JUNE 23, 2016
Why won’t Donald Trump release his taxes? An investigation into the G.O.P. candidate’s finances—the extensive deductions he could claim, the F.E.C. filings from his Scottish and Irish golf resorts, and his declarations to the British government—reveals a disturbing pattern of mistakes, hype, and contradictions.
“Taxation, in reality, is life,” said Sheldon Cohen, a former commissioner of the U.S. Internal Revenue Service. “If you know the position a person takes on taxes, you can tell their whole philosophy. The tax code, once you get to know it, embodies all the essence of life: greed, politics, power, goodness
A rich person’s tax affairs will tell you lots about him or her—but the reverse is fuzzily true, too. Though Donald Trump has refused to release his tax returns, we can get a good idea of what’s in there if we start with what we know about his character and business affairs, then mix these up with the vast rich pudding of loopholes, abatements, and gray areas that wealthy folk in America use to milk the tax system. All this provides an entry into understanding Trump’s bewildering, ever evolving global business affairs, and helps answer some of the great questions of the day. How much is he really worth? Has he broken any laws? How much tax does he pay? Does he use tax havens?
It’s hard to get your arms around Trump’s business conglomerate, which is a patchwork of disparate “artful” deals and raids, strategy changes, bankruptcies, carefully laid plans, and high-energy whims. “I play it very loose,” Trump wrote in his book Trump: The Art of the Deal. “I don’t carry a briefcase. I try not to schedule too many meetings. I leave my door open. You can’t be imaginative or entrepreneurial if you’ve got too much structure. I prefer to come to work each day and just see what develops. There is no typical week in my life.”
Trump isn’t nearly the real-estate player he once was, particularly since some of his companies went through high-profile bankruptcies in the early 1990s. In a ranking of New York condominium developers last September, for instance, Trump didn’t even make the top 20. In Atlantic City, whose real-estate sector he once dominated, the Trump Plaza closed in 2014; he sold the Trump Marina (now the Golden Nugget) in 2011 to Landry’s, a Houston-based gaming-and-restaurant company; and activist investor Carl Icahn now owns the Trump Taj Mahal. (Trump is eager to point out, however, that he made money on his Atlantic City adventure. “I never went bankrupt,” he told me in the first of two telephone interviews. “I made a fortune in A.C., which a lot of people don’t understand.... I used a bankruptcy as a business tool: I made great deals.”)
Many bankers don’t lend to Trump now, burned by what some call “Donald risk,” a reference to the fact that some Wall Street banks have been left with pennies on the dollar through some of his maneuvers. (About his relationship with lenders, Trump says, “We have a lot of cash—we don’t need loans. Every bank wants to do business with us, literally every bank.”) There is still plenty of steel and concrete bearing his name in lights, but much of that is simply him taking licensing income and management fees from the people who actually financed, built, and own these properties. “People who are smart love my licensing deals because you don’t have any risk [and] you make tremendous amounts of cash,” Trump says
In his 92-page financial disclosure to the Federal Election Commission (F.E.C.) in July 2015 and in a second, 104-page disclosure last May, in both of which he calls himself “President of the United States of America” (Hillary humbly calls herself “Candidate for President”), he lists at least $1.5 billion in hard assets. Of this, a minimum of $787 million is in hotels and real estate such as Trump Tower, in Manhattan. There are also 16 golf-related businesses valued at more than $550 million, aircraft worth at least $58 million, $6 million in vineyards, and $4.3 million in entertainment ventures. These are lower-bound numbers: categories include “over $50 million,” with no upper limit. (The main purpose of these disclosures isn’t to build a full picture of a candidate’s finances but to identify conflicts of interest.) Trump claimed to me that his net worth is “much more than $10 billion…. I don’t know how much more.” A Trump press release in July 2015 also claimed his net worth was “in excess of TEN BILLION DOLLARS,” though Fortune in May estimated it at $3.9 billion, and Bloomberg News reckoned it at $2.9 billion last July. (Michael Bloomberg, by comparison, is worth $45 billion, according to Forbes.)
All this keeps his tax advisers busy, doing imaginative things, such as putting goats on a golf course in New Jersey, to qualify for farmland tax reliefs. A picture he tweeted of him signing his tax returns—a stack of papers that rises above his head and out of the frame—points to the sheer byzantine scale of his tax affairs and a business empire that encompasses Trump Tower, Trump chocolate bars (shaped like gold ingots, naturally), and the intriguingly named Trump Follies LLC. His global interests stretch from Azerbaijan to China, India, Panama, Dubai, Turkey, Saudi Arabia, and a few places in between. “I have 121 [foreign] deals either starting or under negotiation, pretty far down the line,” Trump boasts, citing “numerous deals” in China. “China likes Trump,” he adds, “even though I tell the country China is killing us…. It’s our fault, not China’s fault. I’m sure you read the recent articles that the young people of China really like Donald Trump.
