Wednesday, September 30, 2020

The Pandemic versus the Shiny Distraction of Trump’s Taxes

by Neil H. Buchanan
Every day that the news is not focused on the Covid-19 pandemic is a good day for Donald Trump.
Earlier this year, I wrote two columns on Dorf on Law (here and here) in which I argued that the Supreme Court's decisions in what had become known as the "Trump tax cases" were surprisingly but profoundly unimportant.  I conceded that the Court had done something good by not doing something terrible, which in this instance would have involved endorsing Trump's insane "absolute immunity" theory.  Otherwise, however, the cases were in fact not particularly important politically or practically.

Every day that the news is not focused on the Covid-19 pandemic is a good day for Donald Trump.
In those columns, I argued that "Democrats might even be better off in a world in which Trump insists on acting like he has a lot of bad things to hide than in one where we get to see what he is hiding (even if it is truly bad)."  Well, courtesy of some truly great journalism by reporters at The New York Times, we now have a rather clear idea of how truly bad things are, and why Trump was hiding all of it.

Every day that the news is not focused on the Covid-19 pandemic is a good day for Donald Trump.
Given that I am a professor of tax law, and given how often I have opined that knowing the details of Trump's taxes is unlikely to be enlightening or helpful to those who oppose him, I am not surprised that people have contacted me to ask if I am planning to write about The Times's bombshell.  What are my key reactions to all of this?

Every day that the news is not focused on the Covid-19 pandemic is a good day for Donald Trump.
Most importantly, it is now obvious that Trump committed tax fraud on a rather massive scale.  Yes, a prosecutor would of course investigate further and nail down all of the elements of each count against Trump, but I am saying that I would be shocked if even a semi-competent prosecutor could not bring this case home with ease.

We can start with the most glaring red flag, which is the two consecutive years for which Trump paid exactly $750.00 in federal income taxes.  This is actually much more damning than the multiple years with zero taxes paid, because getting to zero tax liability happens whenever taxable income (after deductions and so on) is zero or less.  So two years of paying zero in taxes could happen as a result of very different computations of taxable income.  Two years of $750, though?  Not a chance.  And that result is actually even more difficult to believe, because inflation adjustments and other changes from 2016 to 2017 would require different taxable incomes to result in consecutive $750 tax payments.  I do not know why they went with $750 as their target, but that result had to have been reverse-engineered.
Every day that the news is not focused on the Covid-19 pandemic is a good day for Donald Trump.
Like so much of what we have seen in The Times's story, this is the opposite of sophisticated tax planning.  This is, in fact, clumsy in the extreme.  In 2005, because of a complication caused by my having worked in one state while living in another, I hired a Manhattan-based accountant.  Even though I told him that I had not made any charitable contributions that year (don't judge me!), he sent me a Form 1040 for my signature that showed me taking a $300 deduction for charitable donations.  When I pointed this out, he said, "Oh, right, I give all of my clients $300 for that deduction.  You probably did at least that much but didn't keep track."  This reliance on self-help round number defaults is the foundation of hack accounting.
There are also the now-much-discussed deductions for personal grooming ($70,000 for hair styling), the $2.2 million business deduction for property taxes on a family residence, paying his daughter as a "consultant" even though she is also an employee, and on and on.  Again, the information available would of course need to be supplemented for a prosecutor to win in court, but these examples are not even close to a legal gray area.  And more broadly, the absence of innocent explanations for the bottom-line outcomes is striking.
Every day that the news is not focused on the Covid-19 pandemic is a good day for Donald Trump.
Shortly after The Times published the article on Sunday, a reporter from a different news organization called to ask me for my take on the story.  I later saw that my first reaction was shared by many other commentators: Trump is either a tax cheat, a terrible businessman, or almost certainly both.  As his former lawyer Michael Cohen testified to Congress last year, Trump routinely inflates numbers to exaggerate his wealth to lie to lenders and then deflates the numbers to lie to the IRS.

Trump and his apologists are arguing that it is perfectly okay for him to have paid zero taxes in any given year, because that is simply what happens when deductions are greater than income.  That does not in any way prove, however, that Trump's deductions were all legitimate.  Instead, it merely says that it is possible for a taxpayer to have legitimate deductions that exceed his income.  Trump talks about depreciation deductions, which truly have been outrageously generous for decades, but such deductions depend on the values of the assets being depreciated.  If Trump has overstated the value of depreciable assets, then he has necessarily helped himself to excessive deductions.

But most importantly, legitimately paying no taxes means legitimately not having taxable income.  We have plenty of rules on the business side (but not the personal side) allowing businesses to use losses in one year to offset taxable income in other years, but when I teach those rules in class, I note that there is a self-enforcing aspect of such tax giveaways, because a business that cannot in good years make up enough to cover its losses from bad years will quickly go out of business.  Trump, however, runs businesses that should by all accounts have folded years ago.  So it is not even that he is a tax cheat, a terrible businessman, or both.  He would have to be a terrible businessman who also somehow never goes out of business.  Hence the personal loans that are soon to come due.

