By Frank Thomas
In recognition of Trump’s extremely complicated tax situation, James Stewart in a recent NY Times article asked him to just simply submit ten numbers – adjusted gross income and actual federal taxes paid over his last 5 year returns.
That seems a simple request for Trump to respect. But the legally allowed complex tax concessions given to real estate developers complicates making judgments about Trump’s moral business integrity and obligation to expose his returns.
If Trump’s consolidated actual tax payment numbers are very modest, if not nil, as I certainly expect they are relative to income flows, then Stewart’s numbers will inevitably encourage some sharp public criticism. But this doesn’t necessarily mean he has done anything wrong if he has used the tax concessions and provisions in a manner the law allows. After all, In addition to real estate developers, many wealthy people pay little or no tax.
But of course, the huge difference is that Trump is running for president. He, above all people, is morally bound to reveal forthwith summaries of his returns accompanied by simple explanations of how he – like most real estate developers – pays such modest income taxes. His hesitation to provide the key numbers and explanations may stem from the naked, public exposure of how special tax laws for an “elite business group” make real estate development so extremely attractive from a tax standpoint and in amassing asset wealth.
I ‘ll try to explain just how this is achieved subsequently. In late ’70s and early ’80s, I was a senior real estate investment specialist for a major insurance’s firm’s Equity Fund involving hundreds of millions of dollars for all-cash purchases of commercial real estate (mostly in partnership with reputable developers). I had responsibility for six states including New York during time Trump was just beginning to make a name for himself in the real estate development world with the spectacular Trump Tower.
In my acquisition work for the insurance firm, I witnessed how massive real estate values and sheltered profits could be built up over the years by astute developers like Trump. This is done with the help of highly qualified legal and accounting professionals who know how to maximally exploit the upper limit of the tax avoidance, deference, or mitigation provisions uniquely available for real estate developers.
For decades, commercial/residential real estate development has been a very attractive wealth accumulation business in good economic times and also subject to very rough times in economic downturns. The real estate development business has some big advantages thanks to a legal web of complex tax deduction/deferral provisions also giving developers flexibility to manipulate the timing and recognition of income. So it’s no surprise to me that Trump has exploited the following tax loopholes to the hilt. In his words, “I fight like hell to pay as little (tax) as possible.”
Following briefly describes two major tax provision loopholes routinely being used on a small to massive scale by real estate developers like Trump.
Limited Liability Companies
Trump has an ownership in over 240 LLCs which ‘pass on’ income tax-free and losses to their owners in a very beneficial way from a tax standpoint. An LLC can generate enormous losses on revenues in the multi-millions and even billions of dollars. This is due to substantial depreciation write-offs (the ridiculousness of a depreciation charge for buildings which generally do not lose value except perhaps over very long periods if not properly maintained), interest payments, operating costs, and real estate taxes. Trump, like all developers, can offset his personal taxable income such as employment income, dividends, royalties, interest by using losses from his 240 LLCs.
More common company structures like C-corporations are taxed twice: first on corporate income and second on dividends and/or other payments. LLCs are taxed once. As stated, they can generate substantial losses which are passed through to LLC owners (like Trump) to offset all or a major portion of their ordinary income.
The 1986 tax reform law banned these structures used as a means to sharply reduce tax payments for ordinary (‘passive’) investors. But (‘active’) professional real estate developers like Trump, thanks to aggressive industry lobbying tactics, were exempted from the 1986 reform restrictions of using LLC losses to offset ordinary income.
Of course, Trump and other developers finance their LLC asset purchases with maximum debt possible to benefit from the interest payments deductions. This plus the already mentioned non-cash depreciation write-offs, real estate taxes, operating costs (including Trump’s travel and living expenses) can create considerable ‘paper’ losses. If losses occur and exceed Trump’s income, they can be carried forward to offset future income. In the past, Trump has benefited greatly from this loss-carry-forward provision, for example, carrying forward the extensive losses in his casino operations.
Like-Kind Real Estate Exchanges
Another significant real estate tax avoidance or tax mitigation mechanism is the so-called ‘like-kind’ transactions. Real estate developers as well as wealthy taxpayers who are well-advised can legally use this vehicle to defer taxes when an asset is sold. It works this way: when and asset that has risen in value is sold and yields a big profit and the cash proceeds are used to purchase another similar property, the transaction may be deemed a ‘like-kind’ exchange. In this case, the gain on the sale is tax-free. In a few cases, it may be possible to make a ‘like-kind’ exchange without selling the property first … with no taxes assessed. This wealth building process can go on forever until someone dies.
