NY Times: Trump Took Advantage Of A ‘Legally Dubious’ Maneuver To Avoid Paying Millions In Taxes

10.31.16 1 month ago • 12 Comments

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On October 1, the New York Times dropped some tax documents that revealed how Donald Trump suffered a $916 million loss in 1995, and the suggestion was that Trump used this loss to avoid paying federal taxes for nearly 20 years. Trump had previously bragged during a debate about how “smart” he would be if he didn’t pay taxes. Also worth noting is how Trump did not evade taxes but simply avoided them in a legal way.

Well, the Trump taxes (or lack thereof) are back after the NY Times obtained additional documentation. The paper now writes that Trump likely performed a “legally dubious method” to achieve his tax avoidance. They aren’t 100% sure that Trump definitely used this loophole because the guy won’t release his tax returns, but multiple experts examined newly obtained documents and believe they pinpointed the avoidance maneuver. It was legal (more on that soon) but so sketchy that his lawyers advised him against doing so:

Tax experts who reviewed the newly obtained documents for The New York Times said Mr. Trump’s tax avoidance maneuver, conjured from ambiguous provisions of highly technical tax court rulings, clearly pushed the edge of the envelope of what tax laws permitted at the time. “Whatever loophole existed was not ‘exploited’ here, but stretched beyond any recognition,” said Steven M. Rosenthal, a senior fellow at the nonpartisan Tax Policy Center who helped draft tax legislation in the early 1990s.

These tax experts told the NY Times that Trump “trampled a core tenet” of U.S. tax laws while borrowing and “losing vast amounts” of other people’s cash. These unfortunate investors (including banks) had lent Trump the money to build his Atlantic City casinos empire, which crashed. Trump then persuaded his creditors to forgive all the debt, which allowed his fortune to flourish. But Trump still had another problem — this canceled debt could also be taxed, so here comes the “audacious tax-avoidance maneuver”:

It is unclear who first glimpsed a way for Mr. Trump to dodge a huge tax bill. But the basic maneuver he used was essentially a new twist on a contentious strategy corporations had been using for years to avoid taxes created by canceled debt.

The strategy — known among tax practitioners as a “stock-for-debt swap” — relies on mathematical sleight of hand. Say a company can repay only $60 million of a $100 million bank loan. If the bank forgives the remaining $40 million, the company faces a large tax bill because it will have to report that canceled $40 million debt as taxable income.

Clever tax lawyers found a way around this inconvenience. The company would simply swap stock for the $40 million in debt it could not repay. This way, it would look as if the entire $100 million loan had been repaid, and presto: There would be no tax bill due for $40 million in canceled debt.

There’s more at the source, including how Congress “later outlawed” this maneuver after Trump apparently used it to great advantage. The paper reveals how Trump consulted with lawyers about this loophole, but the opinion letters they sent back “telling him there were at least six different reasons the I.R.S. would likely cry foul if he were audited.” Again, this was all apparently legal then, but so, so sketchy. And it’s not a legal method now at all.

The NY Times also presented handy illustrated chart to show the complexities of Trump’s alleged maneuvers.

(Via New York Times)

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