"Art of the Steal"...

[Lord Jim]

Art of the Steal: This Is How Trump Lost $916M and Avoided Tax

This is how Donald Trump’s accountants and lawyers most likely used the tax code to avoid paying income tax for almost two decades.

David Cay Johnston 10.03.16 8:41 AM ET

The big New York Times scoop that Donald Trump used $916 million of tax losses to enjoy many income tax-free years raised a question the newspaper didn’t try to answer: How did Trump do it?

Trump, the only major-party presidential nominee in four decades to keep all his tax returns secret, insists “there’s nothing to learn from them.”

Yet in one day I figured out how Trump’s advisers almost certainly arranged the massive tax losses, skipped out on a massive income-tax bill, and then fashioned a loophole with more valuable tax benefits than the already liberal tax breaks Congress gives big real-estate owners while sticking others with the bill.

Trump dumped the real costs of all this on investors who saw gold in his brand name, but who lost everything even as he was paid tens of millions of tax-free dollars.

All this came from subtle clues on the front pages of Trump’s 1995 Connecticut, New Jersey, and New York state income-tax returns. Which sums were on which lines in each state pointed to how Trump must have organized his affairs. Two of the most respected tax professors in America agree with my analysis. Edward Kleinbard of the University of Southern California and Martin J. McMahon Jr. of the University of Florida refined my view.

Trump’s gambit is easy to explain in plain English, but for tax wonks the short version is this: Trump combined tax benefits under Section 1231 of the Internal Revenue Code with the exception provisions in Section 108.

The story of Trump’s income tax-free life begins in 1990 with Trump’s well-documented mismanagement of his casinos and his admission that he paid far too much for “trophy properties” like the Plaza Hotel in Manhattan and 23 worn-out jetliners for the short-lived Trump Shuttle airline.

These mistakes created about $1 billion of “net operating losses,” or NOLs, under Section 1231 of the tax code.

NOLs are incredibly valuable. These tax losses can be used to offset salaries, business profits, and income from, say, a television show or making neckties in China. Thanks to his $916 million of NOLs, Trump could earn much over 18 years in salaries, profits, and interest, but pay no income taxes.

Net operating losses should reflect economic damage suffered by the owner of the NOLs. But Trump found a way to gain from these losses by spreading the costs around to bankers and investors.


NOLs can be used right away or be applied to reduce taxes from two previous years and up to 15 future years. In contrast, Congress requires that real estate be depreciated for tax purposes over 39 years. The faster a tax break becomes available, the greater its value. Trump’s advisers found a way to convert real-estate depreciation into NOLs that were much more flexible and could be used faster.

Trump claimed to be worth billions in 1990, just as he does now, yet he could not pay his bills. He stiffed hundreds of small-business suppliers, including those for the Trump Taj Mahal casino in Atlantic City, which will go out of business next week. In all he owed more $3 billion, nearly a third of his debt secured by nothing more substantial than his signature on bank loan papers.

Last May, Trump revealed that he took on debt with no intention of paying it all back, which strikes me as fraud. “I’ve borrowed knowing you can pay back with discounts,” he told CNBC in May, boasting “I’ve done well with debt.”

Back then Trump threatened endless litigation unless 70 banks he owed money gave him millions more in new loans at low interest rates and provided him with $5.4 million a year for personal spending, the equivalent of $10 million in today’s money.

Back then, one billionaire told The New York Times he didn’t know how to spend that much on himself and his family.

What made the litigation threat credible was Trump’s refusal to pay more than 150 illegal immigrants who demolished the Bonwit Teller department store to make way for Trump Tower. A federal judge ruled that Trump conspired to cheat the workers, who never did collect all of their $4-an-hour wages despite an 18-year struggle.

The bankers realized that a man who would endure almost two decades of litigation to avoid paying such meager wages might tie them up for eternity over the billions of dollars owed to them.

When the New Jersey Casino Control Commission took Trump’s side against his bankers, they gave in. The banks canceled close to a billion dollars of Trump’s debts and extended new loans on favorable terms.

Normally, any part of a loan that is forgiven becomes taxable income, as millions of people who could not repay home mortgages or student loan debt have learned in recent years.

That’s where Section 108 comes in. Three years after Trump bested his bankers, Congress amended that section to let real-estate professionals avoid income taxes on debts that were canceled.

