Monday, December 17, 2018

Tax issue re. Donald Trump, Michael Cohen, and Stormy Daniels

A reporter on the national beat recently asked me whether Trump might be guilty of tax fraud if he deducted the payments of $35,000 per month that he was making, for some period, to reimburse Michael Cohen, for paying $130,000 in hush money to Stormy Daniels. The payments reportedly included a gross-up for the income tax consequences to Cohen, under the assumption that he would include them without deducting the hush money payment.

This would have been a great question for my Federal Income Tax exam, if only (1) I had heard it in time, and (2) it weren’t too politically sensitive to be a proper exam question. (E.g., one doesn't want students' answers to be influenced by their own political views, or their perceptions as to mine.)

Anyway, here’s a lightly edited & expanded version of my response:

That's an interesting question. The key tax issue is, what would have been Trump’s legitimate business reason for deducting the payments to Cohen?  Clearly there would be tension between Trump’s (1) saying it was just personal, hence not a campaign finance violation, and yet also (2) treating it as deductible (if he did).

But here's an odd aspect of it. Suppose we posit that Trump is a long-time criminal who sought the presidency for multiple reasons, but in part as a money-making scheme that would give him opportunities to defraud the U.S. government and the American people by – just to give a partial list – violating the emoluments clause, putting foreign policy up for sale, having the U.S. government pay fees to his businesses, serving the interests of foreign governments that were giving him a lot of money, and so forth. To the extent that he was seeking to maximize the profits from his preexisting business by becoming president, illegal payoffs to Michael Cohen to help him win the election might be viewed as an expense of this business.

Among the relevant tax law doctrines here is the one holding that one can't deduct as business expenses the costs of seeking to enter a new line of business. So, just as law students can't deduct law school tuition (but an established lawyer may be able to deduct expenses of paying for continuing legal education), Trump in 2015-2016 couldn't properly deduct the costs, such as paying off Cohen, of seeking the presidency, if we consider his seeking public office to involve entry into a new business.

But insofar as he was merely seeking to advance his preexisting criminal career by running for president, the case for the business deduction is strengthened.

In short, I think a strong argument against viewing deduction of the amounts paid by Trump to Cohen for silencing Stormy Daniels as improper (whether or not as meeting the mens rea requirement for tax fraud) relates to the view that Trump incurred these costs as part of an ongoing course of criminal activity, of which his political career is merely a continuing part.  Kind of like Michael Corleone moving the family business to Las Vegas.

So far as the mens rea required for tax fraud is concerned, Trump may also have reasonably believed that this line of argument made the payments to Cohen a proper deduction, since surely we know that he was lying when he said publicly that it was merely a personal and private matter.

A further issue pertains to Internal Revenue Code section 162(c)(2), which denies deductions for “an illegal bribe, illegal kickback, or other illegal payment under any law of the United States, or under any law of a State (but only if such State law is generally enforced), which subjects the payor to a criminal penalty or the loss of license or privilege to engage in a trade or business.”

The payoffs to Daniels via Cohen do not appear to have been an illegal bribe or kickback under relevant U.S. law - except, of course, for the campaign finance angle, which led to Cohen’s guilty plea.  Does this make it a nondeductible illegal payment (to Daniels via Cohen) by Trump?  Does it matter if we accept the apparent DOJ position that a president can’t be indicted while in office?  Does it further matter that the statute of limitations will apparently run while he is still in office if he serves for at least five years?

I suppose we could also ask whether the expense could be deducted or instead was required to be capitalized, as an input to creating goodwill. (Or was it merely about preserving existing goodwill? Cf. the pompous, confused, Delphic, and ultimately verging on useless analysis that Justice Cardozo offered in Welch v. Helvering.)

Sounds like a great topic for further legal research by someone (although I don't think it will be me).

UPDATE: A reader points out that, under the so-called INDOPCO regulations (sometimes called the anti-INDOPCO regs, as they involved substantial retreat from the scope of capitalization that was suggested by the eponymous Supreme Court case), Welch v. Helvering-type outlays generally can be expensed, even if there is creation of future value that in principle might seem to support requiring capitalization. 

Thursday, December 06, 2018

Reilly on Shaviro on the pass-through rules

In his newly posted piece on, "Law Professor Argues New Pass-Through Rules (199A) Are Horrible," Peter J. Reilly in Forbes reads my article on the pass-through rules, supplemented by a phone interview. He notes that I published the piece in the British Tax Journal, rather than in the U.S., because (however justifiably) its tone was less temperate than is usual for me.

He notes that I credit section 199A with having "achieved a rare and unenviable trifecta, by making the tax system less efficient, less fair, and more complicated," and that I compare the 2017  proceedings to Gilded Age politics.

It's a fun response by Reilly, and insofar as he disagrees with me it's because my noting that the provision will require business people to "pay large sums to tax lawyers and accountants to figure out how best to structure their arrangements with an eye to minimizing federal tax liability" is good news for accountants such as him.  "So a small portion of those large sums is coming my way."

Reilly also quotes my noting, in the article, that the motivation for the pass-through rules appears to be sociological - aimed at rewarding members of the business elite while excluding member of the more educated professional and academic elites, simply because these are self-consciously distinct groups and the former were driving the bus in 2017.

He responds that this mistakenly classifies accountants as part of the educated classes and the intellectual elite. That may well be right, if one looks just as accountants from a sociological standpoint. But in the 199A list of professions banned from getting the 20% tax cut (other than below income phase-out), accountants were unlucky enough to get grouped, based on prior statutory precedents, with the likes of lawyers, doctors, and artists.

BTW, on a related note, I recently heard through the grapevine an explanation of why, at the last moment in the 2017 enactment process, architects and engineers were taken out of the professional classes' exclusion from full pass-through benefits. The word is that Bechtel told their Congressional patrons (or servants?) to take out engineers, and architects got pulled too because the two groups were listed right next to each other, and a second deletion was thought useful in obscuring the political deal.

Gives you a nice sense of the sheer thoughtfulness behind contemporary Congressional Republican industrial policy.

Tuesday, December 04, 2018

Talks in Tel Aviv

This Thursday night, on the day after my last class of the semester, I'm heading to Tel Aviv, where I'll be participating in two events next week at the Bar Ilan Law School. First, on Tuesday, December 12, I'll discuss my recent article on international tax policy after the 2017 U.S. tax act (see part 1 here and part 2 here). This may be the last time I discuss this piece at a seminar, but as I'm in effect expanding it (plus other stuff) into a short book, it remains reasonably fresh to me.

Second, on Thursday, December 14, I'll be among those discussing Tsilly Dagan's excellent recent book, International Tax Policy: Between Competition and Cooperation. We international tax policy book authors need to stick together. Her book is complementary to mine, as I'm mainly interested in the unilateral angle (what a given country might want to do absent strategic interactions between countries) and she is more interested in the strategic aspect. In the time allotted to me, I'll discuss underlying dilemmas in the field, the book's main contributions, and follow-up qustions or issues.