Three pages of Donald Trump's state tax returns from 1995 obtained and released by The New York Times reveal he reported a $916 million loss for his federal adjusted gross income, leading to speculation about the Republican presidential nominee's real estate dealings and the possibility that he could have used net operating losses to significantly reduce or eliminate his income tax liability in many subsequent years.
According to the Times, the almost $1 billion loss shown in the returns suggests that Trump could have avoided paying federal income taxes for 18 years. Since the story broke, many media outlets and other observers have speculated that the loss is an NOL carryforward, and while commentators note that the use of NOLs is a legitimate part of tax and business planning, some have also argued that they are an example of how the country's wealthiest -- in particular those in the real estate business -- can take advantage of provisions unavailable to other taxpayers to lower their tax bills.
There's nothing wrong per se with Trump claiming NOLs, according to John R. Brooks of Georgetown University Law Center. "If he truly lost a billion dollars, then he should be entitled to use that to lower his income," Brooks told Tax Analysts. But whether Trump really did lose almost $1 billion is harder to determine and "a little harder to believe," Brooks said. "That's why we need more information."
Still, NOLs are part of an "extremely generous set of rules for the real estate business," and they're another way that wealthier individuals are able to structure their affairs in ways that ordinary taxpayers can't, Brooks said.
Other theories for Trump's large loss have also been raised. Tax Analysts' Lee A. Sheppard suggests that the loss may be associated with forgiveness of an $832 million loan to Trump through an S corporation. In which case, given the year of forgiveness, 1995, Trump may have benefited from the statutory glitch at issue in Gitlitz v. Commissioner, 531 U.S. 206 (2001).
Kyle Pomerleau of the Tax Foundation also said that the Times' speculation that Trump could have erased his income tax liability for 18 years relies on an assumed variable that's not known for a fact. The 18-year figure comes if one assumes Trump earned $50 million per year, but Trump could have earned far more or less than that, Pomerleau told Tax Analysts. Trump could have earned $2 billion in 1996 and used up the entire NOL for all anyone knows, he said.
While much of the $916 million loss is presumed to come from the bankruptcies that several of Trump's businesses went through in the early 1990s, it's unknown how Trump calculated that number, Pomerleau added. Even with a loss that large, it may not be possible to assume that Trump paid no federal income taxes, even in 1995, he said, noting that NOLs are calculated differently under the alternative minimum tax and that Trump still plausibly could have been left paying taxes.
"We may be collectively over-speculating here," Pomerleau said.
The 'Alleged' Returns
The documents obtained by the Times include the first page of Trump's New York resident state income tax return, filed jointly with his ex-wife Marla, along with the first page each of the couple's nonresident returns for Connecticut and New Jersey. Both the New York and Connecticut returns indicate the Trumps' federal individual income tax AGI for the year was -$915,729,293.
For positive income, the Trumps reported only $6,108 in taxable wages to go along with $7,386,825 in interest income, $26,051 from dividends, $62,205 in taxable refunds or credits, and $3,427,092 in sole proprietorship income reported on his Schedule C.
The Trumps also reported $3,000 in capital losses, $1,356,097 in losses from the sale of business property, and losses of $15,818,562 on Schedule E of Form 1040. The bulk of the losses, however, were reported as the $909,459,915 loss listed under Line 15, "Other Income," of the New York return, with a note to see an explanatory statement that was not included with the leaked documents.
The Trump campaign in an October 1 statement labeled the returns "alleged" and said they were "illegally obtained." According to the Times, Trump's lawyer threatened legal action against the newspaper for publishing the returns, which the paper made available at http://goo.gl/KqkYHn.
Whether the Times could face federal charges for publishing the returns is an open question. In an October 2 blog post, the Tax Foundation noted that while 26 U.S.C. 7213(a)(3) provides for a $5,000 fine and five years of imprisonment for the unauthorized disclosure of federal tax returns or tax return information, only state tax returns were disclosed in this case.
Trump the Genius?