Just these two special developer tax law benefits result in up to +-$100 billion in lost federal tax revenues yearly. So far, every attempt at a major reform of the tax system – including the two big tax provision loopholes noted herein so tenaciously exploited by Trump and other real estate developers – have failed miserably.
Accelerated depreciation and ‘like-kind’ exchanges are both elective. These two tax electives defer payment of tax way into the future, but do not eliminate it. Trump could have planned his business affairs so that he paid a reasonable amount of tax each year, as most corporate good citizens do. However, he would lose the time value of the tax deferral which would probably be substantial. (Note that from an accounting point of view, SEC reported income is not affected by tax strategies. Profit is currently reduced by tax payments deferred into the future). By foregoing these two tax elections, Trump would have made what could reasonably be called a sacrifice.
If and when Trump reveals Stewart’s 10 numbers related to his last 5-year returns, the public will hopefully get a closer look at the extraordinary tax avoidance, deferral, mitigation provisions magically in action in his plus $10 billion real estate asset empire – resulting, I expect, in Trump paying ludicrously, if not obscenely, modest taxes on his adjusted gross income.
I’m assuming Trump’s +240 LLCs have been correctly following the tax laws benefiting real estate developers. Maybe there are some audit problems here that are behind why no one has seen Trump’s summary returns yet? I doubt he’s embarrassed about how little tax he has likely been paying in both his domestic and foreign investment activities over past years.
John Lawrence says
Thank you, Frank, for this astute analysis. Trump lost almost a billion dollars in 1995 due to the failure of his Atlantic City casinos, the Plaza hotel and Trump airlines. He had gone on a foolish buying spree and paid the price for it when these enterprises went south. However, as you correctly point out, he could write off this billion dollars over the ensuing years. Trump said, “This makes me smart.” But was it so smart to lose a billion dollars in the first place? I don’t think so.
Frank Thomas says
This is how “smart” people like Trump can be in exploiting the special exemptions from the Tax Reform Act of 1986, whereby Trump can claim losses exceeding what he actually invests in a project. So he leverages investments to the hilt with as little equity cash invested possible.
This can creates almost a no-lose or win-win situation. For example, with the LLC (Limited Liability Company) deductions allowed for interest, depreciation, operating expenses, real estate taxes and other costs on a highly leveraged property that still makes a profit, Trump can still achieve a good return on a small equity investment.
If LLC losses occur that may exceed his investment, as happened to the tune of $1 billion in 1995, Trump can get a huge return on his original small equity investment in the LLC from the substantial tax reductions on his personal income obtained by offsetting the LLC losses against his income.
To repeat, under current commercial real estate tax law, it can be a win-win situation big time irregardless if modest profits or losses incur in the LLC. And the properties that have losses, can subsequently increase in value over time which of course is the objective of the asset wealth expansion game.
Bernie Sanders intends to submit legislation that will close this unique commercial real estate tax loophole and the ‘like-kind’ exchange tax loophole.
Frank Thomas, thank you for your comment. However, irregardless is NOT a word.
John Lawrence says
Irregardless originated in dialectal American speech in the early 20th century. Its fairly widespread use in speech called it to the attention of usage commentators as early as 1927. The most frequently repeated remark about it is that “there is no such word.” There is such a word, however. It is still used primarily in speech, although it can be found from time to time in edited prose. Its reputation has not risen over the years, and it is still a long way from general acceptance.
It is a construct, probably came from some loquacious fool. Your quote from Merriam’s doesn’t include the last sentence; “Use regardless instead.” Regardless, I thought I’d try using my modest grasp of English language and usage to try explaining why it can’t be a word, or at least an efficacious word. Placing the prefix “ir” at the beginning of regardless turns it into a double negative. “ir” means NOT. Irregardless means “not regardless.” The suffix to regardless is “less.” It means “without.” So, regardless means “without regard.” If you add the prefix “ir” to regardless, it would mean “not without regard.” (Isn’t that a no-no double negative?) Have you heard or seen a person speak or write “irregardless,” in such context? It doesn’t appear to be the intended meaning of Mr. Thomas. Basically, the modifying prefix and suffix cancel each other out and we end up back with the word regard. I don’t always rely on the digital search when it comes to questions of language and usage. I still have a “hard copy” of Webster’s II. Regardless as a defined word listed. Irregardless is not. I didn’t mean to be snobbish or boorish toward Mr. Thomas. I apologize for that. I also strongly agree with his comment. I appreciate his extensive knowledge of the tax code. I hope a President Clinton will work closely with Senator Sanders to close the above referenced loopholes.
