Is Trump’s $915 Million Tax Loss Connected to an Exotic Tax Shelter?

[Cross-Posted from Emptywheel.net]

The news is out about Donald Trump’s $915 million of tax losses.

The real question is whether those losses were real economic losses, or just a tax artifice created by a clever planner.

Real estate developers like Trump benefit tax-wise from provisions that allow them to claim losses attributable to borrowed money. But those provisions are not a complete giveaway if the borrowing ultimately is repaid.

If the borrowing is not repaid, as we know to be the case of Trump’s casino debt, the tax law generally requires the person whose debt is forgiven to recognize income, which typically erases the tax benefit of those earlier losses. Even in those situations where debt forgiveness does not result in income, the borrower’s tax attributes are reduced by the amount of debt forgiven, and unused losses are at the top of the list of those tax attributes to be trimmed.

Could Trump have figured out how to have his cake and eat it too – that is, keep his losses for tax purposes, even while being excused from having to repay the borrowed money on which those losses were based? Yes, it is possible!

One possibility is that Trump’s lenders agreed not to expressly forgive Trump’s debt, but instead to sell their rights as lender for pennies on the dollar to an individual or entity close to Trump, such that it would never be enforced. This strategy is referred to as “parking” the debt. Some tax professionals like John Hempton at Bronte Capital and commentators like Josh Marshall at TPM have speculated this is the artifice Trump and his advisors engineered to preserve Trump’s huge losses and thus shelter close to a billion of future income from tax.

Does the tax law permit the parking of debt that effectively has been forgiven? Certainly not by design. If Trump parked the debt with a close relative, the tax code would have treated it as if the debt was forgiven.

Trump could have parked the debt with someone not so closely related or with a friend, but not if had an agreement that said person would not enforce the debt. Which means he’d be at severe risk, as the person could turn on him and enforce the debt. That would have been almost a billion dollar risk. It is hard to imagine Trump, his accountants and attorneys permitting that.

Could Trump have parked the debt with a corporation, trust or partnership he controlled? In a word, yes. Congress tried to prevent debtors from circumventing the law this way as well, but they inadvertently created a small crack in the law, which Trump just may have been able to squeeze through.

The tax code expressly identifies corporations, partnerships and trusts deemed too close to a debtor to purchase his debt without causing the debt to be deemed forgiven for tax purposes. Those rules were well written. After they were written, however, and not long before Trump faced his financial difficulties, Congress created a new type of entity for tax purposes only, the “real estate mortgage investment conduit,” or REMIC. Those rules state, in no uncertain terms, that certain partnerships, corporations and trusts become something else for tax purposes. They are expressly NOT to be treated as partnerships, corporations or trusts. Thus, unwittingly, Congress created a gaping yet little noticed hole in the rules that prevent parking debt with a controlled corporation, trust or partnership.

And Trump may have seized on Congress’ mistake.

The REMIC rules were enacted in 1986 to facilitate investment in mortgage-backed securities (yes, those securities that crashed the economy in 2008). A REMIC is a partnership, corporation or trust under the law of the state in which it is formed (usually, Delaware) that holds almost exclusively interests in mortgage debt, and satisfies a few additional statutory requirements related to the type of ownership interests (for example, corporate stock, partnership interests, or beneficial interests in a trust) it issues.

Congress anticipated that REMICs would hold entire pools of mortgage interests, but never specified a minimum number, which means a REMIC might hold only one mortgage – for example, the mortgage on a Trump casino – and still qualify. Or it could be multiple similar obligations.

A few clever tax lawyers realized that by qualifying a partnership, corporation or trust as a bastardized form of REMIC, they could circumvent the rules that prevent the parking of debt with a controlled entity to avoid debt forgiveness income.

Trump’s situation quite clearly lent itself to this exotic strategy. If he used a REMIC he controlled to purchase the mortgage debt on one or more of his casinos (and/or other properties) at a deep discount, the rules that prevent debt parking would not have applied to him.

The bottom line: Trump indeed could have used a debt parking strategy to preserve close to a billion dollars in losses for tax purposes even though he avoided the economic loss on which those tax losses were based.

Did Trump employ this strategy? Nobody knows yet, but it would explain why those losses still showed up on his tax return in 1995 and how he gamed the system for an enormous tax windfall.

The secretive and shady nature of whatever avoidance scheme Trump has used, which would clearly be on the edge of legality, even if putatively legal as Trump claims, would also very easily explain why Trump steadfastly refuses to make public any more of his tax return information.

It is also exactly why the public is entitled to see his convoluted machinations and judge for themselves his honesty. And, remember, all statutes of limitation, both criminal and civil, have long ago expired as to the 1995 and surrounding years tax returns. There is no legitimate reason whatsoever Trump cannot release them. Other than fear that what he is hiding is exposed.

14 responses to “Is Trump’s $915 Million Tax Loss Connected to an Exotic Tax Shelter?

  1. For Sure Not Tom

    Trump likes to say he avoided taxes because he’s so smart.

    But Trump doesn’t do his own taxes, so that doesn’t stand up to the least bit of scrutiny.

    So you could say Trump is a great businessman because he hired the best tax guys.