Mitt Romney, whose own complex wealth and tax affairs contributed to his defeat at Barack Obama’s hands in 2012, speculates that the only logical explanation for Trump’s refusal to publish his returns is that there is “a bombshell” in there. “Given Mr. Trump’s equanimity with other flaws in his history,” he continued, “we can only assume it’s a bombshell of unusual size.”
BRILLIANT DEDUCTIONS
David Cay Johnston, one of the U.S.’s best-known tax writers, calls Trump “one of the major welfare kings of America,” because of his track record of playing the government for profit. Johnston’s 1992 book, Temples of Chance: How America Inc. Bought Out Murder Inc. to Win Control of the Casino Business, contains long sections about Trump and includes one of the few public sightings of his tax returns, which appeared on casino regulatory findings. They show that Trump paid a total of just under $72,000 in federal income taxes (on just over $219,000 of income) from 1975 to 1977, then 0 percent in 1978 and 1979. According to a Politico report, Trump again appeared to pay no federal taxes in 1991 and 1993 due to losses in his hotel and casino businesses. The suspicion is that he’s continued to pay little or no federal income tax ever since.
It’s a well-grounded suspicion, not just because of Trump’s reputation for hardball but also because he’s in real estate, which may be the most highly tax-subsidized sector of the American economy.
“Real estate is the gold mine of gold mines for people who know how to maneuver through it,” says Jack Blum, a Washington, D.C., lawyer and an expert in financial crime. “The potential for shenanigans is virtually unlimited, much more than other sectors. The only other one that might come close is petroleum.” Trump himself admits, “One of the big assets of real estate, you are allowed large deductions
There are a few big tax strategies in real estate, underpinning some of America’s greatest fortunes.
First, there’s depreciation. Cars, say, lose value, and it makes sense to set those real losses against tax. Buildings, though, generally appreciate in value—yet such is the power of the real-estate lobby that you still get the depreciation deduction, which is based on a formula.
Strategy number two: In theory you pay taxes on your gains when you sell up—but you can get out of that too by using another officially approved scheme, known as the “like-kind exchange.” Here, if you re-invest the proceeds of a sale into a qualifying real-estate project within 180 days, you can postpone paying the tax. The I.R.S. has interpreted this rule very broadly, says Ed Kleinbard, professor of law and business at the University of Southern California’s Gould School of Law and author of We Are Better than This, a book on the U.S. fiscal system. “So a swap of farmland for an office tower is viewed as a like-kind exchange. The trick in real estate is to keep all the balls in the air as best you can, until you die.”
As if that weren’t enough cream for the real-estate moguls, the sector is fueled by borrowing—and you can set the interest expenses against your income. Lenders will often give mortgages for 90 percent or more of a project’s value, meaning that very little of a developer’s money is involved. Interest and depreciation usually wash out the rental income. As Trump himself once put it, “Leverage: don’t make deals without it.
Today, however, Trump says, “I don’t need debt. I don’t have very much. I have about 3 percent debt.” When I point out that his F.E.C. disclosure lists debts of at least $315 million, he responds that this is 3 percent of $10 billion. True, but if you go with lower estimates of his wealth and higher estimates of his debt, it is considerably more.
There is a story in Washington, D.C., tax circles that Dan Rostenkowski, chairman of the House Ways and Means Committee from 1981 to 1994, was so scandalized by the shamelessness of the real-estate sector’s tax perks that he threatened to make the sector tax-exempt—which, counter-intuitively, would have increased their tax payments considerably. “Tax exemption for real estate was a serious threat,” says John Buckley, a former chief tax counsel to the Ways and Means Committee. “It would have recognized that there would be no tax on real estate, but it would have disallowed the use of real-estate tax losses to offset other income.”
And this brings us to yet another avenue to tax-free living for real-estate moguls. These deductions can travel. If you are an active real-estate professional—that is, in part, if you spend at least half of your work time in real-estate activities—then you’re allowed to assemble all your losses and deductions, magpie-like, wherever and however you suffered them, whether it’s from Trump Tower or a Scottish golf course, and throw them all into one big pot. (When Trump was asked whether he was active in real estate, for tax purposes, he responded: “I don’t know how I am categorized, but I spend a lot of time on real estate … even during the campaign.”) You then stir in your federal income and hope those losses will offset it all, like one of those science experiments where you pour one liquid into another, brightly colored liquid to make it all go clear. With enough deductions, a real-estate mogul like Trump can zero out his federal income-tax bill.
If Trump is not considered active enough in real estate, however, he is covered by a different system, for investors, and those real-estate losses do not travel, says Lee Sheppard, a tax lawyer and widely read contributing editor at the trade publication Tax Notes. Trump told me he won’t release his tax returns yet because he’s under a “routine audit,” and Sheppard speculates that the audit could be about this very question: whether he is active enough in real estate to be able to use those real-estate losses to offset other income—something that would become a lot harder to argue, Buckley adds, if he were president.
