Vernon Ogrodnek, The Press of Atlantic City/AP Photo
Letters are taken down from the closed Trump Plaza casino sign, in Atlantic City, New Jersey, October 2014.
The top line from the New York Times blockbuster report on Trump’s tax returns is that he paid virtually no taxes for ten of the past 15 years; and that his true financial empire is worth far less than he claims, maybe less than zero.
Trump is very likely underwater, with debts soon coming due that exceed the value of his holdings. These include a probable $100 million debt to the IRS for an inflated tax refund that he fraudulently claimed a decade ago.
Year after year, Trump pocketed real profits running well into the millions, while claiming losses for tax purposes. But he invested those profits recklessly and ended up genuinely in the red. He keeps afloat by borrowing money.
Yet the deeper story here is that many of Trump’s maneuvers are merely more aggressive, sometimes fraudulent, variations on what real estate moguls do, day in and day out. A big-time real estate investor has to be a real dope to pay taxes at all. Lobbyists have stacked the tax code to make legal tax avoidance in real estate child’s play for a competent accountant.
A Bloomberg piece last year used court filings in a divorce settlement to reveal that New York developer Harry Macklowe, a billionaire, had paid no taxes since 1981. And everything he did was legal.
Unlike ordinary corporations, real estate investors do not need to make any public disclosures. So we learn about these maneuvers only when the IRS wins a settlement as the result of an audit, or occasionally when tax avoidance moves become public in court records, as in Macklowe’s case.
In real estate, part of the game is to set up so many separate entities that the grand strategy and possible tax fraud is opaque even to the IRS. The Trump Organization, for instance, uses 500 separate business entities.
One question prompted by the Times investigation is why the IRS audit is still incomplete. At its heart is a $72.9 million “refund” paid by the IRS to Trump in 2010 against paper losses in the period 2005 through 2008. A decade later, the IRS audit is still pending.
The Republicans in Congress have been so successful at stripping the IRS of audit capacity that the IRS is hopelessly outgunned by operations like the Trump Organization. It is often compelled to settle at pennies on the dollar or give up entirely.
While Trump, characteristically, has been far more aggressive than your typical real estate mogul, including using tactics that cross over the line into tax fraud, much of the scandal, as Michael Kinsley famously said, is what’s legal.
For instance, thanks to special sweetheart provisions in the tax code, real estate investors can take losses for “invested” money that was in fact borrowed. Trump took a paper tax loss of $916 million, hardly any of which was his own money.
These are known as passive losses. (You also get to deduct the interest on the debt.) Investors in other industries are subject to stricter, more economically accurate rules.
Real estate investors make a lot of their money when the value of a property inflates. Normally, this would be subject to a capital gains tax once the property is sold. But in real estate, you can swap your property for another property of comparable value and defer the capital gains tax indefinitely.
In the real estate business, it’s legal to get debt forgiveness by swapping debt for equity. In other businesses, debt forgiveness would incur a tax. Not in real estate.
And then there is the depreciation ploy. As a real estate investor, you can claim depreciation deductions for a property whose value is actually appreciating. In principle, you have to pay capital gains tax on the fictitious valuation when the property is sold, but you can keep deferring that indefinitely thanks to the property exchange gambit described above.
Trump’s maneuvers are merely more aggressive, sometimes fraudulent, variations on what real estate moguls do, day in and day out.
Trump did all of these, and more. Where he stepped over the line was in putting family members on the payroll at exorbitant salaries, and claiming these as business expenses; and taking millions in other tax deductions for outlays that supported his lavish lifestyle.
If the IRS ever finishes that audit, Trump will be personally liable. And there is no pardon available for debts to the IRS.
There is also the curious question of how Trump was able to keep borrowing money to finance an empire that looked increasingly like a Ponzi scheme. If he submitted to his principal creditor, Deutsche Bank, the same claims of losses that he gave the IRS, he never would have qualified for credit. Either his IRS filings or his loan application was bogus.
And having to borrow from foreign creditors to finance a failing business empire, while president, was itself a grotesque conflict of interest.
The Times has released only a portion of the Trump trove. We are likely to find other cases of sheer illegality. But if we ever get back to a new age of reform, we should not stop with reversing Trump’s multiple assaults against democracy. The tax treatment of the real estate industry cries out for radical remedy.
