From adultery to undocumented immigration, the space between how Donald Trump conducts his life and business and what he says on the campaign trail could cover the distance between Trump Tower and Mar-a-Lago. He claims his four business bankruptcies show how “smart” he is. He boasts of his philanthropy, even as his private foundation now appears to be little more than a personal piggy bank.
And then there’s the matter of taxes. Here’s Donald Trump in 2012:
HALF of Americans don't pay income tax despite crippling govt debt...http://t.co/gDAUj0Kt— Donald J. Trump (@realDonaldTrump) February 23, 2012
Except it now appears Trump may very well be one of those Americans. It turns out you don’t need to be receiving government welfare benefits to be a taker.
Some anonymous soul mailed the first page of Trump and second wife Marla Maples’ 1995 New York, New Jersey, and Connecticut tax returns to the New York Times. On them, the couple declared an astonishing “carried loss” of $916 million. According to the tax experts the Times hired, this likely would have allowed Trump to avoid paying personal federal income taxes for the better part of the next two decades.
Don’t ever think this will happen to you.
As F. Scott Fitzgerald famously observed, the rich are different from you and me. One thing that gives them a boost: a plethora of tax loopholes and dodges that the rest of us can’t even dream about.
To review: In the years immediately prior to the 1995 filing, Trump’s business experienced enormous setbacks. He purchased an airline shuttle service in the Northeast and bought New York City’s famed Plaza Hotel for $400 million, only to lose both as his businesses cratered, as did his casinos in Atlantic City. Trump declared corporate bankruptcy for the first time in 1991, and then again in 1992.
All of that should qualify Trump as a bad businessman, despite his boasts to the contrary. But one thing Trump is unquestionably good at is manipulating the tax code. Or at least good enough to hire people who know how to do so. As the Times put it this weekend, those leaked tax filings “suggest Mr. Trump took full advantage of generous tax loopholes specifically available to commercial real estate developers to claim a $15.8 million loss in 1995 on his real estate holdings and partnerships.”
The other $900 million, meanwhile, would’ve been carried over from previous years. But since we only have the first page of Trump’s tax filings, we can only speculate what losses, real or paper, they comprise, and we don’t know whether the states of New York, New Jersey, and Connecticut—not to mention the federal government —accepted these filings or challenged them. But given the amount, a decent proportion of the loss, University of Southern California law and taxation professor Edward Kleinbard told me, “has to relate to real estate. Where else do you lose money like this?”
For the commercial real estate business, carrying over a loss actually isn’t unusual. “It’s normal for a real estate developer to operate at a loss because of interest and depreciation,” Kleinbard told me. Here’s one reason why: Prior to the 1986 Tax Reform Act, as Justin Miller writes in a must-read article in American Prospect, anyone could invest in a real estate partnership and then declare the losses on their taxes, reducing their burden. Eventually the Internal Revenue Service wised up, and the 1986 legislation all but put the tax dodge to an end. Not shockingly, the real estate industry pushed back and was ultimately successful—at least on its own behalf. In the 1990s, real estate “professionals”—defined as people who worked on their real estate business at least 750 hours a year—gained the right to write off their losses against their personal income.
What’s more, though, the federal tax code permits real estate moguls to depreciate their property over a period of years. They can do this even if the property in question is actually worth more than the purchase price. For someone like Trump, this is huge. That “loss” can completely offset other unrelated earnings.
Then of course we need to note—like the New York Times did—that Trump is taking advantage of other breaks, not necessarily all real estate–related but surely related to his companies’ early-’90s tribulations, available to the wealthy to offset income. As the Times puts it:
But the most important revelation from the 1995 tax documents is just how much Mr. Trump may have benefited from a tax provision that is particularly prized by America’s dynastic families, which, like the Trumps, hold their wealth inside byzantine networks of partnerships, limited liability companies and S corporations.
The provision, known as net operating loss, or N.O.L., allows a dizzying array of deductions, business expenses, real estate depreciation, losses from the sale of business assets and even operating losses to flow from the balance sheets of those partnerships, limited liability companies and S corporations onto the personal tax returns of men like Mr. Trump. In turn, those losses can be used to cancel out an equivalent amount of taxable income from, say, book royalties or branding deals.
In other words, Trump is far from alone here. He’s just the rare billionaire who pissed off someone with access to his taxes enough that he or she mailed them to the Times. “The IRS often backs down to people who are powerful,” explains Jeff Hauser, the executive director of the Revolving Door Project, a think tank located within the Center for Economic and Policy Research that studies executive branch appointments. “If you are someone who has no ethics, what you can get away with is just amazing.” Why? First, many ways of reducing a tax bill, like net operating losses, are perfectly legal. And even if the deduction is questionable, the IRS needs to chase the filer down and prove it. Wealthy filers aren’t known for backing down quickly—and they can afford a small army of lawyers and accountants to keep the IRS at bay.
How much of this is going on among the .01 percent is a mystery, but it’s probably quite considerable. Much was made a few months ago when the so-called Panama Papers, the leak from a Panama law firm that helps the global elite hide their wealth, included so few Americans. Well, of course they didn’t, came the quick rejoinder. First, the competition for our .01 percent dollars is intense. Why go to Panama when you can go to the Cayman Islands? Moreover, a number of states, most famously Delaware, allow Americans to open up anonymous corporations, allowing them to move their funds about with ease.
You and I get very little in the way of such breaks. Let’s say, for example, that you made an investing error a few years ago and purchased some shares in Groupon. At one time the stock traded above $25, but more recently, it’s been hanging out around $5 a share. If you decided you didn’t want that stock any longer, you would sell at a loss. In turn, the tax code permits you to use that loss against a stock market gain—like, say, if you bought Facebook shares when they traded for a little more than $18 in 2012 and sold them last week for $128 a pop. A great deal, right? But what you can’t do is use that stock loss to avoid paying taxes on your salary and other work-related earnings. Capital gains taxes don’t work the way net operating losses do.
And what about real estate? If you sell your house at a loss or are foreclosed upon, the IRS counts debt forgiveness as income. You only get a tax break if the sum was used for your main residence (vacation homes don’t qualify!), and it’s limited to $1 million, or $2 million for married couples filing jointly. The money, moreover, must have been used on the home itself. You aren’t a professional real estate investor. Trump is—so he gets to write off his real estate losses against his personal income.
Will all of this make a difference to Trump supporters? I’m dubious. Cannily, Trump has never claimed to be an upright citizen. Part of his draw is that he’s a smart guy who’s taken advantage of the system to grow his business, and now he’ll do it on our behalf. His scammy scumminess is baked into the DNA of his popular appeal.
This is almost certainly the approach Trump will take to counter the bad press from the New York Times’ tax scoop. Former New York City Mayor Rudy Giuliani claimed on the Sunday morning political talk show circuit that Trump’s leaked filing showed he’s “an absolute genius,” while New Jersey Gov. Chris Christie claimed, “There’s no one who has shown more genius in their way to maneuver about the tax code.” Trump’s campaign released a statement to the New York Times claiming, “Mr. Trump is a highly-skilled businessman who has a fiduciary responsibility to his business, his family and his employees to pay no more tax than legally required.”
This is as disingenuous a statement as they come. Trump has no “fiduciary responsibility” on his personal taxes. But if I had to bet, it’s not going to matter much to Trump supporters. All too many don’t seem to object to the scam itself. They just want in on it.