Even if Trump can’t get to zero after taking advantage of all this, he need not fear: he may be able to deduct expenses incurred by his celebrity lifestyle. Sheppard explains this by citing comedian Carol Burnett, who starred in her own variety show on CBS, starting in 1967. “This really was the 60s,” says Sheppard. “When you came out on the stage you wore a sparkly evening gown.” In those days celebrities paid for their clothes, and Burnett wanted to take the gowns as business expenses. The I.R.S. fought her, but she argued successfully that she would not wear them to the grocery store: they were specific work garments. “Entertainers fight about this stuff with the I.R.S. all the time,” Sheppard says.
We can’t see such deductions without Trump’s tax returns, but we can see other things Trump has put into this pot. A Wall Street Journal analysis, for instance, shows that he was able to deduct $39.1 million from his 2005 federal income tax via a “conservation easement,” which meant he simply pledged not to build houses on a golf course in Bedminster, New Jersey, thus reducing the land’s value. Trump’s charitable deduction for the easement amounted to an estimated 2 percent of the entire U.S. total of conservation easements that year, and Trump has done it on at least four of his properties: Mar-a-Lago, in Palm Beach; his Seven Springs estate, in Westchester County, New York; Bedminster; and a golf driving range in California. When asked if he would curb tax privileges for real-estate moguls, if elected president, Trump said, “I’m not doing anything further with this.”
If Trump hasn’t yet gotten to zero, there’s still another tantalizing possibility: offshore tax havens. Sheppard thinks he doesn’t need to bother because “real estate in the U.S. is so juicy you don’t need tax havens.” Trump himself says, “I don’t use them. Honestly I think it’s more trouble than it’s worth: highly overrated,” he says. “They don’t work, and they cause lots of difficulty, and nobody knows what’s going on, and they are really not good…. There is greater incentive in many ways to keep your money in the U.S.”
But it isn’t strictly true that Trump doesn’t use them. He disclosed a company, DJ Aerospace Limited, which he set up in the tax haven of Bermuda in 1994. (Trump declined to respond to questions regarding this company and a handful of other questions as well.) And he also reportedly transferred more than 110 registered or pending trademarks to a holding company in Delaware, which many people view as a tax haven inside the U.S. because it is secretive and can help you avoid taxes in other states.
Other Trump tax-haven activity is harder to find, yet Kleinbard says you can’t rule it out, as when royalties are paid for the use of Trump trademarks for foreign projects he does own. (That Trump has refused to release his returns positively invites such speculation.
Many big businesses park foreign income in tax havens, to defer or escape tax: Apple alone holds an estimated $180 billion or more offshore. Could Donald Trump be doing the same? His brand names and trademarks are intangible assets separate from the man himself, and therefore are similar to the intangibles that drive the profits of U.S. tech firms. Could the non-U.S. rights to Trump’s very name be owned by an offshore tax-haven company? If so, as Kleinbard explained to me, the royalties might flow from a Donaldco in Delaware to a company higher up the corporate “tree” in the Netherlands, then further up to an Irish corporation resident in Bermuda (don’t ask), where they would ultimately be parked offshore as “stateless income,” incurring no tax. This might be Romney’s “bombshell.” (Romney should know. After all, he was found to be parking secret stuff in Bermuda.)
“Trump has sophisticated tax advisers,” says Kleinbard, “and I can’t find a technical tax reason why he wouldn’t have used Silicon Valley tax technologies to park his foreign royalties in an offshore tax haven at near-zero tax rates. If Trump didn’t do this, he might want to ask his advisers why they didn’t recommend it.”
Considering all these possible tax-avoidance strategies, the chances that Trump pays a reasonable tax rate are low. And, in fact, there is a more direct indication of this
In June, Aaron Elstein, of Crain’s, reported that Trump had qualified for several years for tax credits of around $300 under New York City’s School Tax Relief Program (STAR), a benefit open only to married couples whose annual income is less than half a million dollars. This is important for our story. Although we need to be careful not to confuse local taxes with federal taxes, you can extrapolate from one to the other: city and state tax returns normally base their taxable-income assessments on federal tax returns. The Crain’s story suggests Trump has pushed his federal taxable income down below $500,000—less than a thousandth of what he publicly says he earned last year. This indication isn’t watertight: there could be special adjustments between the federal tax return and the city-and-state one, and Trump may also be pushing his licensing income into Delaware to reduce his New York State taxable income. The mayor’s office was “reviewing” the case—but when Crain’s made a Freedom of Information request for Trump’s STAR application the New York State Department of Taxation and Finance said that, after a two-month search, no documents could be found. A Trump spokesperson said, “The city made a mistake and the money was returned.”
