Tuesday, July 06, 2021

TrumpWorld v. Those Pesky, Pesky Tax Laws

by Neil H. Buchanan 
 
Last week, the Manhattan DA's office (working with the New York State Attorney General's office) charged various entities in TrumpWorld with a large number of felonies, and surely there are more to come.  Some of the charged crimes involve tax fraud, which is directly in my academic remit (as the Brits say).  The contours of Donald Trump's response -- not exactly a "defense," at least in any legal sense of that word -- are now becoming clear, and they are unsurprisingly absurd.

I will begin here with an overarching nontax issue relevant to the indictments, with the remainder of the column devoted to tax matters.  Bottom line: the charged crimes are serious, the crimes themselves are in no way sophisticated or borderline cases, and pursuing these charges is essential to the rule of law.

The loudest nontax-related argument coming from Trump, his adult children, and his other enablers is that this prosecution is a politically motivated abuse of the legal system.  References to "banana republics" fill the air of the right-wing mediaverse, and even some left-leaning commentators have offered responses like this: "If the parties' roles were reversed, wouldn't we at least stop to wonder whether there was something purely partisan afoot?"  That instinctive response by liberals is a laudable one, but (as pretty much all of them quickly acknowledged), other than motivating a "to be fair" aside, Trump's Banana Response is an empty talking point.
 
In a column last month that discussed Trump's degradation of the Department of Justice, Professor Dorf noted that the core rule of Justice's Principles of Federal Prosecution requires "partisan-neutral and person-neutral criteria for prosecution."  In particular, "a decision to target a President's political rivals for investigation or prosecution when otherwise similarly situated persons are not targeted would be an impermissible partisan and person-based approach."

As I have noted twice previously (each time crediting MSNBC's Ari Melber, who is a lawyer, for having laid out the argument that I was repeating), if it is bad to prosecute people for political reasons, it is also bad to decide for political reasons not to prosecute people.  "I don't want to face the political consequences of properly pursuing a case against my rivals" is inappropriate in exactly the same way as "I want to gain political advantage by prosecuting my rivals."
 
That is, the logical flip side of Professor Dorf's formulation must be that "a decision to show leniency to a President's political rivals for investigation or prosecution when otherwise similarly situated persons would be targeted would be an impermissible partisan and person-based approach."
 
Last Friday, Rachel Maddow's show devoted an important segment to reminding the public that Leona Helmsley's criminal conviction in the late 1980's was all about the kinds of tax evasion that TrumpWorld is now accused of committing.  Indeed, the similarities are almost eerie.  The fact is that people who are not former presidents have been convicted of these sorts of crimes throughout our history.  Certainly, to take but one example, a prosecutor who found a business that was keeping two sets of books would be guilty of malpractice if she did not aggressively pursue the case.

So much for the "It's all politics" defense.  What about the content of the tax charges?  Now that he is again traveling the country holding his propaganda rallies, Trump has debuted a "What's this all about, anyway?" defense:
"They go after good, hard-working people for not paying taxes on a company car.  Company car.  'You didn't pay tax on the car!'  Or a company apartment.  'You used an apartment, because you need an apartment, because you have to travel too far where your house is, and didn't pay tax.'  Or education for your grandchildren.  I don't even know.  Do ... do you have to p- ... Does anybody know the answer to that stuff?"
Yes, plenty of people know the answer to that stuff.  It is taxable!  It is not even a close call.  Like the Helmsley case, this prosecution is unlikely to show up in any future tax law casebooks, because it is simply not interesting analytically.  It would be like asking whether someone who plans to kill another person without cause and then does so is guilty of murder.  There is no nuance here.
 
But this is the same Donald Trump who thinks that everything that is new to him is new to everyone else.  Remember when that Frederick Douglass guy was getting a lot of attention for what he was doing a few years ago?  Or how Trump claimed to have invented the term "priming the pump," which had been in usage for over eight decades?  Now, he asks whether "anybody knows" whether you have to pay taxes on fringe benefits.
 
[Note: The analysis below is based on federal tax law.  I'm aware that the Manhattan DA's case is based on state law, but any differences between the two bodies of law are immaterial.  Although NYS "piggybacks" on federal tax law less than most states do, the principles that I describe here are fundamental to all tax law.  Again, any differences are not going to get TrumpWorld off the hook.]

The starting point in all income tax analysis is section 61 of the Internal Revenue Code, which defines Gross Income.  After defining gross income (somewhat circularly) as "all income, from whatever source derived," that section provides a list of 14 examples of items that most definitely are gross income.  The very first item on the list is: "Compensation for services, including fees, commissions, fringe benefits, and similar items" (emphasis added).
 