The technique is simple. The taxes due immediately because a debt is forgiven can be exchanged for relinquishing future real-estate tax deductions. Trump agreed to forgo his future right to take about $1 billion worth of depreciation on his casino hotels.

This exchange created a future problem for Trump. Real estate that cannot be depreciated is worth a lot less. Indeed, generous tax benefits drive real-estate investment. So while Trump escaped an immediate income-tax bill, the future tax benefits he gave up would mean that he would likely have to pay income taxes on his salary, fees for licensing his name, and other income.

To solve this problem, Trump sold stock for the first time in 1995. He founded Trump Hotels and Casino Resorts, which then took ownership of his casino hotels.

That meant Trump got money for selling his casino hotels, while the investors got real estate with greatly diminished tax benefits.

Trump Hotels and Casino Resorts was a complete disaster. It lost money every year. During Trump’s 13 years as chairman, the company lost $1.1 billion. Trump stock fell from a high of $35 to just 17 cents, wiping out investors.

Trump did just fine, though. He was paid $82 million, Fortune magazine estimated. The publicly traded company even took out loans that were used to pay off some of Trump’s remaining obligations to the banks from when he owned his casinos outright.

The $82 million Trump was paid by the publicly traded company bearing his name should have all been received income tax-free thanks to those NOLs. Thus his mismanagement, and the tax benefits he stripped out of the casino hotels before he sold them to shareholders, made him richer and them poorer.

So while Trump made money at every turn, the banks that lent him money, the workers and small businesses who delivered for Trump, and the investors in his casino company all got stiffed. And while they paid taxes on whatever income they did manage to collect, Trump enjoyed at least $916 million of tax-free income.

In the first debate with Hillary Clinton, Trump did not dispute her statement that he pays no income taxes. Instead he said it shows he is smart.

That may be, but it also suggests the rest of us are chumps for paying our taxes while Trump enjoys all the benefits of the United States government—little things like individual liberty, the FBI, and a military to protect us—while bearing none of the burden. If we all did as Trump does, we would, to quote a line Trump employs often, not have our country anymore.

Just three pages of tax forms, years of assiduously following Trump, and a deep knowledge of tax law allowed me to determine how he almost certainly arranged to escape income taxes for years while he stuck others with the bill. Now imagine what voters could learn if I had just one complete Trump tax return or years of his Form 1040s and Schedules A through E. It would be possible then to evaluate his unverifiable claims that he is a modern Midas worth more than $10 billion.

A complete tax return for 1995 would also make it possible to determine if Trump followed the law, as a statement he issued asserts, or misreported figures to inflate his tax savings.

Trump has been found more than once to have used two sets of figures to short others and benefit himself.

Keep in mind that we know Trump engaged in sales tax fraud, as I detail in my book The Making of Donald Trump.

Earlier this year I revealed badges of fraud on Trump’s 1984 income-tax returns.

Under oath, his own tax lawyer and accountant disowned the return.

Then there’s Trump’s role in authorizing an alleged quarter-billion-dollar income-tax fraud on profits from the Trump SoHo in Manhattan. The profits were run through a corrupt Icelandic bank under the control of one of the many Russian oligarchs whom Trump has said have paid him tens of millions of dollars and are among his best customers.

Trump’s full tax returns would help us understand how deeply he is involved with the oligarchs, whose fortunes and even lives depend on maintaining friendship with Vladimir Putin, the murderous Russian autocrat whom Trump goes out of his way to praise at every opportunity. Trump’s full tax returns would also tell us about his debts to the Bank of China, owned by the communist rulers in Beijing, and his many deals with Middle East potentates and their retainers.

Knowing how much leverage these foreign power brokers have on Trump is highly relevant since he wants to become commander in chief and possess the powers of federal law enforcement.

What I distilled from just three pages of Trump tax documents—together with other reporting—provides Congress with ample reasons to investigate Trump’s finances, especially the way the tax code can be abused to cheat others and enjoy tax-free living.

Trump, who demands that Congress press investigations into his opponent over personal emails, surely could have no complaint about the use of federal tax dollars to investigate his finances. After all, while a federal investigation into Trump’s conduct will cost us some of our income-tax dollars, it wouldn’t cost Trump a penny.

http://www.thedailybeast.com/articles/2 ... d-tax.html

[oldr_n_wsr]

Anyone see any pieces of skull fly by?
My head just exploded.

