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Trump may have used illegal scheme to avoid paying taxes

New documents show he pushed — and possibly exceeded — the limit on loopholes that Congress closed years later.

Donald Trump at a 1990 ceremony for the opening the Trump Taj Mahal Casino Resort in Atlantic City. CREDIT: AP Photo/Charles Rex Arbogast
Donald Trump at a 1990 ceremony for the opening the Trump Taj Mahal Casino Resort in Atlantic City. CREDIT: AP Photo/Charles Rex Arbogast

Republican presidential nominee Donald Trump has basically admitted that he avoided paying federal income tax for years in the 1990s. But because he still hasn’t released his tax returns, it hasn’t been clear exactly how he was able to do so.

Now documents newly obtained by the New York Times show that he may have stretched the limits of tax law, exploiting a loophole that Congress closed in 1993.

The documents uncovered by the Times relate to to his Atlantic City casino bankruptcy filings from the early 1990s. They show that, as his casino empire was suffering massive losses, he pulled off a bait and switch that allowed him to get out of owing tens of millions in taxes.

He had financed his resorts in Atlantic City with $1.3 billion in debt; by 1992 the properties had all filed for bankruptcy and the bondholders were forced to forgive hundreds of millions of dollars of that debt because Trump couldn’t repay it.

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Because these companies were partnerships, any profits or losses showed up directly on Trump’s own tax bills. And when the bondholders forgave that debt, it should have been counted as taxable income for Trump, thus significantly raising what he owed the government. Every dollar of canceled debt is viewed by the IRS as if it were a dollar of taxable income.

Trump didn’t have the money to pay that kind of bill. In the early 1990s, there were times when he had only a few million dollars, much less than the tens of millions that he would have owed.

So he took an aggressive, contentious, and potentially illegal step to reduce his tax bill.

Corporations at the time were already using what was known as a “stock-for-debt swap,” a frowned upon strategy that let them avoid tax obligations on forgiven debt. Companies would convert that debt into stock, no matter whether their stock was essentially worthless. This would make it look like they had repaid everything they owed and allow them to avoid any taxes on the forgiven portion.

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Trump didn’t own a corporation, where the profits and losses are all taxed at the business level. He owned partnerships. But he decided to use the same strategy anyway, swapping “partnership equity” for the forgiven debt to make it look like he had fully repaid a loan even though he hadn’t.

By avoiding the taxes he would otherwise have owed on the forgiven debt, he was able to preserve the $916 million loss that the Times previously found he reported, which he could have used to avoid paying any federal income taxes at all for up to 18 years. That loss would have been wiped out by the tens of millions in forgiven loans; instead he kept it intact.

Tax experts that the Times spoke to noted that this strategy was highly dubious. “Whatever loophole existed was not ‘exploited’ here, but stretched beyond any recognition,” said Steven M. Rosenthal, senior fellow at the Tax Policy Center.

“He deducted somebody else’s losses,” said John L. Buckley, who served as the chief of staff for Congress’s Joint Committee on Taxation in the early 90s. Essentially, Trump took losses experienced by his investors, which should have reduced their tax bills, and pretended to wipe them out, thus denying them that tax advantage. “He’s getting something for absolutely nothing,” said Buckley.

Trump’s own tax lawyers at the time didn’t think he could get away with it. In letters meant to protect Trump’s strategies during an audit, they instead cast doubt on what he had done. “Due to the lack of definitive judicial or administrative authority,” they wrote, “substantial uncertainties exist with respect to many of the tax consequences of the plan.” One letter found that six of seven components of his gambit were likely to be ruled against by the IRS. It’s unknown whether the IRS ever challenged his returns; he was under audit by the IRS by 1993.

The IRS had already objected to both corporate stock-for-debt swaps and partnership equity-for-debt swaps. And soon Congress stepped in to get rid of the maneuvers. While both the agency and lawmakers repeatedly tried to curb them during the 1980s, Congress successfully banned their use for corporations in 1993 and then for partnerships in 2004.

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When confronted with his tax avoidance during the presidential race, Trump has often thrown the charge back at his Democratic rival, Hillary Clinton, arguing she should have clamped down on tax avoidance schemes while in office. “If you don’t like what I did, you should’ve changed the laws,” he said at the final presidential debate. But Clinton was among those who voted to close the loophole.

While the new documents appear to show Trump avoiding taxes through strategies that weren’t condoned by tax law, he’s also aggressively used legal means to get out of paying taxes. Because he owns so many partnerships, he’s been able to take losses on some companies to reduce the taxes he would have owed on other sources of profit and income — even things like money made on The Apprentice or from Trump Steaks — thus lowering his bill. Most Americans, however, can’t do the same if they lose money on investments or the value of their houses. Real estate developers like Trump can also count what are known as “paper losses”: assuming that their buildings have lost value over time and deducting that from their income, or deducting the interest paid on money borrowed to buy properties.

These tactics are legal, but Trump’s $916 million loss, possibly generated through these means, is a massive outlier, coming to a full 2 percent of all such losses reported in 1995.

Trump has also insisted that while he may have fought tooth and nail to get out of federal tax obligations, he’s paid plenty of taxes to state and local governments. But there again he has fought aggressively to reduce his bills, fighting with local governments and tax assessors to reduce the value of his assets, like golf courses and hotels, and thus what he owes, even when it contradicted the value he gave them on financial disclosure forms.

Because any tax revenue lost from a state or local budget has to either be made up from another source or be offset by cutting public services, these are the tax avoidance schemes that hurt the most.