When Trump tells his followers that every company "does fringe benefits" and tries to dismiss them as minor "perks" unworthy of the attention of the tax authorities, he simply misses the point that fringes are (with exceptions that I will discuss momentarily) quite obviously taxable.
 
Crucially, the entire tax system would likely collapse if it were possible to compensate employees with noncash items as a way to avoid taxes.  Again, this is the kind of thing that most Basic Income Tax courses in law schools (and presumably accounting and business programs as well) cover in the first few weeks of class -- and they are only worth even that much attention because of the possible exceptions.
 
To take a simple example, I know a number of people who have been in a long-term employment relationship with a media company as a "side gig."  In addition to being paid for piecework, the employer at the end of one year gave the employees brand new iPhones.  Were those taxable?  Yes, full stop.  They were clearly compensation, so they fit into that very first example of Gross Income, "including ... fringe benefits."

Note that in this example, as in the Trump cases, there is no escape route by calling the perks mere acts of "generosity."  Even though gifts can be excluded from gross income, Section 102(c) states clearly that that exclusion "shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee."  Among other things, this prevents employers from saying that everything, including cash salary, is not compensation for services but is instead an ongoing gift.

One of the subtleties of studying tax law is understanding the difference between (a) not being allowed to do something and (b) being allowed to do something but being required to pay tax on it.  Students sometimes read about a taxpayer losing a case in which she tried not to pay taxes on a fringe benefit, and they are tempted to conclude: "So employers are not allowed to provide that kind of fringe benefit."  That is a version of (a), which is wrong, whereas the logic of (b) correctly says: "Hey, employers and employees, you can structure your compensation packages in any way that you want, but that does not turn taxable compensation into tax-free compensation.  You can substitute fringes for cash, but the employee pays taxes on the fringes just as much as he would pay taxes on the equivalent value if received in cash."  (And by the way, the employer is allowed to deduct the value of the fringes in exactly the same way that employers can deduct cash salary, as an "ordinary and necessary" cost of doing business.)

An employer might say to an employee, "I hear your grandkids are going to be in college soon.  Do you want me to pay for that?"  Of course, the employee would say yes; but it should not (and does not) matter whether the employer pays the tuition directly or adds to the employee's salary to cover the cost.  The additional compensation is taxable.  If the employer wants to be truly generous, he can even "gross up" the amount, paying the employee enough extra money to cover both the extra compensation and the consequent increase in income tax.

Of course, the more likely situation is that an employee wrongly thinks that his fringe benefits will be untaxed and decides to request that some of his existing compensation be converted into noncash forms, such as paying tuition.  If the system allowed that, employees and employers could simply collude to turn as much of the employee's compensation as possible into noncash benefits, then split the tax savings.

Once again, everything that I am writing here is incredibly old news.  There is nothing unique, insightful, or clever about the observation that a Trump-like approach to fringes would invite rampant abuse.  This is easy, easy stuff.  A person might think as a policy matter that taxes are too high, or he might opine that grandparents should not be somehow "punished" for wanting to help their grandchildren go to college, but the law as currently written says -- quite sensibly -- that these are taxable as income.

As I noted above, however, there are some complicated exceptions to the baseline rule that fringe benefits are includible in gross income.  Trump mentioned company-provided apartments, for example, which one might imagine could be excludible under Section 119(a):
"There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer, but only if, ...in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment."
The "required to accept" provision and the "on the business premises of his employer" provision are not models of legislative clarity, but because this section of the Code has existed for more than 80 years, the contours of what is permissible have been well established for a very long time.  A highly-compensated employee who maintains a home elsewhere but who is provided with a pied-a-terre in the City simply will not be able to rely on Section 119(a).  We do not allow people to deduct commuting expenses, and we certainly do not allow people to say that because they "need" a second abode nearer to work, they can receive that benefit tax-free.
 
Remember that the employee is still much better off, even paying taxes, than if the fringe had never been provided at all.  At a marginal tax rate of 24 percent, for example, a free apartment worth $2000 per month only costs the employee $480 per month.  I think most people would take that deal.

Similarly, the facts of the Trump case would not allow anyone to characterize the perks as fitting under any of the provisions of Section 132, such as "no-additional-cost services," "qualified employee discounts," "working condition fringes," "de minimis fringes," and so on.  Even where the fringe might seem to qualify in some way under one of those provisions, there are strict rules preventing special treatment for certain employees as well as limits on how much can be excluded.  This is still very easy stuff.
 