Every day that the news is not focused on the Covid-19 pandemic is a good day for Donald Trump.
The most amusing aspect of all of this was that Trump's initial response to the story in The Times included this: "The IRS does not treat me well, they treat me like the Tea Party and they never treat me well, they treat me very badly."  Why do I find that amusing?  Because Trump was desperately trying to claim victim status by referring to what I long ago dubbed the "IRS non-scandal," in which Republicans spent years investigating the IRS for supposedly having engaged in "political targeting" of Tea Party and other right-wing groups.
As I explained in my summary of the non-scandal's anticlimactic end three years ago, the IRS's inspector general reported in 2013 that the IRS had used political keywords in screening applications for "social welfare organizations," which are prohibited from engaging primarily in political activity.  Even though that was probably a smart search strategy, the IRS's lawyers had already instructed the agency's workers not to do that anymore, because it looks like it is content-based enforcement.  Nonetheless, Republicans were absolutely sure that Barack Obama was behind it all, and they tried mightily to prove it.  They found nothing, ultimately settling for an apology from the IRS that merely repeated what the IRS had long since changed and already apologized for.

Trump, of course, cannot blame Obama for targeting him, so this is yet another example of his certainty that the IRS is part of the deep-state plot to get him.  So even though he claims that The Times's story is fake, he is saying that the IRS is out to get him by releasing damning information, just as the IRS had "targeted" right-wing groups for being right-wing -- even though the IRS had also used search terms like "occupy" and "progressive" in its later-abandoned screening protocols.  It is yet another example of Trump's instinct to turn everything into an attack on people's motives.
Every day that the news is not focused on the Covid-19 pandemic is a good day for Donald Trump.
Trump has been acting as if the coronavirus pandemic is solved, going so far as to refuse to answer a reporter's question when she asked him for a comment after the U.S. death toll passed a stunning 200,000 (and is projected to more than double by the end of the year).  As the media chases stories about his taxes, his refusal to promise a peaceful transition of power, his embrace of white supremacists, and on and on, they have allowed the pandemic to disappear from the headlines.

I am very worried about all of those stories, and I also continue to think that Trump is soon going to steal the presidency and deal the final blow to constitutional democracy in the United States.  Even so, ...

Every day that the news is not focused on the Covid-19 pandemic is a good day for Donald Trump -- and a very bad day for the rest of us.


former student said...

Creepy style. Perfect reflection of the lying media. Every day people are locked down and miserable is a good day for Democrats. Every day kids are prevented from going to school is a good day for Democrats. Every day working parents have to send their kids to daycare and spend the entire evening trying to homeschool them is a good day for Democrats. Every time another death involving covid as an incidental finding is a good day for Democrats. Every day we distort science to claim that the 10% of people who died with covid died of covid — even though 10% of people who lived have lived with covid — is a good day for Democrats. Every day we pretend the US death rate is out of line with the death rates of other countries by using raw numbers instead of per capita numbers is a good day for Democrats. Every day doctors and scientists are silenced and ridiculed for daring to question obvious infirmities in the lockdown and school closing arguments is a good day for Democrats. Every day we silence people who fill out death certificates for a living about the true causes of death and the true incidence of incidental fevers and infections of all kinds in accelerating death from known causes is a good day for Democrats. Every day we ignore the obvious and expected consequences of over 50% of people with two or more life threatening conditions avoiding urgent and preventive health care appointments out of fear of covid is a great day for Democrats. Every day we kill people with fear and deprive disadvantaged kids of an education is a great day for Democrats.

former student said...

Every day we ignore the consequences of loneliness and isolation especially in teens, young adults, and people living in nursing homes with or without dementia is a great day for Democrats.

former student said...

Every day we ignore polls showing that 35-45% of Black and Hispanics report that they would not go to the emergency room even if they thought they were having a heart attack or a stroke because of fear of covid is a great day for Democrats.

David Ricardo said...

A few comments on the tax issues, which many of us believe are important because the average voter can identify with a high net worth person paying no taxes.

1. “ I do not know why they went with $750 as their target, but that result had to have been reverse-engineered.” We now have further clarification on the $750 tax liability for years 2016 and 2017. Based on detail provided by the Times, we now know Trump was subject to AMT, but had a general business credit (form 3800) to offset his AMT liability. The GBC reported was exactly $750 less than the AMT liability in each year. One can assume that there was probably more than enough GBC to offset the AMT liability but that Trump’s accountants left it $750 short so the return would not be flagged for having zero liability.

2. With respect to consulting fees for his daughter, the issue is whether or not she reported it as income. If she did the net income tax effect was zero, deduction for Trump, income for Ivanka. There might have been a small benefit from payroll tax evasion. But one suspects Trump intended it as a non-taxable gift to Ivanka and then the greedy bastard tried to deduct it. A good question is now many others of this type of transaction have occurred.

3. In terms of deductions for ‘hair styling’ one needs to know if the IRS routinely allows this type of deduction as an unreimbursed business expense for performers. A smart tax advisor would have had that service paid for by the network airing his TV show, but there is no evidence that the word ‘smart’ should ever be associated with Trump.

4. Depreciation on real estate is where there is likely civil or criminal fraud. A development must split the costs between building and land and because land is not depreciable developers tend to under allocate the cost of a project to land. Also, depreciation on the building is very low as it is taken over a long period. So developers do what is called ‘cost segregation’ in which they strip out the costs of things like HVAC, electrical work etc. which have much shorter depreciable lives and get a larger depreciation deduction. Trump probably did this to the extreme.

5. The post is correct that repeated losses ultimately doom a business. But it seems Trump kept things going with loans that financed the losses, loans so risky they required his personal guarantee. But that as we know only postpones the day of reckoning. He may have suspended basis meaning if he is forced to sell some partnership interests he may have a tax liability greater than the sale proceeds. One can only hope.

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