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Legal Scholars Question Trump Attorneys’ Analysis of Russia Ties

Posted on May 16, 2017 by Jonathan Curry, Luca Gattoni-Celli

The White House released a letter May 12 from President Trump’s tax attorneys saying that the past decade of his tax returns show only limited, innocuous ties to Russia, but legal scholars who spoke to Tax Analysts suggested the letter wouldn't satisfy critics’ concerns.

“Saying he didn’t have direct dealings with a Russian company is like saying the sky is blue,” Rutgers University tax law professor Jay A. Soled said of the letter, addressed to Trump by Morgan, Lewis & Bockius LLP tax partners Sheri A. Dillon and William F. Nelson. “The public wants to know if he had indirect dealings with a Russian company,” Soled said.

John R. Brooks of Georgetown University Law Center concurred. “It’s certainly possible that there could be Russian-source income that’s not reflected as Russian-source income in the tax returns,” Brooks said. He noted that if income from a Russian source came through an entity in another country, it would simply show up on a return as income sourced from that country, not Russia.

Dillon and Nelson wrote that their review found that Trump’s returns, “with a few exceptions,” do not show “any income of any type from Russian sources”; any debt owed or interest paid by Trump or his organization to Russian lenders; any equity investments by Russian entities or persons in entities controlled by Trump or his organization; or any equity or debt investments by Trump or his organization in Russian entities.

The letter outlined three exceptions. Dillon and Nelson said that the 2013 Miss Universe pageant held in Moscow earned $12.2 million of foreign income that year, with “a substantial portion . . . attributable to the Moscow event.” The second exception was the 2008 sale by Trump Properties LLC of a Florida estate — which it had acquired in 2005 for about $41 million — to a Russian billionaire for $95 million.

The third exception discussed in the letter was more speculative. “Over the years, it is likely that [the Trump Organization] or third-party entities engaged in ordinary course sales of goods or services to Russians or Russian entities,” Dillon and Nelson wrote, citing sales including rounds of golf on a Trump-owned course or Trump-licensed products such as mattresses. Trump’s attorneys said that such income “would not have been separately identified as ‘Russian’ in . . . books and records and therefore not separately reflected” on the returns. But they added that “the amounts are immaterial” for income falling under the third exception.

That exception illustrates why tax returns are an incomplete picture of an individual’s finances, according to Brooks. “If somebody from Russia bought a tie, you won’t see that reflected” on Trump’s tax returns, he said.

The attorneys for Trump did not respond to a request for comment by press time.

Nor did the White House respond to an inquiry about why the letter, dated March 8, was not released earlier. Trump appeared to invoke the letter during an NBC News interview May 11 while dismissing widespread concern that he may have improper ties to Russia.

Trump said the letter was being provided to Sen. Lindsey Graham, R-S.C., which other news outlets had previously reported. Graham is part of a Senate investigation of Russian tampering with the 2016 presidential election. Graham’s office likewise did not respond to a request for comment.

Practitioners Skeptical

Although Trump touted the letter as “certified” proof that he has no Russian ties, practitioners interviewed by Tax Analysts said that it obscured potential conflicts or failed to address them.

Soled questioned whether Dillon and Nelson framed their letter to Trump so that it only encompassed his income tax returns. After noting that they had been tax counsel to Trump and the Trump Organization continuously since 2005, Dillon and Nelson told Trump in the letter, “As such, we are familiar with your U.S. federal income tax returns and with transactions that are reported on your returns.”

In that capacity, they continued, Trump had asked them to review his returns for the past 10 years. Soled said that lack of specificity might fail to account for Form 709, “United States Gift (and Generation-Skipping Transfer) Tax Return,” or other non-income tax return filings by Trump.

Brooks made a similar point that the letter was narrowly worded to answer a specific question, not all the questions that Trump’s critics have. “I think it settles the question that [Dillon and Nelson] answered,” he said, which is whether Trump’s tax returns from the past 10 years specifically reflect income from Russian sources. “I believe them on that,” he said, adding, “I don’t think there’s any reason they would be lying about it.”

But even if Trump’s lawyers are being truthful, the letter doesn’t answer the question of whether Russian-source income is reflected on Trump’s returns from years outside the 10-year window, Brooks pointed out. He added that when the letter says that there is no Russian-source income, “all that may mean is that there isn’t cash flow that would technically be described as Russian-source.”

Neil H. Buchanan of George Washington University Law School picked up on that point, saying that Dillon and Nelson don’t define what a Russian source is, and that it’s not clear how broadly or narrowly they’re using that term. “They could mean ‘sources/lenders/entities directly owned by the Russian government.’ That would leave a lot of room for sources/lenders/entities that are located in Russia but are private,” he wrote in an email.

Soled conjectured that even though the 2005 Trump tax return obtained by MSNBC’s Rachel Maddow showed Trump and his wife Melania filing jointly, they could have started filing separately in 2006, allowing Trump to transfer property to his wife tax free under section 1041(a) or as a nonreportable gift under section 1041(b).

Melania Trump could sell the transferred property to a Russian individual, perhaps for an above-market price, without any need for her husband to report the sale to the IRS on his own return, Soled said.

Soled also speculated that Trump could transfer property to his children — who are heavily involved in the Trump Organization — or might deal directly with a company based in Bermuda or the Cayman Islands but fully owned by Russians. Soled said Trump could have used such arrangements to hide money or obscure dealings with a Russian entity without leaving any direct evidence on his own tax return.

Critics Unsatisfied

While the letter sheds some additional light on the content of Trump’s returns, it appears unlikely to end speculation by Trump’s critics about whether his returns conceal suspicious business ties to foreign entities, including Russia.

Americans for Tax Fairness Executive Director Frank Clemente told Tax Analysts in a statement that the letter “is about as transparent as Trump has been with his tax returns” and a “distraction” from the ways Trump may have structured his businesses. “Trump may well be using his cloaked Delaware businesses or other shadow businesses he may have registered in tax havens around the world to maintain extensive financial relationships with Russian oligarchs,” Clemente said, insisting the letter does not “substitute for the public’s right to see Trump’s taxes.”

House Ways and Means Committee member Bill Pascrell, D-N.J., likewise dismissed the letter's reference to exceptions, saying in a May 12 tweet: “Exceptions? #CongressMustRequest a closed session review of @POTUS #TaxReturns to help understand the full extent of #TrumpRussia story.”

The letter came a day after The Economist published an interview in which Trump said he will release his tax returns “at some point,” perhaps after he leaves office, but not as a bargaining chip to make a deal with Democrats to support his tax reform plan.

Brooks also said that there’s a “broader point here that tax returns are not a full picture of somebody’s financial situation.” Critics of the president who are hoping to find a “Russian smoking gun” will likely be let down, because “that’s not the value of the tax returns.” Instead, they should expect to see a better overall picture of Trump’s financial situation in general, as well as ways in which he may be “taking advantage or aggressively interpreting parts of the tax code,” Brooks said.

“I never thought they would [find a smoking gun], and sure enough, at least for the last 10 years they probably won’t,” Brooks added.

Buchanan said he wouldn't expect to find any flagrantly improper Russian connection explicitly stated on Trump’s returns. But, he wrote, “information on the tax returns could be the starting point to trace the circuitous connections between Trump and Russia that are currently obscured by maneuvers that allow these lawyers to say, ‘Nothing Russian here!’”

Follow Jonathan Curry (@jtcurry005) and Luca Gattoni-Celli (@TheGattoniCelli) on Twitter for real-time updates.