Pages From Trump’s Tax Returns Raise a Decade’s Worth of Questions
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Version 0 of 1. Like or loathe Donald J. Trump, you have to give him this: He’s done more to shine a spotlight on the loopholes and fundamental unfairness of the tax code than any other American president. In doing so, he’s made a powerful case for tax reform, though perhaps not quite along the lines he has in mind. This, of course, has happened despite Mr. Trump’s strenuous efforts to conceal his returns, reneging on a campaign promise to release them at some point, and defying a decades-long tradition in which presidential candidates have made public, at minimum, their recent tax returns. What we’re left with are scraps from Mr. Trump’s voluminous tax filings that have been leaked to the news media by anonymous sources: his federal Form 1040 from 2005, disclosed last week by Rachel Maddow on MSNBC, and a few pages of his 1995 state tax returns, which include some data from that year’s 1040, revealed by The New York Times last fall. Flimsy and incomplete as they are, those returns nonetheless contain some startling revelations. Last week’s disclosure, on the face of it, was pretty tame: In 2005 Mr. Trump and his wife, Melania, paid $38.4 million in federal tax, or about 25 percent of a reported income of nearly $153 million. So for at least one year, Mr. Trump did pay a substantial amount in federal tax, and he made a lot of money — two claims he has made before that were greeted with a fair amount of skepticism. But scratch the surface, and a far more complicated and troubling picture emerges. On the line for “other income,” the Trumps reported negative $103 million. Tax experts told me that is almost certainly what was left of the $916 million loss reported on the 1995 returns reported by The Times, an amount that could be carried over and used to offset income in future years. “That’s my assumption,” said Leonard C. Green, a certified public accountant who is president of the Green Group, a tax and accounting advisory firm, and author of “The Entrepreneur’s Playbook.” That means that in the years between 1996 and 2005, Mr. Trump was able to use the enormous loss to offset $813 million in income. It’s possible, though unlikely, that some of those tax-loss carry-forwards, as they’re known, expired unused. In 1995 they could be used for up to 18 years, which means any of the losses incurred before 1987 would have expired by 2005. But there’s no evidence Mr. Trump had losses of anywhere near that magnitude that early in his career. Most of the losses are presumed to date from the problems his casino operations ran into in the early 1990s. It’s also possible that Mr. Trump earned close to $1 billion in taxable income during that decade that he sheltered from federal tax using his loss carry-forward. The reason that’s unlikely is also evident on Mr. Trump’s 2005 return: the alternative minimum tax. The A.M.T. is a parallel system for calculating tax liability intended to ensure that high-income taxpayers pay a substantial amount in federal tax even if they have large deductions or other items to offset income. The A.M.T. is much reviled by tax experts across the political spectrum for its unintended consequences and fiendish complexity. “It’s received wisdom among tax people that having two tax systems makes no sense,” said Douglas Holtz-Eakin, an economist who served as director of the Congressional Budget Office and is now president of the American Action Forum, a pro-growth advocacy group. “It’s a shadow tax system. Personally, I believe you should have one tax system you believe in and then live with it.” (I routinely pay the A.M.T., as do many residents of high-tax states like New York and California.) But in the Trumps’ case, the A.M.T. seems to have worked as planned. Using the regular tax calculations, which allowed the Trumps to take the full amount of the loss carry-forward, they were able to reduce their taxable income to $31.6 million. The federal tax due on that amount was $5.3 million, or just over 3 percent of their total income. Because of the A.M.T., the Trumps had to recalculate their tax liability by adding back some of the deductions and offsets, such as payments of state, local and real estate taxes and, it turns out, the loss carry-forward they used to offset ordinary income. That meant the Trumps had to add back the $103 million and then subtract the A.M.T.’s version of the loss (an extremely complicated calculation) to produce what is known as A.M.T. income, which is taxed at a flat 28 percent rate. Since that figure was larger than their taxable income using the regular system, they had to pay the A.M.T.— $31.3 million (which is 28 percent of about $110 million) — plus the regular tax of $5.3 million. In light of that, it is hardly surprising that President Trump has called for abolishing the A.M.T. But a question remains: If the Trumps were subject to the A.M.T. every year, and had to add back any loss carry-forward and pay the resulting tax liability, how did they use up so much of it — $813 million — by 2005? No one I spoke to could answer that question in the absence of the Trumps’ returns from that decade. It seems unlikely that Mr. Trump earned enough to exhaust that much of the loss carry-forward if he was subject to the A.M.T. His 2005 return suggests that his income in 2004 was far less than in 2005. Steven M. Rosenthal, a tax lawyer and senior fellow at the Urban-Brookings Tax Policy Center, pointed out that based on Mr. Trump’s estimated-tax payments for 2005, he appears to have paid about $12 million in federal income tax in 2004. That would almost certainly have been because of the alternative minimum tax, suggesting his A.M.T. income was about $43 million ($12 million divided by 28 percent). Given the recession that began in the early part of the decade, his income in earlier years may well have been less. It’s possible that he even had reported losses (many real estate developers do, as we know Mr. Trump did in some years), in which case he would have paid no federal income tax and wouldn’t have needed any of the loss carry-forward. Losses from partnerships and limited-liability companies, the entities through which the Trumps report much of their income, do not have to be added back as part of the A.M.T. calculation. Since many losses in real estate result from depreciation, a noncash charge (what Mr. Trump might well refer to as a “fake loss”), that’s another big loophole for real estate developers like him. The tax experts told me that one explanation for how Mr. Trump could use $813 million of his loss carry-forward before 2005 could be that he was the recipient of enormous debt forgiveness by his lenders. (Trump Hotels and Casino Resorts filed for bankruptcy for the second time in 2004, and bankruptcies often result in debt forgiveness.) Forgiveness of debt is usually treated as ordinary income, and taxed accordingly. But thanks to another loophole available to Mr. Trump, it’s possible to offset income from debt forgiveness with a loss carry-forward and enter only the net amount on the line for other income. That means the offset escapes the A.M.T., because only the net amount entered on the “other income” line has to be added back in the A.M.T. calculation. Hypothetically, Mr. Trump could have had $300 million of debt forgiveness in 2005, and, assuming he had $403 million in loss carry-forwards, he would have entered the negative $103 million for other income ($300 million, less $403 million). The $300 million in debt forgiveness would thus escape taxation, since only $103 million was added back as part of the A.M.T. calculation. That information would have been disclosed on a schedule attached to the Trumps’ return, but no such schedule has been revealed. Confused? If so, you’re not alone. “It’s fiendishly complicated,” Mr. Holtz-Eakin said. “I have a dream of a tax code that the average Ph.D. in economics can understand and comply with.” The complexity alone should be cause for reform. Details aside, the bottom line is that by 2005, the Trumps appear to have significantly reduced their taxes by offsetting $813 million of income thanks to the loss carry-forward. Many millions more would have gone untaxed, thanks to other loopholes that wouldn’t show up on just two pages of Form 1040. Hope Hicks, a White House spokeswoman, declined to comment for this column. There is nothing inherently illegal, of course, about using the tax code to minimize what one owes. But all of this should make perfectly clear, if it wasn’t already, why presidents need to release their tax returns. Will Mr. Trump’s proposals for tax reform address these loopholes? Or will they simply be efforts to further line his own pockets and those of family members who now run the Trump Organization? “We’ll never know unless he releases his returns,” Mr. Rosenthal said. |