I should probably try to explain my horror with usage of “that word.” I would categorize it as something akin to being a part of Orwell’s Newspeak. Another chalkboard scratching seemingly ubiquitous practice I see among people is adding modifiers to the word “unique.” Unique is an absolute modifier. It can’t be modified. So many times people say or write “very unique,” “highly unique.” Their intention seems to be to enhance its affectation and/or effect, to dramatize it. Such dramatization is typically characteristic of Mafia Don and his sycophantic minions (and a lot of our visual media “journalists”). It scares me.
John Lawrence says
Thank you, Wayne for your loquacious and efficacious, not to mention pertinacious, explanation of a minor point in the English language. I should say your unique explanation is not highly irrelevant.
Frank Thomas says
Thought this added information might be interesting to some readers. According to Washington Post research data, Trump’s income and taxes were as follows during 1975-2015:
1975-77…………$ 219,334………..$ 71,943
1979………….$ 3,849,939………..$ 00 (casino profits were offset by real estate losses)
1980-94……….Unknown……………Unknown (except that for years 1984, 1993 no taxes were paid and in 1991 little taxes were paid)
1995………….$916 million loss…..No taxes paid
!996-2010……..Unknown……………Unknown (but likely no taxes were paid due to loss-carry-forward from 1995 $916 million loss)
2011-15……….Unknown……………Unknown (but likely no taxes were paid due to loss-carry-forward from 1995 $916 million loss)
2007-14………..$ 141 million……$ 43.0 million
2015…………..$ 10.7 million……$ 3.6 million
It’s obvious Trump was successful in paying little or no taxes from 1995 to 2010 and likely paid little or no taxes 2011-15.
In sharp contrast, the Clintons paid federal taxes amounting to an effective average tax rate of +-35% (excluding a +-10% average tax rate for state and local taxes) during 2007-15.
As noted in my article, President Reagan’s Tax Reform Act of 1986 prohibits taxpayers to offset active income with losses from a business the taxpayer is not really involved in (i.e., has a passive interest in). However, an exemption to this rule was made for real estate.
Thus, this exemption enables people like Trump active in real estate to use their real estate losses to offset any other income whether it be, for example, Trump’s product branding fees, royalties, substantial compensation for his leading role in the exceptionally popular TV production, Apprentice, income from interests in wine gardens, golf courses, etc.
In the Executive Branch Public Financial Disclosure Report that every national political candidate is requited to submit, Trump’s May 2016 104 page update of this report shows he either is the director or has an interest in over 540 LLCs, partnerships, corporations and funds. According to a NY Times study of Trump’s historical rate of success, a third of his ventures fail, another third have big problems, and a third do as expected.
So Trump has lots of opportunities to exploit some extraordinary income tax advantages to offset ordinary income with losses from his myriad investment interests. In typical mendacious Trump style, he brags constantly how wealthy he is, but to the tax authorities always makes the case he has less assets and profit than actually is the case.
Frank Thomas says
Trump’s lying ‘snake oil salesman’ ways have been brought to light again. This time by none other than Warren Buffett, a businessman I’ve greatly admired the last 50 years. He is the rare owner-executive who built a solid business empire strictly adhering to three basic Stakeholder Priorities – a winning management strategy for his firms for decades:
During the second debate last Monday, Trump said that Buffett in past years had used the carry-forward provision to significantly reduce his income taxes to LITTLE or ZERO as Trump has done the past 20 years. Warren Buffett exposed this claim as an outright fabrication.
He cited specific details from his own returns showing that he had “paid federal income taxes EVERY YEAR since 1944, and in the 72 returns filed, he never used a loss carry-forward provision.” Buffett also said that he has no problem releasing his tax data while under audit by the IRS. He added, “neither would Trump – at least he would have no ‘legal’ problem.”
Warren Buffett is among the growing number of reputable Republicans from the political and business worlds who have said they are supporting Hillary – or many notable Republicans who have announced they will not be voting for Trump.
Frank Thomas says
Here’s another link to Buffett’s Remarks if above doesn’t work.:
Google: “Read Warren Buffett’s Response to Donald Trump About His Taxes,” by Michal Addady, Oct. 10, 2016, Fortune