[BoSoxGal]

He is entirely lacking in morality, a true psychopath.

[MajGenl.Meade]

the short version is this: Trump combined tax benefits under Section 1231 of the Internal Revenue Code with the exception provisions in Section 108

Venomous slime that he is, I don't blame Trump as much as I do the government. That's the root of the problem - and it's one that Trump (if voted in) would make worse. Rich fat cats in Congress are the ones who've set the rules and who do they really advantage - rich fat cats. And HRC is right up there with them, squeezing the udder for all she's worth. Which is a very great deal.

Hmmm

The State Department misplaced and lost some $6 billion due to the improper filing of contracts during the past six years, mainly during the tenure of former Secretary of State Hilary Clinton, according to a newly released Inspector General report.

The $6 billion in unaccounted funds poses a “significant financial risk and demonstrates a lack of internal control over the Department’s contract actions,” according to the report.

The alert, originally sent on March 20 and just released this week, warns that the missing contracting funds “could expose the department to substantial financial losses.”

The report centered on State Department contracts worth “more than $6 billion in which contract files were incomplete or could not be located at all,” according to the alert.

“The failure to maintain contract files adequately creates significant financial risk and demonstrates a lack of internal control over the Department’s contract actions,” the alert states.

[Burning Petard]

The Donald has said he would reform the tax code to be fair for everyone and the people at the top would pay their fair share. Please note he does not agree with Warren Bufett or Bill Gates as to just what that fair share might be.

His actual detailed proposal for tax reform does not touch the sections he used for this "loss" nor most of the other special provisions for real estate investment.

snailgate.

[Sue U]

the short version is this: Trump combined tax benefits under Section 1231 of the Internal Revenue Code with the exception provisions in Section 108

Venomous slime that he is, I don't blame Trump as much as I do the government. That's the root of the problem - and it's one that Trump (if voted in) would make worse. Rich fat cats in Congress are the ones who've set the rules and who do they really advantage - rich fat cats. And HRC is right up there with them, squeezing the udder for all she's worth. Which is a very great deal.

It is highly unlikely the tax code provisions were actually written to facilitate the financial sleight of hand Trump's accountants and tax lawyers used to game the system. Quite the opposite, it is highly likely that the green-eyeshades saw the potential interaction of the different code provisions and structured the transactions so they would at least arguably meet the letter -- though not the spirit or intention -- of the law, especially since the tax code sections cited deal with completely different subjects: Section 1231 is the characterization of gain or loss from the sale of property used in business, while Section 108 concerns the imputation of income from discharge of debt. So Trump could take on a lot of debt, then sell property at a "loss" on paper, pocket the money from the sale, use the loss carry-forward against future tax liability, and have the debt discharged while insolvent so that the discharge is never counted as income. The equity investors lose everything, the bondholders and other creditors get stiffed in bankruptcy court and Trump walks with the cash. The transaction "works" -- if you are a complete sociopath.

[liberty]

How hypocritical this is; how many people here would not do the same thing if they could? Very few people pay more taxes that they have to pay. When I was stationed in Florida, I was the only fool in my squadron not to take advantage of the fact that Florida had no state income tax and my home state did. If I had become a resident of Florida I could have avoided state income tax, but that would have been a lie. I had no intentions of returning to Florida.

Don’t be a hypocrite change the law; get rid of the loopholes and simplify the system.

[BoSoxGal]

You understand the description of the convoluted implementation of tax code provisions Donald Trump utilized and your observation is that's normative behavior?



They do say socio/psychopathy is a fairly large subset of the population: Mayo Clinic asserts 200k cases/yr of antisocial personality disorder diagnoses, rating the condition 'common'.

If I ever learn to expect that rather than being painfully surprised, I'll find life much easier to live.

[Econoline]

I have the feeling that Donald Trump would find the following quote absolutely, completely incomprehensible...



...but then again, he would probably find the concept of "civilization" absolutely, completely incomprehensible.

[oldr_n_wsr]

You understand the description of the convoluted implementation of tax code provisions Donald Trump utilized and your observation is that's normative behavior?

