Chronic Losses v. Tax Avoidance: Mutually Exclusive

Posted: Sep 29, 2020 12:01 AM
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Chronic Losses v. Tax Avoidance: Mutually Exclusive

Source: AP Photo/Bebeto Matthews, File

The New York Times’s "blockbuster" expose on President Trump’s tax returns and financial health seems on one hand to be intent on condemning President Trump and the Trump Organization for not paying taxes while on the other hand attempting to demonstrate that he has chronic economic losses. It is a balancing act in which the authors fail miserably.

The New York Times (NYT) offered up what they believe is a treasure trove of information regarding the Trump Organization’s taxes. The NYT indicated they have tax return data for both President Trump and hundreds of his companies from more than two decades. The NYT indicated that it has declined to provide these records in order to protect its sources.

The NYT offered that it received the Trump tax information from sources with legal access to such information. The NYT did not indicate that those sources had authority to disclose a single word or single number contained in such information.

A perhaps reasonable guess is that someone did a download of tax data from inside the Trump Organization, provided it to the NYT and the NYT put a team together to analyze the data. (There is information disclosed in the NYT that there would be no reason to send to a tax preparer, so the logical source of the information is from the Trump Organization itself).

Did the provider(s) of the tax information commit felonies and/or civil crimes by providing the information without permission to the NYT? Did the NYT engage in soliciting President Trump’s personal tax information? Is the NYT holding stolen property? All good questions for the lawyers.

President Trump is essentially "accused" of off-setting taxable income from certain ventures with taxable losses from other ventures. And if the losses exceed the income, he is "accused" of using those losses to offset prior or future income. Virtually every business does both, including the New York Times itself. In the United States, it is called taxing net income. I think President Trump is being accused of following the law.

In tax classes, we teach there are two methods of reducing taxes: tax avoidance techniques and tax evasion. Tax avoidance legal; Tax evasion illegal. It is apparent that President Trump used the proceeds of his successful entertainment business to expand his other more tangible enterprises. The reality is that the other enterprises might lose money in the early years of investment and are allowed a depreciation deduction for the wear and tear on the property. This is the reality of using risk capital to build new worth.

Among other items mentioned, the NYT mentions and questions the Trump Organization’s consulting fees paid and worries that the fees may have been paid to family members. One wonders what the concern would be assuming that the family members are both working (visibly accurate) and report the income on their tax returns. The income tax is being reported by the recipients of the consulting fees. Based on everything else alleged by the NYT, the ultimate taxes paid to the government must be higher as the result of these consulting fees being paid. No harm, no foul.

The report seems concerned that President Trump took advantage of an Obama era created tax opportunity to carry back losses for four years. Again, he is being accused of following the law. The report does not mention that the Trump Tax Cuts and Jobs Act of 2017 eliminated this Obama created loophole in 2018 and went further by eliminating all loss carry backs. Because of this Trump tax bill change, the difficulties of the 2020 economy will produce no refunds of prior year taxes for the Trump Organization. Isn’t this a good thing if one is worried about the amount of income taxes president pays?

After worrying about President Trump not paying sufficient taxes (Trump claims he does pay significant taxes), the NYT worries about President Trump’s ability to repay or refinance $421 million of notes due over the next four years. However, the article reports increasing revenues at many venues including his office buildings. The NYT reports that a single building saw revenues rise from 30.5 million to $43.2 million in 2018. (When revenues rise dramatically, the underlying value does the same.)

The NYT article states that “tax returns do not, for example, record net worth." It thus far does not appear that the NYT has either a fair market value balance sheet or a cash flow projection for the Trump Organization. Without that data, accurately determining whether the overall net worth of the Trump Organization is growing or shrinking is next to impossible.

One of the authors of the NYT piece tweeted today: “Here’s our first story. Watch this space for additional articles in the coming weeks.” Who knows whatever information is in their hands, but leaking the information during the final month of a presidential election is an interesting decision.