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Unlike all of the other major-party nominees for president over the last 40 years, Donald Trump has declined to release any of his income tax returns.
Donald Trump speaks at a rally on Oct. 3, 2016, in Pueblo, Colo. (Photo: John Locher, AP)
Donald Trump’s top surrogates took to the Sunday talk shows to put the best spin on a New York Times story about the GOP presidential nominee reporting a loss of $916 million on his personal income taxes in 1995. The large loss, the Times reported, could have allowed Trump to avoid paying federal income taxes for up to 18 years.
But in defending Trump, New Jersey Gov. Chris Christie and former New York mayor Rudy Giuliani made some false and misleading statements:
• Giuliani claimed that Trump would have violated his “fiduciary obligation” to his company and “could have been sued by his investors” if he paid unnecessary taxes. But tax experts told us that a partner generally cannot be sued as a fiduciary for paying too much in personal income taxes. One called Giuliani’s claim a “specious” argument.
• Christie wrongly claimed that Trump has proposed tax changes “so you don’t have this kind of situation.” Trump has not proposed any changes to tax law that would prevent a taxpayer from writing off net operating losses, which is what Trump reportedly did in 1995.
• Christie falsely claimed that the Times story “does not have any information … that says Mr. Trump did not pay taxes.” Actually, the story indicates that Trump paid no taxes at least in 1995, and it quoted Trump’s tax attorney saying that Trump did not pay taxes.
• Giuliani falsely claimed that the Times failed to say that what Trump did “is perfectly legal” until “about 26 paragraphs” into the story. In fact, the Times said exactly that in the first paragraph.
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Trump’s ‘Fiduciary Obligation’ to Investors
The New York Times on Oct. 1 published a story that said it had obtained three pages of personal income tax returns that Trump had filed in 1995 with New Jersey, Connecticut and New York. The tax attorney who prepared and signed the tax returns for Trump verified the documents as “legit.”
The documents show that Trump reported a net operating loss of $916 million in 1995, which the Times said “could have allowed him to legally avoid paying any federal income taxes for up to 18 years.” That’s because net operating losses under IRS rules “could be used to wipe out taxable income earned in the three years before and the 15 years after the loss,” the paper reported.
The Trump campaign has neither confirmed nor denied that Trump reported a $916 million loss in 1995, saying in a statement that he “has a fiduciary responsibility to his business, his family and his employees to pay no more tax than legally required.”
Giuliani went further on CNN’s State of the Union and on NBC’s Meet the Press to claim that Trump could be sued for violating his fiduciary responsibility to investors.
Giuliani on Meet the Press, Oct. 2: "If Donald Trump hadn’t taken those losses, he could have been sued by his investors. He could have been sued by his business partners. When I run a business, and I run a business, if I don’t take advantage of the five deductions that are available to me, even if you think those deductions are unfair, then I’ve violated my fiduciary duty. So I have clients, and I have clients that take losses like that, and I advise them, 'You have to take those losses. Otherwise, you’re not doing your job.' "
Giuliani on State of the Union, Oct. 2: "If he didn’t take advantage of those tax deductions or tax advantages that he had, he could be sued, because he — his obligation, as a businessman, is to make money for his enterprise and to save money for his enterprise. It would have been insane for him not to take advantage of them. … the reality is, you are ignoring completely the fiduciary obligation that he has to all the people around him to run his business at the lowest possible expense."
We wondered whether Giuliani is right that Trump could be sued by his investors for violating his “fiduciary obligation” to his company, so we contacted some experts to find out.
Trump pays personal income taxes on his investment gains and losses because, as the Times story noted, he has set up partnerships, limited liability companies and other pass-through entities to conduct his business.
Kent Smetters, a professor of business economics and public policy at the University of Pennsylvania’s Wharton School, told us that “standard operating agreements require partners to pay their taxes, because the bankruptcy or legal liabilities facing one partner can impact the others.” But, he added, “the agreements typically don’t require” each partner to make maximum use of tax benefits.
Trump can be sued if he did not have the liquidity to meet the terms of the financial agreement with his investors because he paid too much in personal income taxes, Smetters said. But “technically, a partner can’t be sued as a fiduciary for paying too many taxes at the personal level, unless the operating agreement contained very non-standard language.”
Leonard Burman, director of the Urban-Brookings Tax Policy Center, was more direct: “Trump’s investors have no stake at all in what he reports on his personal income tax return. The fiduciary responsibility argument is specious.”
Trump’s Tax Plan
On Fox __news Sunday, Christie made the point twice that Trump would change the law to fix the kind of situation highlighted by The New York Times.
“There’s no one who’s shown more genius in their way to maneuver about the tax code as he rightfully used the laws to do that,” Christie said. “And he’s already promised in his tax plan to change many of these special interest loopholes and get rid of them so you don’t have this kind of situation.”
Later in the show, Christie said, “And the genius that Donald Trump has been, to make sure he follows the law, which is exactly what he’s done, and politically he has said that he’s going to change these laws and that there’s no one who’s better suited to change these laws than someone like him who’s been subjected to audit by the IRS year after year after year.”
In response to The New York Times story, Trump tweeted, “I know our complex tax laws better than anyone who has ever run for president and am the only one who can fix them.”
But the issue raised by the Times article — the possibility that Trump sustained a net operating loss in 1995 and could have carried over that loss for up to 18 years — is not addressed at all in Trump’s tax plan.
“Nothing in Trump’s plan would limit the tax breaks he takes advantage of,” said Burman, of the Urban-Brookings Tax Policy Center, “and he’d also eliminate the estate tax, which is the backstop to the income tax, rationalized in part as a way to tax otherwise untaxed income. Clinton would increase the estate tax on people like Trump.”