I would bet it's "normative behaviour" to those who are in the position to use it. I try not to pay one penny more in taxes than I have to and would (and do) use any legal means to maximize my deductions. Call it creative accounting or gaming the system, as long as it's legal.
The politicians set up this ridiculously complicated system for themselves and any other fat cats that bribe[/i] help them to get elected and stay in office.
Trump, Buffet and other b/millionaires use creative accounting to minimize their tax burden.

[Sue U]

The tax code may be complicated, but almost all of the complexity is in service of two goals: 1) to be "fair" to the taxpayers and 2) to be a tool for implementing public policy by encouraging or discouraging certain economic activity (e.g., the mortgage interest tax deduction, etc.). There hasn't been any significant change to the tax code since 1986.

If Trump had actually planned to use the tax code in the way he did,* it would probably be considered fraud. Instead, the pure happenstance of his colossal mismanagement of his casino-hotel-airline properties allowed him to turn his business failures into get-out-of-tax-jail-free cards while sticking his investors, lenders and contractors with the actual losses. Come to think of it, it's not unlike the plot of The Producers.


___________
*Trump actually has no idea about the tax code or how it works. Instead, it was a tax lawyer/CPA in his organization who came up with this scheme as his businesses were falling apart in the early 90s. Not that there's anything wrong with having tax professionals do the professional work, but to claim Trump actually understands -- let alone conceived -- the transactions is unreasonably speculative.

[Lord Jim]

Since Trump claims to be such an expert on the tax code, I would love to see Anderson Cooper on Sunday ask him a question about what specific sections he was able to use to so "brilliantly" avoid having to pay taxes...

Then he could show the millions of Trumpanzees watching just what a "genius" he is...

I have absolutely no doubt that the depth of Trump's understanding of the tax code is about on a par with the depth of his understanding of NATO, but it would be nice to see him have to let his adoring sycophants in on that fact...

[liberty]

You understand the description of the convoluted implementation of tax code provisions Donald Trump utilized and your observation is that's normative behavior?



They do say socio/psychopathy is a fairly large subset of the population: Mayo Clinic asserts 200k cases/yr of antisocial personality disorder diagnoses, rating the condition 'common'.

If I ever learn to expect that rather than being painfully surprised, I'll find life much easier to live.

If you are referring to me I don’t see how that can be in that there are people in my family including my wife that I love so much that I would die for them. However, I have never been subject to peer pressures which I think has been to my advantage. While my friends learned to smoke and drink from each other’s example I didn’t. I don’t know if that qualifies as sociopath or not, but I don’t care either way.

[oldr_n_wsr]

While my friends learned to smoke and drink from each other’s example I didn’t.

I learned those things on my own. And I refined and took them farther and harder than most.
but that's a different thread

[Econoline]

Come to think of it, it's not unlike the plot of The Producers.

...complete with "Springtime For Hitler" ?

[Econoline]

VERY interesting and informative post by Josh Adler on Facebook:

I've held off on publicizing my Trump stories online, but his allegation at the debate tonight that maybe he didn't pay his contractors because they didn't do good work pissed me off, and I have to leak one. My grandfather's company was one of the numerous contractors that Donald Trump refused or was unable to pay in full for their work. "Unable" because of Trump's mismanagement and over-leverage, not because he had some kind of ex post facto savvy for retrading his contracts. The payment failures were not because of poor performance -- Trump repeatedly hired my grandfather's company for every project that Trump developed in Atlantic City, as did every other casino developer in Atlantic City. What I heard growing up was that it was Trump's well-known practice not to pay final bills and then dare his contractors to sue. Most couldn't afford the fight, and most didn't obtain lien rights because they needed the work too badly too fight that hard on the contracts.

My grandfather, who was responsible for negotiating contracts face-to-face with Trump for at least a decade (and had a number of choice anecdotes about Trump that I will not share tonight), therefore insisted on mechanics lien rights on their jobs. His company had essential, specific expertise Trump needed, and Trump blustered and threatened but caved in when my grandfather walked out. On Trump's final project, when Trump could not pay the bill, he begged them to release their lien at a discount or else he would go bankrupt and pay them nothing. It was indeed true that he could not afford to pay the bill and would be forced into bankruptcy if they did not release the lien. They checked. There was no concern about the quality of work. To my knowledge, he never alleged that the work was bad nor could he have -- they were one of the essential prime contractors for every casino he or anyone built in A.C. Preferring something to nothing, they agreed to discount the payment and release the lien. He then reneged on the new discounted deal, and soon went bankrupt anyway. Nonetheless, they were paid a larger share of what they were owed than most others were, because he couldn't open the casino without the lien released. State law. And you know what? All the lights, slot machines, security cameras, escalators, elevators and air conditioners in those casinos? They worked! That's why they were hired to build every single casino in Atlantic City, not just Trump's.