The Trump campaign, while not acknowledging the tax returns as legitimate, came to the defense of Trump's business and tax acumen. Trump "is a highly-skilled businessman who has a fiduciary responsibility to his business, his family and his employees to pay no more tax than legally required," the campaign said, adding that he has paid "hundreds of millions of dollars" in other types of federal, state, and local taxes.
"Mr. Trump knows the tax code far better than anyone who has ever run for President and he is the only one that knows how to fix it," the campaign said.
Likewise, former New York Mayor Rudy Giuliani, an adviser to the Trump campaign, said October 2 on ABC's This Week that rather than being an embarrassment, the documents show "what a genius he is, how smart he is, how intelligent he is, how strategic he is." Giuliani also emphasized that there was nothing illegal about Trump claiming the loss.
Trump took that same message on the campaign trail. "As a businessman and real estate developer, I have legally used the tax laws to my benefit and to the benefit of my company, my investors, and my employers. I mean, honestly, I have brilliantly -- I have brilliantly used those laws," he said October 3 in Pueblo, Colorado.
Meanwhile, at a campaign rally in Toledo, Ohio, Democratic presidential nominee Hillary Clinton sarcastically asked, "What kind of genius loses a billion dollars in a single year?" Clinton said that while ordinary Americans "were working hard and paying their fair share, it seems [Trump] was contributing nothing to our nation."
Frank Clemente of Americans for Tax Fairness also acknowledged that Trump might have a reasonable reason for claiming the losses and that the "fundamental fault" for enabling wealthy individuals to avoid paying income taxes ultimately lies with Congress. But while Trump "claims that he's the guy to fix the loophole-ridden tax code we have . . . his tax plan would do nothing to erase the loopholes that he's taken advantage of," Clemente said.
And according to Clemente, even if it's still not clear how Trump was able to claim $916 million in losses, the leaked tax returns reveal why he has been so reluctant to release his personal income tax returns. With the leaked returns providing further evidence that Trump has likely paid little or nothing in taxes for years, Clemente said, "I can't blame him" for not releasing them.
"If he thought revealing his returns was advantageous, he would do it. If he thought it was harmful, he wouldn't," Clemente said.
There's no easy way out of this politically for Trump, according to Neil H. Buchanan, tax law professor at George Washington University. "If Trump wants to say that he simply used plain-vanilla rules like NOLs in a very normal way, he loses the ability to call himself a genius about taxes. If, on the other hand, he claims that he did something extra clever, he raises the possibility that he cheated," Buchanan said. "He loses either way, because the only way to settle this is by releasing his tax returns."
Daniel Palazzolo of the University of Richmond agreed that the report by the Times once again brings the spotlight back to the nagging issue of Trump's undisclosed tax returns and puts Trump in the uncomfortable position of having to explain "why such a successful businessman had to take so many losses."
Senate Minority Leader Harry Reid, D-Nev., said the leaked documents prove Trump is "over-leveraged and deeply indebted to someone," adding, "The American people deserve to know who has leverage over this man who wants to be president." Reid also called on Congress to pass the Presidential Tax Transparency Act (S. 2979), which would require major party presidential candidates to make their tax returns public.
Trump has been criticized for months for bucking the trend of presidential nominees releasing their personal income tax returns, a tradition that dates back to 1976. The reason he typically provides for not releasing his returns is that he is under an ongoing IRS audit and that his tax lawyers have advised him not to make his returns public until the audit is complete.
During the first presidential debate held September 26, Clinton speculated that Trump isn't revealing his returns "because it must be something really important, even terrible that he's trying to hide." She also suggested that his returns would show that he pays almost nothing in federal income taxes, to which Trump responded, "That makes me smart."
The Clinton campaign unveiled an ad October 3 that connects Trump's claim that he has a net worth of $10 billion to the Times report that he may not have paid taxes for 18 years. The ad quotes Clinton saying, "If not paying taxes makes him smart, what does that make the rest of us?"
Marie Sapirie contributed to this article.
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