Tax Analysts Blog

Trump's Tax Loss Harder to Explain Politically Than Legally

Posted on Oct 3, 2016

By now virtually everyone is aware that Donald Trump claimed a $916 million tax loss on his 1995 returns.  We know this because The New York Times obtained a partial copy of Trump's state returns and published a story speculating that Trump has been using this loss to avoid paying any income taxes for years (18 years is the number being thrown about). The Trump campaign is going to have to do a lot of damage control to mitigate the political effect of the Times' revelations, but a real estate developer claiming huge losses isn't all that remarkable from a tax perspective.  

The Times article implies, and a host of follow-up stories from other journalists and publications have practically stated, that the 1995 loss shown on Trump's New Jersey, Connecticut, and New York returns means that Trump probably hasn't been paying federal income taxes since at least 1995.  The authors point out that Trump could have used $50 million of that tax loss each year for 18 years.  They say that this would have canceled out Trump's income as CEO of a company involved in Atlantic City operations as well as his money from The Apprentice (which came to about $50,000 to $100,000 per episode).  The authors also, like many others, gleefully point to Trump's under the breath remark at the September 26 presidential debate that he was very smart in response to Hillary Clinton's speculation that he hasn't been paying taxes.

None of that proves much of anything.  We have no idea what Trump's income is, and without knowing that, we don't really know how quickly he might have exhausted the huge tax loss.  For that matter, we don't know what other losses he might have claimed before or after 1995 which would have affected his tax liability.  The Times has a piece of Trump's tax puzzle, and they've stretched it as far as they can to back up Clinton's debate contentions.  Everyone wanted Trump's tax returns so they could prove he wasn't paying taxes (or that he's not as rich as he claims or that he doesn't give to charity or something -- anything -- else bad) and so a 20-year-old tax document is serving as a substitute for a full disclosure, feeding into narratives that were already pre-written.  Of course, one could argue that Trump's failure to disclose his returns caused this kind of debate, but because the press has already tried and convicted Trump of "something" based on very little information, perhaps his aversion to disclosure isn't so hard to understand.

What no one, even the Times, has argued is that there is anything inappropriate in this partial disclosure.  Just as Trump has long argued, it is perfectly legal to claim tax losses and then use them to cancel out future income, within the limits allowed by the tax code.  Even Trump's flippant response about the world of real estate isn't that farfetched.  And Trump's empire was collapsing around him in the 1990s, which many have said fits with the timing of the 1995 loss.  There has been some fringe speculation about tax shelters and the magnitude of Trump's actual cash losses (as compared to his claimed tax loss), but there isn't anything resembling enough information to make an informed conclusion on any of that.

This information is going to hurt Trump.  It couldn't have been timed better to damage his campaign.  The Times' conclusions about Trump's lack of paying taxes dovetails perfectly with the billionaire's disastrous debate performance.  Trump's campaign staff, if they want to, can easily explain how a real estate developer had valid losses in the 1990s and why it was fair for the candidate to take advantage of them.  But they will have a much harder time managing the political fallout from the perception that a wealthy businessman has a zero effective tax rate  -- just remember all the negative press Mitt Romney received for a tax rate in the teens.  

Read Comments (8)

Edmund DantesOct 3, 2016

Tax Notes commentators have been screaming for Trump to release his taxes for months. The ignorant reception this illegal leak of his 20-year-old tax information received from the press fully justifies Trump's decision to keep his private financial information private, within the limits of the election law. The radio coverage of these tax matters this morning was so wrong I almost drove off the road.

I trust you all are satisfied now?

What will happen to the IRS employee who leaked the info to the NYTimes? No doubt the same thing that happened to Lois Lerner—not a thing.

MDOct 3, 2016

The tax information was from state returns, not federal returns, which means that if any government employees were involved with the leak, they were state employees. Moreover, considering the information was from multiple state returns, it could be that the leak had nothing to do with governmental employees. Read or listen to all the facts before you start asserting your preconceived opinions next time.

Mike55Oct 4, 2016

Presumably the thought process was: (1) the IRS and state revenue authorities share information and (2) multiple state returns were illegally disclosed, so (3) the IRS was the most likely culprit. Doesn't seem all that crazy to me.....

For what it's worth though, my own speculation is that the very same return preparer interviewed by the NYT was the culprit. He demonstrated a startling lack of professional ethics by validating that the returns belonged to Trump, potentially stands to gain from his ensuing minor celebrity, and had access to the returns at some point in time (having prepared them).

Mike55Oct 3, 2016

I find articles like the NYT piece on Trump's tax loss deeply troubling. Characterizing the ability to carry forward an NOL as some kind of exotic tax loophole, created via the use of "Byzantine" legal entity structures, primarily for the benefit of "dynastic families" is outrageous. I suppose the "freedom of the press" necessarily includes the freedom to mislead, and we must take the bad with the good. However, one would hope for greater journalistic integrity.

Note that the NYT had to find a real estate professor to quote rather than a tax expert on the benefit of Trump's tax loss. Presumably even the most left wing tax commentators in the NYT's rolodex balked at the article's tone. Trump obtained a $320M tax benefit... by losing $915M! Apparently losing huge amounts of money is now a tax loophole.*

Final point: while I don't know him personally, I'd be willing to place a bet that Mr. Jeremy Scott does not want Trump to become our next president any more than the NYT editorial board does. Yet he managed to not let his personal political views (assuming I have them right) compromise the integrity of his work, even in the context of an opinion blog. It doesn't seem too much to ask for major news sources to adhere to the same level of professionalism. The NYT should be ashamed.

*Of course it's possible (though highly unlikely in my opinion) that the $915M loss was created via aggressive tax planning. But that wasn't part of the NYT article in the least; in fact, the article discusses Trump's all too real business failings during the period at issue. The article instead portrayed the lowly NOL carry forward, in and of itself, as being some kind of abusive tax shelter for the rich.

Del DiebigOct 4, 2016

The Trump NOL may well be a typical example of what has been described as audit-proofing a tax return. Make the loss so large that IRS managers would be discouraged from devoting audit resources to a tax return, unlikely to yield immediate tax deficiencies.

If the IRS is indeed auditing Mr. Trump’s 1040, it shows that someone at the IRS is finally paying attention and looking at the long-term.

The lenders to Mr. Trump probably also took a bad debt deduction, so it could well be that between Mr. Trump and the creditors that the same dollars provided a double deduction at least until there is a final accounting by the tax authorities.

Edmund DantesOct 4, 2016

Great point, Mike55. As to the source of the leak, the fact that these were state returns does not exonerate the IRS, which has a long history of leaking tax info about Republicans. See, for example, Richard Nixon, as documented here at Tax Notes. It's true, it might not have been the IRS. But their attitude is guilty until proven innocent, and therefore so is mine.

Travis RechOct 4, 2016

Way to admit you were wrong and admitting nothing at the same time while also deftly deflecting criticism. Astonishing rhetorical flair.

Edmund DantesOct 4, 2016

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