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Donald Trump, taxes, and fiduciary responsibility

Submitted by Robin Messing on Sun, 10/02/2016 - 3:17pm

Donald Trump seems to be almost as good at dodging taxes as he was at dodging the draft.  We already knew that Trump paid no federal income taxes in 1978, 1979, and 1984. We also knew that Trump paid $0 or close to $0 in federal income tax in 1991 and 1993.  We should have sympathy for Trump in the early 1990's--he was was having tough times during those years as his casinos were going bankrupt and his creditors forced him to live on only $450,000 a month income.  (That’s right. That’s not a typo.)

Now we learned something new. Yesterday's New York Times revealed that Trump declared a $916 million loss on his taxes in 1995 thanks in part to his disastrous business decisions involving his hotels and casinos.  He paid no taxes in 1995, and this tax loss may have enabled him to escape paying any Federal income taxes until 2010.  The Trump campaign released a statement saying,

Mr. Trump is a highly-skilled businessman who has a fiduciary responsibility to his business, his family and his employees to pay no more tax than legally required. That being said, Mr. Trump has paid hundreds of millions of dollars in property taxes, sales and excise taxes, real estate taxes, city taxes, state taxes, employee taxes and federal taxes.

Trump has yet to provide EVIDENCE that he has paid hundreds of millions of dollars in these other taxes, so we'll just have to take his word for it.  Of course, it is easy to understand why some would be skeptical, given Trump's rather loose relationship with the truth.

It's funny how seriously Mr. Trump talks about his fiduciary responsibility now, given that during the 1990's Trump was sucking millions of dollars out of his casino and hotel businesses as they were on the road to bankruptcy.  Russ Buettner and Charles Bagli explained in their New York Times article just how seriously Trump took his fiduciary responsibility for others as his casino and properties were going down the toilet (emphasis added):

During a decade when other casinos here thrived, Mr. Trump’s lagged, posting huge losses year after year. Stock and bondholders lost more than $1.5 billion.

All the while, Mr. Trump received copious amounts for himself, with the help of a compliant board. In one instance, The Times found, Mr. Trump pulled more than $1 million from his failing public company, describing the transaction in securities filings in ways that may have been illegal, according to legal experts. . . .

Just over a year after it opened, the Taj Mahal was in bankruptcy court, followed in 1992 by both the Plaza and the Castle. In the plan that was worked out, Mr. Trump ceded to the lenders a 50 percent stake in the businesses in return for lower interest rates. The lenders agreed to defer certain principal and interest payments and hold off on personal claims against Mr. Trump for five years. But there was little or no reduction in the enormous debts that would plague his gambling empire far into the future.

Mr. Trump now says he looks back on the period as his golden era in the casino business.

“Early on, I took a lot of money out of the casinos with the financings and the things we do,” he said in a recent interview. “Atlantic City was a very good cash cow for me for a long time.” . . .

His agreements with lenders and the two casino bankruptcies in those years still left Mr. Trump personally responsible for more than $100 million in debt, and his agreements had only delayed the day of reckoning to June 30, 1995.

He dealt with that danger by first shifting much of his personal debt onto his casinos, then onto a new group: shareholders.

Step 1 came in 1993, when his company sold more junk bonds, adding another $100 million in debt to the Trump Plaza casino. More than half of the new money went to pay off Mr. Trump’s unrelated personal loans.

Then, in June 1995, with the risk of being forced into bankruptcy just weeks away, Mr. Trump shifted ownership of the Plaza casino to a new, publicly traded company: Trump Hotels and Casino Resorts. In the initial public offering, 10 million shares were sold at $14. At the same time, the company also sold another $155 million in junk bonds, at a 15.5 percent interest rate.

Becoming a public company burdened Mr. Trump with the responsibility of putting shareholders’ interests first. But Mr. Trump, the largest shareholder and chairman of the board, could generally meet that obligation by obtaining approval from his board of directors and disclosing financial details in securities filings. The board’s three outside members were widely seen as bowing to his wishes.

A week after the initial public offering, the new company began using some of the almost $300 million it had raised to clear Mr. Trump’s personal debts. During his financial pinch two years earlier, Chemical Bank had forced Mr. Trump to give up his ownership of the Trump Regency, a hotel next to the Trump Plaza. He held an option to buy it back for $60 million, which included debt on the hotel and $35.9 million that he personally owed the bank from his purchase of a Manhattan property. The new company exercised that option, in effect transferring Mr. Trump’s debt to its own balance sheet.