Take company cars as an example.  Again, this is hardly virgin ground, precisely because quite a few companies do provide cars to certain employees (as taxable fringes).  Section 132(f) carefully lays out the limits on the "qualified transportation fringe" exclusion, and company cars simply do not fit the bill.  For one thing, such a car would not meet the definition of "commuter highway vehicle" required in the Code, and even if it did, the exclusion is limited to $175 per month.  Unless the indictees can show that, say, their company cars were valued at $500 per month and the employees dutifully included $325 per month ($500 minus $175), they are still in violation of the law.
 
On all of these questions, there are no legal gaps that have not been filled long ago.  If there were wiggle room on any of this, the Manhattan DA certainly would not have included these charges, especially in a criminal case.

Again, a company is absolutely free to provide any of these perks to any employee on whom it wishes to bestow special favors.  The employee, however, must choose between receiving the perk and paying taxes on it or refusing the perk.  It is not a tax-free fringe benefit.

Most importantly, the New York indictment does not attempt to nail someone for making an honest mistake or for a one-time violation of a vague tax provision.  The prosecutors lay out an elaborate, fifteen-year-long scheme by which Trump's employees were provided taxable benefits on which they did not pay taxes (even as the business deducted those expenses).  This is a planned set of criminal acts, by which people avoided paying millions of dollars in taxes.

At this point, those among Trump's supporters who would previously have picked up the pitchforks to go after someone like Helmsley have decided that anything that Trump does -- even shifting taxes onto The Little People -- is fine by them.  For the rest of the country, however, this is what the arrogance of the wealthy looks like.  It is why tax evaders are not sympathetic defendants.  People do not like paying taxes, but they have no choice; and slick New Yorkers who try to get away with tax evasion are rightly reviled.

The DA's case might not be the sexy bombshell that some people hoped it would be.  (Such an indictment might yet be in the works.  Who knows?)  But what makes the case so interesting is that the legal analysis has virtually no gray areas.  TrumpWorld simply decided that the rules do not apply to them.  They were wrong.

5 comments:

Michael Byrnes said...

This post was great!

I had one question about the indictment, which:

1. Alleges a scheme whose purpose was "to compensate Weisselberg and other Trump Org executives in a manner that was off the books."
2. States that Weisselberg was "one of the largest individual beneficiaries" of the scheme.
3. Notes that Weisselberg received $1.76 million in ureported income from this scheme, allowing him to evate a bunch of taxes and fraudulently claim refunds, along with hiding his NYC residence and evading city taxes.

So, multiple people involved, Weisselberg was ONE OF the largest beneficiaries, but the indictment only mentions Weisselberg's money.

Does that suggest that there is more to come? Why indict only Weisselberg now?

kotodama said...

[new nym! f/k/a hardreaders]

@Michael Byrnes

Good questions. Jack Townsend's blog addresses these in more detail. Specifically, his point #3 surmises that larger beneficiaries may include TP himself and his family members.

http://federaltaxcrimes.blogspot.com/2021/07/preliminary-comments-on-trump.html

As to whether corresponding indictments are coming, well, maybe. I'd guess the DA also wants to pursue those, but getting evidence and/or cooperation from Weisselberg first would help facilitate that.

Prof. Shaviro has even more analysis of the indictment over at Just Security.

https://www.justsecurity.org/77331/the-weisselberg-indictment-is-not-a-fringe-benefits-case/

-kd

HuskerDru said...

Wouldn't an (admittedly very technical) exception to the two-sets-of-books rule be where applicable tax law diverges from Generally Accepted Accounting Principles? Of course, in such instances, both sets of accounts would be transparently available both to external auditors and the relevant tax authorities.

Michael A Livingston said...

I think the larger problem is that these behaviors were apparently going on for quite some time, and nobody—including some extremely competent prosecutors’ offices—thought them worth prosecution. So it is very hard to escape that these are political prosecutions. I don’t think the opinions of Ari Melber of Rachel Maddox, who work for a network whose business model essentially requires them to attack Trump at all times, are especially relevant here.

Greg said...

I think there actually ARE good reasons to exercise a certain amount of leniency towards your political rivals (or even some non-rival political actors.) The first is that avoiding the impression of pursuing a criminal case against your political rivals has negative effects on the country as a whole. The pardon of Richard Nixon comes to mind as effectively a choice not to prosecute that helped the country to heal.

The other reason is that no one can be truly, perfectly non-partisan. As a result, there is a reasonable argument to exercise leniency towards your political rivals in borderline cases, as a way to avoid succumbing to hidden political biases.

None of this is to say that the tax cases against President Trump necessarily qualify for the above forms of leniency (particularly the latter) but as a general rule, a certain amount of leniency towards political rivals is appropriate.