Someone with a sophisticated understanding of tax law very specifically picked Donald Trump's 1995 state tax returns to send to The New York Times, succeeding not only in making a political point easily grasped by the public but quite possibly in shaping federal tax reform next year.
That encapsulates much of the immediate reaction from current and former state tax officials and practitioners to the unauthorized disclosure of the Republican presidential nominee's alleged New York, New Jersey, and Connecticut individual income tax returns.
But there is more, including the following general points of consensus:
- The documents themselves -- including the lack of official intake stamps and the presence of a sticky flag pointing to a line on the New Jersey return -- suggest that these are personal copies and that the sender was not from the IRS or a state tax agency.
- Although Trump could file suit against the Times, the newspaper wouldn't be liable under federal or state taxpayer confidentiality laws.
- It's impossible to know whether there was any wrongdoing by Trump, but it's entirely possible -- likely, even -- that there wasn't.
That last point was likely not a concern for the sender, said Verenda Smith of the Federation of Tax Administrators. She said someone selected Trump's 1995 tax year return because it shows a nearly $1 billion loss that Trump could carry forward for years.
"Whoever mailed this intended for there to be political turbulence and, judging by the results, chose that year very carefully," Smith said.
The public overnight instantly grasped that Trump's primary lines of business receive substantial income tax benefits. Up until this week, net operating loss carryforwards and carrybacks have been considered to be desirable and legitimate tax policy, but the release of Trump's returns could lead to increased federal scrutiny of those provisions.
"I think all of the lobbyists for real estate tax interests before Congress just canceled their vacations for the next six months," Smith said.
Connecticut Revenue Commissioner Kevin Sullivan added a similar sentiment at the end of an October 3 statement. "At a policy level, any situation like this is a wake-up call," he said. "The federal tax code can be manipulated to avoid taxation even while making lots of money. That's all the worse because the burden then trickles down to all the other taxpayers who do not have the resources to game the system."
In an October 1 statement responding to the Times article, the Trump campaign said "the only news here is that the more than 20-year-old alleged tax document was illegally obtained" and that Trump "has paid hundreds of millions of dollars" in state and federal taxes.
An early-morning tweet from Trump's official Twitter account the next day read: "I know our complex tax laws better than anyone who has ever run for president and am the only one who can fix them." The tweet, which tagged the Times's main Twitter account, ended with "#failing."
Who's the Source?
The gist of Sullivan's statement was that after an internal review, there's no reason to believe that Connecticut tax records were disclosed by anyone at the agency. The commissioner added that "there are so many other possible sources like family members, employees, lawyers, accountants -- especially if someone was disgruntled over not being paid or otherwise treated badly."
"It is inconceivable that anyone could have broken into one, much less three, tax agencies and gotten into 15-year-old files that are in deep storage and are encrypted," Smith said.
Randall Fox of Kirby McInerney LLP said some preliminary conclusions can be drawn from the fact that the source sent one page from the state tax returns for each of three states.
"First, it does not look like the source was an IRS employee because they would not likely have state tax returns," Fox said. "Second, the source does not appear to be an employee of a state tax agency because the employee of one state agency would be unlikely to have returns from other states."
Jack Trachtenberg of Reed Smith LLP pointed out that the sticky flag with an arrow that shows up on the New Jersey return "probably would have been removed before being sent to the taxing authority," which he said suggests that the documents are file copies that were retained by an individual outside government.
Trump and his then-wife, Marla Maples, their tax preparers, and their lawyers -- including divorce lawyers -- all could have had access to the 1995 documents.
Trump in the Clear?
"The media just seems to be assuming that something was done illegally," said Fox, former head of the New York attorney general's Taxpayer Protection Bureau. "I don't think we've seen enough to know whether it's illegal or not, in the same way the disclosed pages do not tell us whether the taxpayer is a genius or a fraud."
And although New York State Attorney General Eric Schneiderman (D) on October 3 issued a notice to the Donald J. Trump Foundation saying that it must stop fundraising in the state because it had violated state law, Fox said it's too early to know whether Schneiderman will get involved in the situation involving Trump's tax returns, "because we really do not know a lot of facts."
Peter L. Faber of McDermott Will & Emery in New York agreed. "Unfortunately, we don't know the components of the $916 million loss," he said. It's common for people in the real estate industry to have perfectly legitimate deductions, typically for depreciation and interest, that completely offset their income so they end up paying no income tax, he said. "Still, a net loss of that magnitude would be unusual," he added.
