Monday, October 03, 2016

Three main takeaways from the Trump tax story: business, tax, and policymaking

An extra day's reflection helps me to see more clearly what are the three main takeaways from the NYT's Trump tax story.  Nothing new here, just a matter of suggesting the right emphasis.

1) Business - Not many people could lose $900 million like Trump did.  But we've already seen his management skills at work in the presidential campaign.  Feckless, erratic, and undisciplined are not the qualities one would want in either a business person or a president, and the fruits here are plain for all to see.

2) Tax - Here I think the big story is that, while it's likely that someone lost $900 million, it probably wasn't Trump.  The question of what happened to debts that he presumably escaped in bankruptcy looms over the loss claim here.  Now it's possible that debt cancellation later on, while not creating taxable income because the discharge occurred in bankruptcy or when he was insolvent, reduced the NOLs.  This is consistent with the known facts, which solely relate to 1995, but we can pretty much rule it out because then the Trump campaign could have pointed out that he didn't spend all the years since using NOLs for someone else's losses against his own income.

So it's plausible that he avoided reduction of the NOLs, by either a more straightforward method or a more esoteric one.  The straightforward method would involve electing, under Internal Revenue Code section 108(b)(5), to reduce the basis of depreciable property before taking a hit to his NOLs.  But the problem with this is that it would in effect reduce the NOLs, albeit slowly, via the loss of depreciation deductions over time.  Even for real property, which gets depreciated slowly, this could add up after a while.  So the more advanced method, involving dubious tax planning, would be to try to park the debt somewhere where it wasn't formally forgiven but in actual economic effect was, thereby getting to continue deducting other people's losses.

Let's try to put this more saliently. It's all very well (to tax experts if not the general public) to pay no tax for years because one's loss years plus one's gain years didn't actually add up to a net gain.  But it's not so innocuous if, in effect, he was deducting other people's losses against his income.

3) Policymaking - If that's what he did, does that, as the Trump campaign would have it. show that he's a "genius" and knows the Code better than anyone, hence can fix it?

Anyone who actually thinks that Trump knows anything about the federal income tax, please raise your hand.  This is not a man who can read more than two sentences in a row, or who appears to know much of anything about anything substantive.  The last time I checked, the best tax experts get paid a lot of money because they actually can read, think, and analyze things.  Whatever his skill set, it doesn't appear to include any of that.  But also, as many have pointed out, his latest tax plan, possibly the most detailed policy proposal that he has issued in any area (although he is trying to have it both ways on whether all business would get a 15% rate), does nothing whatsoever to eliminate any of the games that he (presumably through his advisors) played.  Instead, all it does is throw further giant tax cuts at people like himself.


Stuart Levine said...

I'm not certain whether I suggested this to you previously, but I suspect that the among the issues under audit is whether Trump could avoid COD income because he is or was, in the appropriate years, insolvent. Stated differently, his wealth was not "Yuge"; rather, it was non-existent.

Daniel Shaviro said...

Yes, definitely an interesting possibility.

Unknown said...

What do you think of the possibility raised by David Cay Johnston in the Daily Beast6 today that Trump may have had the $916 mil debt forgiven in exchange for relinquishing future deductions for depreciation of certain real estate holdings? In 1995, the same year Trump claimed the $916 mil NOL, he took his casino company public. The new company took ownership of the properties that no longer could depreciated. Trump got to keep the tax deduction on the $916 mil. See below:

"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 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."

What do you think?


Daniel Shaviro said...

Johnston's analysis is interesting, and reflects that he knows a lot about Trump's business affairs. While not really knowing for sure, I have found it hard to believe that Trump had enough basis in depreciable assets to soak up most of the debt forgiveness, which might bring us back to the issues of NOL reduction or debt parking, etc. A further interesting aspect of his story is that it seems to imply that the public shareholders were some combination of (a) stupid and/or (b) duped by Trump with respect to the stock sales. Neither of these possibilities would be terribly hard to believe.

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