At the heart of the issue raised by The New York Times is net operating loss reported by Trump in his 1995 personal tax returns.
“The idea of carrying forward a Net Operating Loss is pretty simple,” said Alan Cole, an economist with the Center for Federal Tax Policy at the Tax Foundation. “If you lose $50 in December but make $100 in January, pretty much everyone agrees that you made $50 in total. Carrying losses forward allows you to match your losses against income to get that result, even if the income and the losses initially fall in different reporting periods.”
Although both Christie and Giuliani referred to Trump’s “genius” in taking advantage of the tax code, Cole told us there’s really not much genius in taking advantage of net operating loss. In fact, he said, it is pretty common.
“I’d advise caution on the narrative about Net Operating Loss being an obscure, super-complicated strategy that only a handful of genius businessmen understand,” Cole told us via email. “Talk to any tax professional in law or accounting, and they’ll tell you that Net Operating Loss is an ordinary thing that everyone knows about. What’s unique about Trump’s Net Operating Loss is its sheer size. Probably only a handful of people ever have had such a large loss. Over a million people do this every year. It’s not a work of artistic genius.”
The law is simply intended to allow businesses to smooth out their operating losses over the years, said Andy Grewal, a professor of law at Iowa University and an expert in tax administration.
Neither Trump nor Clinton has proposed any policy to amend the laws regarding net operating losses, he said. And he doesn’t think they should.
“It’s not a problem that needs fixing,” Grewal said. “It isn’t a giveaway, like, say, the mortgage interest deduction.”
The law simply allows people to use losses to offset gains. If someone wanted to do away with that practice, Grewal said, “you would have destroyed the whole tax system.”
While neither candidate is proposing changes to the rules regarding net operating losses, Clinton has proposed limiting tax benefits of “like-kind exchanges” that are used to shield real-estate investments from capital gains taxes.
“Ordinarily, rising (real estate) value shows up as capital gains, which is taxable in principle—albeit at much lower rates [than] other income,” wrote Steven M. Rosenthal of the Tax Policy Center in a blog post titled “Does Donald Trump pay taxes, ever?” “However, real estate investors often use special like-kind exchange rules to defer taxes. These rules apply to real estate, but not stocks or bonds. If a real estate investor exchanges property long enough, and dies, the gains are never taxed.”
But that change proposed by Clinton wouldn’t affect the issue of net operating losses highlighted in the Times article.
“Clinton’s proposal wouldn’t have stopped Trump’s NOL (net operating losses), but would limit his ability to continually roll over untaxed gains,” Burman explained.
‘Not Paying Tax’
On Fox News Sunday, Christie described the Times story as a “very, very good story for Donald Trump,” because it shows how he fought back from business failures to “build another fortune.” But then Christie went on to say — falsely as it turned out — that the newspaper had no information “that says Mr. Trump did not pay taxes.”
Fox News Sunday host Chris Wallace, Oct. 2: "Wait. You’re saying it’s a good story for Donald Trump that he failed to pay any federal income taxes — first of all, that he took a billion-dollar loss, and that he failed to pay any federal income taxes for years. That’s a good story?"
Christie: "Chris, first of all, you don’t know he didn’t pay federal income taxes for years. All the story said was that kind of loss can be used for up to 18 years. But if Mr. Trump made $600 million the next year, $600 million, that loss would be wiped out.
"So, let’s be precise about what it said. The New York Times does not have any information in that story that says Mr. Trump did not pay taxes. All they did was quote the law which says if you have that kind of loss, you can use that kind of loss to offset income for up to 18 years."
Christie is right that the story said that Trump could have used the $916 million in reported losses in 1995 to avoid paying federal income taxes for up to 18 years. But he is wrong to say, “The New York Times does not have any information in that story that says Mr. Trump did not pay taxes.”
Actually, the story indicates that Trump at the very least did not pay any federal income taxes in 1995, and it quoted Jack Mitnick, Trump’s longtime tax attorney, as saying his client paid no taxes. Mitnick handled Trump’s tax affairs for more than three decades, until 1996, and he prepared and signed Trump’s 1995 New Jersey income tax returns.
“Here the guy was building incredible net worth and not paying tax on it,” Mitnick told the Times.
Burying the Lede?
Giuliani also got his facts wrong when he criticized the Times. On CNN, Giuliani claimed the paper did not say until “about 26 paragraphs” into its story that what Trump did was perfectly legal.
Giuliani, Oct. 2: "First of all, what you failed to leave out of what you said — and it’s not your fault —#8212; it’s the New York Times‘ fault — is that this is perfectly legal. And the Times makes that point about 26 paragraphs into the opinion."
In fact, the Times said in its lead paragraph — known in journalism jargon as “the lede” — that what Trump did was legal.
The New York Times, Oct. 1: "Donald J. Trump declared a $916 million loss on his 1995 income tax returns, a tax deduction so substantial it could have allowed him to legally avoid paying any federal income taxes for up to 18 years, records obtained by The New York Times show."
In the third paragraph, the Times supported its lede by citing tax experts as saying “tax rules especially advantageous to wealthy filers would have allowed Mr. Trump to use his $916 million loss to cancel out an equivalent amount of taxable income over an 18-year period.”
Now, it is true that the Times did not say until later in the story — paragraph 13 — that “nothing in the 1995 documents suggested any wrongdoing by Mr. Trump.” But it had already said in the first and third paragraphs that it would have been “perfectly legal,” to borrow Giuliani’s term, for Trump not to pay federal income taxes for up to 18 years.
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