Trachtenberg said that the Times piece "takes a dim view" of what appears to be Trump's use of a large net operating loss deduction, but that one cannot readily determine whether the losses were used to offset all of Trump's taxable income in subsequent years.
"One can debate Mr. Trump's business acumen vis-à-vis the failed businesses that appear to have generated the losses, but it's not clear that his taking the NOL deductions is in any way contrary to the goals of long-standing and widely accepted tax policies and rules," Trachtenberg said.
Trachtenberg -- who served as New York's first taxpayer rights advocate -- also defended Trump's right to keep his tax returns secure from unauthorized disclosure.
"The Times story, which leaves out any discussion of the reasons for allowing NOL deductions like those seemingly claimed by Mr. Trump, illustrates the importance of taxpayer secrecy provisions for individuals and businesses," Trachtenberg said. "When private taxpayer information is disclosed to the public, it is often, for political reasons, misrepresented or allowed to be misunderstood by a public that is unfamiliar with the complexities of the tax code."
James W. Wetzler, former commissioner of the New York State Department of Taxation and Finance and now with Deloitte Tax LLP, said the New York state return would include copies of the New Jersey and Connecticut returns if Trump had claimed a resident credit for tax paid to those states.
"Note that he did pay New Jersey tax," Wetzler said of Trump.
Wetzler said his own theory has been that Trump had been carrying forward NOLs that were adjusted by the IRS in the prior audit cycle. He added that the March 7 letter from Trump's tax attorneys, which the candidate released on March 30, said the earlier audit led to no additional tax -- but said nothing about adjusting NOLs.
"Because he deducted the disallowed losses on the returns currently under audit, he knows that the audit will lead to additional tax," Wetzler said. "He doesn't want to admit that he underreported taxable income or that he filed returns showing zero tax, so his plan has been to wait till the audit is over, file amended returns reflecting the audit adjustment, and show he really paid some tax. All pure speculation on my part, but at least we now know there was a large NOL."
The New York Times Liable?
It's unclear whether Trump will sue the Times. In its October 1 article, the Times said it received an emailed letter from Marc E. Kasowitz, a lawyer for Trump, which said that publishing tax records is illegal without authorized disclosure and that Trump would pursue legal action.
Dave Heller, deputy director of the New York City-based Media Law Resource Center, told Tax Analysts that the federal law prohibiting the publication of federal tax returns without authorization would "almost certainly be ruled unconstitutional" if applied to the Times for this.
"Under well-established Supreme Court precedent, a law criminalizing the publication of truthful information has to allow breathing room for the publication of information of public importance -- such as information about a presidential candidate's tax return," Heller said.
"Thus even though the government has a compelling interest to ensure the privacy of taxpayer records, that cannot justify a blanket ban on publication of such information," he added.
David Ardia, an assistant law professor and co-director of the University of North Carolina's Center for Media Law and Policy, said the Times's decision to publish Trump's tax records under the First Amendment would likely hold up in court, given their newsworthiness.
"It's really preposterous to think that the Times can be found liable for publishing this information, given the robust First Amendment protections . . . that exist for publication of truthful information of great public concern," Ardia said. "And that's going to pretty much shut down any attempt to use the law to punish The New York Times for disclosing the tax records."
Fox, meanwhile, said that states have their own tax secrecy laws protecting return data, which generally apply to prevent government personnel from disclosing a taxpayer's tax returns.
"They do not prevent someone outside of government from disclosing someone's tax returns, so those tax secrecy laws usually do not apply to nongovernmental persons such as tax preparers, accountants, financial employees, foreign hackers, or someone who found documents accidentally left on the copier," Fox said.
The New York Times is one of Faber's tax clients. While Faber did not want to speculate on the newspaper's possible exposure to liability, he said his understanding is that generally the press has pretty wide latitude to print newsworthy items.
"Here, the Times did nothing improper," Faber said. "It did not steal documents -- it simply received them in the mail. The disclosure did not jeopardize national security."
"It was maybe inevitable that some parts of Trump's tax returns would come out because he has been so secretive about them," Fox said. "I'm assuming that there are some tax years in his life that are no longer under audit. If Trump is unwilling to disclose his tax returns for some years because they are under audit, the same argument does not prevent disclosure of returns for other years."
Faber said that in his view, there is no reason a presidential candidate should not publicly disclose his returns, even if they are being audited.
"At a minimum, he should be willing to disclose how much he paid in taxes and how much he gave to charity," Faber said. "The IRS already knows this, so public disclosure would not complicate his audit."