abandonment — can suddenly declare all the losses on the business that could not be used in prior years. But there are a few catches, including this: Abandonment is essentially an all-or-nothing proposition. If the I.R.S. learns that the owner received anything of value, the allowable losses are reduced to just $3,000 a year.
And Mr. Trump does appear to have received something. When the casino bankruptcy concluded, he got 5 percent of the stock in the new company. The materials reviewed by The Times do not make clear whether Mr. Trump’s refund application reflected his public declaration of abandonment. If it did, that 5 percent could place his entire refund in question.
I am really intrigued by this analysis because it strikes me as something that would come from talking to tax experts and kind of half understanding what they said. Referring to being allowed to deduct suspended losses as unleashing a “giant tax-avoidance coupon” strikes me as, well, silly. The losses have to be real losses. They were not allowed in the year they were incurred.
But then there is “reduced to $3,000 a year”. That has to be a reference to the rule that capital losses in excess of capital gains burn off at $3,000 per year against ordinary income, but they can be used against capital gains. So in the abandonment discussion, it would seem that the reference is to Revenue Ruling 93-80. This allows ordinary loss treatment on the abandonment of a partnership interest for no consideration.
But that has nothing to do with suspended losses. Whether suspended losses (and I assume that the losses are suspended under Code Section 469 passive activity loss rules, because Trump was no long materially participating) are released depends on whether the transaction is one in which gain or loss is recognized.
So how much of that loss was writing off remaining basis and how much was suspended losses? And was the 5% corporate interest a non-recognition transaction.
It’s frustrating. The reporters got something translated from ancient Greek and I am trying to translate it back. I am going to need to consult with #TaxTwitter, I’ll let you know how it comes out.
New York Times Tax Coverage
It is annoying that it is the New York Times that landed these documents. I love the obituaries and book reviews, but I have found their tax coverage wanting over the years. Here is my round up on that issue.
New York Times Has Trouble Finding Tax Accountants To Discuss Tax Bill
New York Times Analysis Of Trump’s Tax Position Misses A Lot
Donald Trump’s 1995 Return: What The New York Times Missed
NY Attorney General And Trump Foundation – Much Ado About Not Much