    But that doesn’t hold up, either, because anyone can hire the best tax guys, most people just can’t afford the best tax guys.

    And even then, this doesn’t hold up, because the best tax guys didn’t actually do the real work, they just filled out the forms.

    It was decades of rich people buying our congressmen to get loopholes written into the tax code to benefit rich people that got Trump out of the hole.

    Trump was born rich and rich people can afford to be dumb and lose 916 million, because the system is rigged for rich people, and against everyone else.

    No matter how you look at it, Trump lost 916 million dollars because he’s not good at business.

    And there you go, proof that it’s turtles, all the way down.

    • You do realize don’t you, Not Tom, that they had to buy democrats as well as Republicans in order to get the tax code written the way they wanted? And you are aware, aren’t you, that survey after survay has shown there are more millionaire democrats than Republicans. I distinctly recall that during the LA democrat convention they had a crisis of where to park all the private limousines that showed up.

      • For Sure Not Tom

        You are aware, For Sure Steve, that I’m a Sanders supporter.

        I said they were buying congressmen, I never said GOP congressmen.

        Why so defensive? 🙂

        • It’s just a knee jerk reaction, that’s all.

          You know, if Sanders had made it, I might have voted for him. I’m serious. I had nothing against him personally (although I really didn’t support anything he stood for) and I wouldn’t have had a choice between Hillary and Trump. I think we could have better sustained a Bernie Presidency than a Hillary or Trump one.

    • A different point about being “dumb” in business, Not Tom. You really are only dumb in business is you fail. If you make money for yourself and your investors, you will always be considered a genius. The way Bob explains his losses, his accountants used the Tax Code to make him a winner, so he’s a genius. His investors see him making money, so they invest with him, he’s a genius. He goes bankrupt over and over and yet never loses his billionaire status, he’s a genius.

      You are just looking at it the wrong way. When I was young they used to have a saying (like me, long out of date, I’m sure) “If you so smart, how come you ain’t rich?”. Well, he’s rich, I’m not…maybe he’s smarter than me…or at least knows which smart people to hire.

      • For Sure Not Tom

        Nope. He does not make money for his suckers, I mean, investors.

        “Trump Hotels & Casino Resorts, a once publicly traded company whose shares dropped more than 90% when the firm sought bankruptcy protection, was charged in 2002 by the Securities and Exchange Commission for reporting financial results in a way that made it appear the company was doing better than Wall Street analysts expected due to “operational improvements,” the complaint said. But that was a “false and misleading impression” that initially fooled investors into driving the stock price higher, the SEC said.”

        http://www.usatoday.com/story/money/markets/2016/06/24/trumps-company-tricked-investors-heres-how/86058802/

        Trump took out loans to repay his debts and even paid himself 82 million while his suckers, I mean, investors, watched the stock price go from the high 30’s to penny stock territory.

        He has a long history of screwing investors, and no one wants to go after him because he’s got a quiver full of lawyers.

        He’s not a smart businessman, he’s a very successful con man.

        • I was being tongue and cheek… ;o)

          • For Sure Not Tom

            Cheeto Benito’s tax guy says Trump had nothing to do with taxes.

            Expect Trump to sue Mitnick in three, two, one….

            http://www.huffingtonpost.com/entry/jack-mitnick-trump-accountant-taxes_us_57f52344e4b015995f2c6a89?

          • Well, the guy can step forward and say it was his work, and that is fine. But – and I am being serious – one of the things that makes a man a successful businessman is hiring smart people to do good work for which you get the credit. Take this accountant…he may be smart as a whip, but he isn’t rich. He sells his skills and makes other people rich. He is successful in his own way, but he is not as successful as Trump.

            I understand your dislike of Trump. I am no fan of his, either. BUT try as hard as you can, you can’t take Trump’s success away from him. Regardless of how he did it, he is a very successful man. He knows how to think at that level (which is a rare trait) and he employs the right people to make things work. I think he would make a lousy President but he knows how to conduct business at a high level.

          • For Sure Not Tom

            Nope he was born rich his daddy cosigned for all his big projects and his daddy loaned him money even after he took over the business.

            In fact in one illegal thing he did his daddy bought $3.5 million worth of chips at one of his casinos to loan him money which you later got busted for .

            I’ll give him credit for being smart enough to have a rich daddy .

          • You may find the “Daddy” excuse acceptable, but Daddy didn’t make him a billionaire. He did that on his own. I feel odd defending Trump, but for all his faults, he has done well in business.

          • For Sure Not Tom

            Daddy did make him a billionaire, assuming he is one at all.

            Here’s another example of his daddy bailing him out of trouble.

            http://www.newsweek.com/donald-trump-federal-income-tax-records-506713

            He’s a con man and clearly you have bought in.

          • Steve, as to whether “daddy made him a billionaire,” I’ve never done the analysis myself, but I’ve read in several places that if Trump simply took his inheritance and plopped it into an S&P 500 Index fund, he would have wealth greater than he does now. Also, take a look at the new Forbes 400 list. In a year when the Forbes 400 as a group saw its wealth increase by 20%, Trump saw his decrease by about 20%.

  2. To paraphrase Donald Trump (with apologies to John McCain):

    I like businessmen that make money, not lose it.