Trump Took Tax Losses He Knew Were Fraudulent
This
explains why he fought all the way to the Supreme Court in a failed effort to
keep his tax information secret.
One technique he used at least 26 times between 2015 and 2020 was as simple as it was flagrant. Trump filed sole proprietor reports, known as Schedule C, that showed huge business expenses despite having zero revenue.
That created losses which Trump used to offset his income from work and
investments, thus lowering his income taxes. Additional Schedule Cs had
expenses exactly equal to revenues while only a few showed profits.
Trump knew this was unlawful because he lost two trials over his
1984 income taxes in which he did the exact same thing, a story I broke in June 2016. Both judges, in
scathing opinions, ruled that Trump committed civil tax fraud.
That Trump persisted in using the same fraudulent technique in
six years of recent tax returns is powerful evidence of mens rea or criminal intent. This device is not
Trump’s most lucrative tax cheating technique, but it is the easiest for jurors
to understand should Trump be indicted on tax charges.
The 65 Schedule Cs Trump filed as a candidate and as president
helped him convert a federal tax bill that could have been as high as $46
million into a $2.1 million profit from the federal tax system, my analysis of
the Congressional Joint Committee on Taxation staff
report shows.
Trump received more than $154.2 million in wages, interest,
dividends, capital gains, and pensions over the six years when he ran for
president or lived in the White House. Despite this huge revenue stream, Trump
reported minus $53.2 million in Adjusted Gross Income, the
last number on the front page of your Form 1040 income tax return.
Other Tax Schemes
The Congressional report raises questions about numerous other
tax deductions Trump took, including charitable deductions that may be bogus or
overstated; treating personal expenses as business expenses; loans to his three
older children that may be to escape gift taxes; and reporting almost $5
million of capital contributions as tax-deductible business expenses.
In short, Trump’s tax returns are a rich environment in which
questionable conduct is found throughout the filings and needs only seasoned
auditors to uncover fictional expenses.
Should our Justice Department or the Manhattan District
Attorney’s office ask grand juries to indict Trump for tax crimes, the losses
on supposed businesses with no income would be easy for jurors to understand.
In contrast, a kitchen sink tax prosecution could confuse jurors because
it would involve obscure tax law issues, possibly allowing Trump to slip away.
Year by Year
In four of the six years, Trump’s taxable income was zero.
The report shows that Trump paid no income tax in three of the
six years and just $750 in 2016.
Over the six years, he paid $776,126 in net federal income tax.
That’s just half of one percent of his positive income, the equivalent of a
married couple earning $100,000 paying $500 instead of the typical $8,500.
The typical tax rate for Trump’s income class is more
than 25%.
Trump received $18.7 million in refunds under the Alternative
Minimum Tax, which is $2.8 million more than he paid, a nifty profit off that
tax law. Three decades ago Trump lobbied Congress for generous Alternative
Minimum Tax refund provisions for himself and other real estate investors.
In four of those six years, all but 2016 and 2017, his Schedule
Cs showed losses totaling almost $1.3 million.
Shocking But True
Because New York State tax returns adhere closely to federal
rules on reporting income and tax-deductible expense, Trump almost certainly
made additional profit off the Empire State tax system.
It may shock you to learn that there are legal ways to turn the
burden of income taxes into a source of profit. Still, every sophisticated tax
accountant and lawyer knows how business owners, especially real estate
operators like Trump, can do this legally. As a leading Manhattan tax lawyer
told me years ago: “If you’re big in real estate and pay any income tax, you
should sue your tax lawyer for malpractice.”
Workers and pensioners are excluded from the rules that let rich
business people and landlords convert the burden of income taxes into the joy
of financial gains.
Accounting Alchemy
Medieval alchemists claimed that the mythical Philosopher’s
Stone would turn lead into gold. They failed, but thanks to the modern alchemy
of tax accounting, the black ink of taxable income can be transformed into the
red ink of losses that in turn reduce or eliminate income taxes and can even
turn the income tax system into a source of profit.
For decades I’ve been exposing ways that tax law and accounting
rules favor the wealthiest business owners, hoping the voters would realize
that the tax system that burdens them is, perversely, a lawful source of income
for people like Trump.
Trump didn’t limit himself to lawful tax avoidance, my analysis
of the Congressional report and other documents shows.