Eventually Trump had to get out of the real estate development business and go into reality television and product branding. Noble vocations, no doubt. He couldn't get anyone competent to work for him anymore at competitive rates because they knew they wouldn't get paid, nor could he get equity investors or debt financing for new projects on market terms after all the bankruptcies and accounting scandals. Maybe Hillary Clinton doesn't have the standing or expertise to challenge him on his "business" arguments, or maybe it's not a strategic point for her, but when he toots his horn about building a great real estate empire, let's be clear: Trump was a failure as a real estate developer. His early New York projects that made his small but up-and-coming reputation were subsidized by his father's personal loans and relationships. The later, bigger ones all flopped. After he worked his way out of all those failed projects in the 1990s, he didn't -- couldn't -- do any more development, he just licensed his name to other developers who took the risk and maybe he invested his inheritance in some acquisitions as a passive partner.

(By the way, I've never been as big a real estate developer as Trump, and Trump was not a big developer, he was a small developer. I'm a microscopic developer. But I've built a few buildings and I know how it works.)

And hey, maybe his tax returns say something else. We'll never know. My suspicion is that they would reveal that he has a lot fewer assets than he's claimed, and none that he developed. He's not embarrassed about not paying taxes, that's a silly charge. Of course he didn't pay taxes. His alleged audit is irrelevant, even if true, since the returns were already filed and say whatever they say, he can't change them now so releasing them can't impact the audit. It seems far more likely to me that his fear is that revealing the returns would TRIGGER an audit. (If there is one thing all Americans can agree on, it's that Donald Trump cheats on his taxes. It's just that his supporters believe that's a selling point.) Heck, he probably claimed the Earned Income Tax Credit on his negative income. I would bet $1,000 that he claimed the EITC. I think they would also show that he owes a lot of money to the only kinds of organizations who would still make him loans after all of his real estate fiascos -- those who either charge above market rates -- which would embarrass him because that looks like a bad deal -- or who earn their returns in other ways, through influence, though he probably doesn't report that income. Since his son revealed publicly not long ago that much of their recent financing has come from Russia, and most exported Russian wealth is subject to Putin's whims, that could explain Trump's obfuscation and denial of Russian atrocities in Syria and Ukraine and his frequently professed admiration for Putin. Not hard to guess who pulls those strings.

Here's what I meant to say before I went on this speculative tirade: If Trump hired so many thousands of contractors whom he didn't pay because, somehow, they all did such bad jobs for him, again, and again, and again, bad architects, bad drapers, bad plumbers, doesn't that just say he must be terrible at hiring people? Fool me twice... you can't fool me... but fool me thousands of times? After all, there must be SOME capable American workers out there (though I doubt very many of his workers were American.) This scarey-clown who says he is going to surround himself with all the best and smartest people in the world can't hire a good plumber in a thousand tries, despite being one of history's great titans of stone and steal? I mean steel? How did he ever succeed in business? Oh, that's right. He didn't. Good thing about Papa Fred buying all those casino chips and the $14 million mini-loan. That's what she should have said.

My grandfather was born in 1917 in Atlantic City to German-Jewish immigrants and orphaned at age eight. He worked nearly every day of his life from then until he passed away at 95. He sold his first company in his 60s but couldn’t stay retired and went back to work for another 30 years. His job for the U.S. Army during World War II — assigned to a high school graduate because he shared a last name with a famous (but unrelated) Austrian psychiatrist — was to interview and assess convicted felons to determine whether they were psychologically fit for early release from prison to carry a weapon with our troops overseas.He always said that job, judging the character of dangerous men with a strong incentive to deceive him, or as he put it, being a “human bullshit detector,” was the training that made him a great success in business. So when my grandfather would occasionally remark to me that Donald Trump was the worst person he had ever known, I remembered it.

My emphasis.
(Go here to see the original post and all the comments under it.)

[WASSing link removed...okay, CP?]

[Crackpot]

Link wassing the screen