It's generally accepted that Trump appears somehow to have deducted $916 million of losses, over time, despite the fact that these were predominantly other people's losses, not his. The question has been how he purported to do this, but the NYT appears to have advanced the ball with this story, which is based on the discovery of a 1991 opinion letter from Willkie Farr (itself available here).
At the front, the Willkie Farr opinion lists eight uncertain tax issues on which the tax plan to make other people's losses deductible by Trump depends. One of these it describes as "more likely than not" to be resolved favorably to Trump upon a full IRS vetting. For the others, it says that there is merely "substantial authority" for Trump's position.
The Times article says "substantial authority" means that one has about a one-third chance of being legally correct. I have heard of its being used to describe as much as a 40% possibility of legal correctness.
One of the odd things about tax opinions generally is that they don't quite explain what the likelihood of correctness means. After all, it's explicitly probabilistic for "more likely than not," and implicitly so for "substantial authority" even though the term appears to address the nature of support for the position. Presumably it uses a subjectivist conception of probability, based on the writer's risk-neutral assessment of zero-value betting odds. Perhaps this reflects an underlying thought experiment involving multiple repeated independent trials (in alternative universes?) or a grouping of equally plausible (albeit distinct) positions, all of which then get tested rigorously.
Another peculiarity about tax opinions with multiple issues that are assessed probabilistically is that there is no analysis of the degree of correlation between the probabilities. E.g., suppose each of two positions "should" be correct, and that we define that as 70% likelihood correctness. Is the likelihood that both are correct 70% - the case of perfect correlation between them - 49% (i.e., not collectively even more likely than not) - the case of perfect independence - or somewhere in between?
Tax opinions generally do not address this at all. In a typical case, however, there's almost no chance that they are perfectly correlated - the technical issues are distinct. On the other hand, perfect independence is often unlikely. For example, two legal issues that are distinguishable may nonetheless both be strongly influenced by the question of whether or not a given arrangement is economically meaningful.
Returning to the Willkie Farr tax opinion, if all of the issues were perfectly independent we're in the neighborhood of a 2/10 of 1 percent chance that the overall position was valid (from assuming six 40% probabilities plus one at say 55%). With perfect correlation, it would rise to 40%. But since perfect correlation is unlikely I imagine that reasonable views about actual correlation might place the probability of overall correctness anywhere from, say, 5% to 20%. And that's based on Willkie Farr's judgment, even though (with all due respect to Willkie Farr) there may have been a bit of preliminary opinion-shopping on Trump's behalf to get the most favorable view that any reputable NYC law firm was willing to provide.
What about audit review? I suspect it was not seriously reviewed, and here's why. It involved a gigantic NOL, having in the main a deferred impact on tax liability, while also raising many complex issues. It would be natural for an IRS auditor, seeking immediate bang for the buck, to figure: Even if I get this reduced substantially, surely there will be something left, meaning that Trump would have NOLs for the next few years anyway (assuming no possibility of immediate cancellation of indebtedness income given the insolvency / bankruptcy issues). And also, while this was still early in the era of the 1990s rise of tax shelters, the IRS may by that point have had more fish to fry than auditors to mind the fry pan (so to speak).
So, a bit like Dupin's purloined letter, it may have been so blindingly visible that it didn't get looked at seriously.
Back to the presidential race. What should we make of this? Well, for me, the fact that Trump, if he were president, would probably respond to the article by instructing his people in the Justice Department to shut down the New York Times and find some excuse for indicting the article's authors weighs a bit more heavily on the scale than the tax scam itself, as does his being a self-proclaimed sexual assaulter, a credibly accused fraudster and racketeer, and apparently a stooge (at best) in support of Russian interests at the expense of our own. So it doesn't worsen my views of Trump, although at this point there is literally nothing that could do so.
"the fact that Trump, if he were president, would probably respond to the article by instructing his people in the Justice Department to shut down the New York Times and find some excuse for indicting the article's authors..."
ReplyDeleteCome on, Dan. That's like me saying that if Hillary became President she would probably use the IRS to audit her political enemies and to harass conservative nonprofit groups. It's plausible, but she hasn't said she'd do it, and she personally hasn't done this in the past. On the other hand, quickly firing U.S. Attorneys who are investigating you (1993) and instructing people in the Justice Dept. to shut down an investigation (2016) is something we have seen before...
Going back to the Willkie Farr tax opinion, though, I'd be interested in your thoughts on it. It was an opinion on the tax status of the bonds, not of Trump, and it was very complicated. Does it really have any bearing on Trump's taxes?
ReplyDeleteThe bondholders had to worry about things like whether the new bonds were debt or were really equity and would be taxed as equity. Did they have to worry about whether the company had debt forgiveness income?
The question of what tax opinion language means is also fascinating. Willkie was willing to say it was "more likely than not" that the bonds were debt and not equity, but not willing to give a "more likely than not" opinion on the other five issues, only that there was "substantial authority" on one side of the issue.
The true meaning of the "substantial authority" opinion is that they're saying that if it came to court, even if the company lost to the IRS, the court would impose fewer penalties, because the position was not unreasonable,even if wrong. Probably, going deeper, Willkie is saying that more likely than not the court would not impose penalties-- the probability is a separate idea.
On the other hand, when Willkie says they are not willing to give a "more likely than not" opinion on side A of the issue, I don't think that means they would be willing to give a "more likely than not" opinion that side A is wrong, either. They may just think the law is so tangled that they don't want to give a firm opinion. This is Ellsberg Paradox stuff, to be academic: they are unsure about the probability.
Does the Gitlitz opinion bear on these issues? https://www.law.cornell.edu/supct/html/99-1295.ZO.html David Cay Johnston complains that the Supreme Court approved of a position like Trump's in that case, 8-1, in 2001, and that Congress then changed the statute to prevent double counting. If that's what at issue here, it seems Willkie was too relucant to say the scheme was OK. But maybe the issues are completely different, and maybe the SC position was unpredictable--- I don't know.