Fraud Trials
This takes us back to 1984, by far Trump’s most lucrative year
up to that point. Trump Tower opened at the end of 1983, and his first Atlantic
City casino opened in the Spring of 1984. Rivers of greenbacks flowed into
Trump’s accounts.
State and city auditors spotted a Schedule C consulting business
that showed no fees or other revenue but more than $600,000 in costs. State and
city auditors disallowed the losses. Trump appealed. I couldn’t find a record
of the IRS taking any action.
In scathing decisions following administrative trials, judges
for New York State and City ruled that Trump was not entitled to use losses
from this supposed consulting business to offset his other income.
Trump produced no receipts, no invoices, no work papers —
nothing indicating the 1984 consulting business was more than a figment of his
imagination.
“The record does not explain how Petitioner [Trump] had
significant expenses without any concomitant income from his consulting
business,” wrote H. Gregory Tillman, the city administrative law judge who
tried the case in 1992.
Trump complained of double taxation, but Judge Tillman ruled
that claim baseless. Using bold face to emphasize his point—an extraordinary
step in a judicial opinion—Judge Tillman wrote, “The problem at issue is not
one of double taxation, but of no taxation.”
Trump’s longtime tax accountant and lawyer, Jack Mitnick, gave
damning testimony before Judge Tillman.
Photocopier Enables Fraud
The tax return the city received was not an original with “wet”
(ink) signatures, but a photocopy.
Asked about the validity of the photocopy, Mitnick gave
astonishing testimony.
“We did not” prepare that return, Mitnick testified, referring to himself and his firm. In other words, the tax return was a forgery. Mitnick’s signature was applied using scissors and a photocopy machine.
(My
first national journalism award, in 1975, was for exposing a corrupt Michigan
state senator who put his name on his predecessor’s medical records using a
photocopier, then trick the state Supreme Court into giving the supposedly
dying senator a law license after he badly flunked the bar exam, and then
miraculously recovering and using his law license to swindle his predecessor’s widow
out of her fortune.)
Imaginary Businesses?
The Congressional report assumes that all the Schedule Cs on
Trump’s recent tax returns actual businesses. Some of them may not exist except
in tax filings. Auditors would be smart to demand evidence of business activity
such as calendars, correspondence, travel to see potential clients, and the
like to determine whether some or all of these businesses exist only on paper,
if that.
While we only have details from six recent years of Trump’s
taxes, it’s reasonable to suspect that he has used this technique continually
since 1984 and may have well used it before then.
There is no statute of limitations on civil tax fraud, so even
if Trump is never indicted, he could be pursued to collect taxes owed, along
with penalties and interest, going back years or even decades.
But the beauty of the particular Schedule C scheme is that this
is plain and simple.
Much more lucrative for Trump, the Congressional report
indicates, was Trump apparently treating real estate as a Cost of Goods
business rather than applying the real property rules. Bogus or overvalued
charitable donations are another area of inquiry the Congressional report
recommended.
Much of tax law is esoteric and difficult to grasp. But what
Trump did again and again and again—taking expenses for businesses with no
revenue—is so simple that jurors should have no trouble understanding the
issues were Trump to be indicted by a federal or New York state grand jury.
The Congressional report also notes another tax integrity issue
I have spent years exposing: the least compliant taxpayers get away with
wrongdoing because fighting them consumes vast amounts of limited government
resources. The IRS today is a mere shell of what it was at the turn of the
century, or in 1980, in terms of capacity to uncover tax frauds and to pursue
enforcement, civil or criminal, against those who thumb their nose at the law.
The Transactional Records Access
Clearinghouse at Syracuse University is a rich source of
information on the decline of the IRS.
The Congressional report notes “the history of difficult
negotiations between Mr. Trump’s counsel and IRS personnel” implying this
explains why only one auditor was assigned to only one of the six Trump tax
returns and that auditor was not allowed to seek advice from the specialists
the IRS employees in fields from biology to real estate partnership rules.
Considering that Trump headed our government for four years
while obviously cheating on his income taxes, his case deserves whatever
resources it takes to bring him to civil and criminal justice.
David Cay Johnston is the Editor-in-Chief of DCReport.
He is an investigative journalist and author, a specialist in economics and tax
issues, and winner of the 2001 Pulitzer Prize for Beat Reporting.