In 1996, the public company issued more stock and sold $1.1 billion in junk bonds. The money was used in part to pay off $330 million in bonds on the Plaza that had been guaranteed by a company Mr. Trump controlled, as well as almost $30 million that Mr. Trump personally owed to two banks. The company also bought the Trump Taj Mahal and Trump Castle — soon renamed the Trump Marina — shifting more of Mr. Trump’s debt to shareholders. 


There is one point that has been largely overlooked in the commentary that I've seen about yesterday's bombshell. Donald Trump is proud that he pays so little taxes. During the first debate with Clinton he bragged that it shows he is a smart businessman.  He claims he knows the tax law better than anyone who has run for president and that makes him the only one who can close the loopholes.  Why anyone would believe that he would actually close loopholes that has saved him millions in taxes is beyond me.  But even if he wants to close the loopholes, yesterday's article calls his expertise into question. 

In an interview on Wednesday, Mr. [Jack] Mitnick [Trump's tax preparer] said he could not divulge details of Mr. Trump’s finances without Mr. Trump’s consent. But he did talk about Mr. Trump’s approaches to taxes, and he contrasted Fred Trump’s attention to detail with what he described as Mr. Trump’s brash and undisciplined style. He recalled, for example, that when Donald and Ivana Trump came in each year to sign their tax forms, it was almost always Ivana who asked more questions.


But if Mr. Trump lacked a sophisticated understanding of the tax code, and if he rarely showed any interest in the details behind various tax strategies, Mr. Mitnick said he clearly grasped the critical role taxes would play in helping him build wealth. “He knew we could use the tax code to protect him,” Mr. Mitnick said.


Three more points must be mentioned in light of the recent revelation that Donald Trump pays little or no income tax.  First, he has whined about paying so much taxes in the past and he has decried deadbeats who didn't pay taxes. This article by Sarah Jones at PoliticusUSA documents the crybaby's tweets.  Hillarious. Second, Trump apologist Rudy Giuliani has been saying that Trump could have been sued for failing to meet his fiduciary responsibility if he had not taken advantage of every tax loophole for his business.  But Jason Easley of PoliticusUSA points out that why this is misleading.

Everything Rudy Giuliani said on ABC’s This Week was a lie because he mixed up business income with personal income. Trump’s businesses are separate corporations, which pay separate taxes. It doesn’t matter how much money the businesses made. What matters is how much income Trump personally took in, and whether not he personally paid taxes on that income.

Trump’s personal tax returns have nothing to do with the fiduciary responsibility. It is all about how big of a piece of the pie Trump gave himself and the steps he took to avoid paying taxes.


And third, Katy Tur asked Trump after the debate whether he pays tax now. He refused to answer.


Update 10/6/16: 1) Pulitzer Prize winning author and tax expert David Cay Johnston has given us his analysis of how Donald Trump finagled the tax law to minimize his taxes.  His article, "Art of the Steal" is MUST READ because it discusses the fraud that Trump almost certainly perpetrated against bankers and stockholders of his company.  Here are some excerpts:

Last May, Trump revealed that he took on debt with no intention of paying it all back, which strikes me as fraud. “I’ve borrowed knowing you can pay back with discounts,” he told CNBC in May, boasting “I’ve done well with debt.”

Back then Trump threatened endless litigation unless 70 banks he owed money gave him millions more in new loans at low interest rates and provided him with $5.4 million a year for personal spending, the equivalent of $10 million in today’s money. . . .

What made the litigation threat credible was Trump’s refusal to pay more than 150 illegal immigrantswho demolished the Bonwit Teller department store to make way for Trump Tower. A federal judge ruled that Trump conspired to cheat the workers, who never did collect all of their $4-an-hour wages despite an 18-year struggle.

The bankers realized that a man who would endure almost two decades of litigation to avoid paying such meager wages might tie them up for eternity over the billions of dollars owed to them. . . .

So while Trump made money at every turn, the banks that lent him money, the workers and small businesses who delivered for Trump, and the investors in his casino company all got stiffed. And while they paid taxes on whatever income they did manage to collect, Trump enjoyed at least $916 million of tax-free income. . . .

A complete tax return for 1995 would also make it possible to determine if Trump followed the law, as a statement he issued asserts, or misreported figures to inflate his tax savings.

2) Donald Trump has been boasting that he's a genius for figuring out how to game the system so he could pay no income tax.  He claims that only he can fix the tax code because only he understands the loopholes.  His tax accountant, Jack Mitnick, has now said that this is nonsense.  Mitnick said, "I did all the tax preparation. He never saw the product until it was presented to him for signature."  When asked who he would vote for, Mitnick said, "That's confidential".  Hardly a ringing endorsement for tax-expert Donald.