Right-wing bloggers are shoveling piles to defend Donald Trump’s taxes. (More)
“If Trump managed to pay no taxes for years, the most likely way he did this was by losing sums much vaster than the unpaid taxes”
The big news this weekend was the leak of Donald Trump’s 1995 tax returns to the New York Times. The returns showed that in that year, Trump claimed $916 million worth of business losses; those losses, said the Times, “could have allowed him to legally avoid paying any federal income taxes for up to 18 years.”
Liberal social media dissolved into an ecstatic puddle; conservative social media, at least the part that is supporting Trump, angrily denounced the Times for publishing this tripe.
A few sensible people tried to explain that while the story might have well show that Trump was a bad businessman, it didn’t really show any sort of interesting tax shenanigans. And since we had long known that Trump lost a bunch of money in Atlantic City, a story that has been amply and ably covered by folks like our own Tim O’Brien, it didn’t even really offer much news.
If Trump managed to pay no taxes for years, the most likely way he did this was by losing sums much vaster than the unpaid taxes. This is fair, it is right, it is good tax policy. There are many valid indictments of Trump as a candidate and as a businessman. But on the charge of unseemly tax avoidance, if this is all the evidence we have, then the grand jury would have to return … no bill.
Over the weekend, the New York Times reported that they had obtained a copy of Donald Trump’s 1995 New York state tax return (whoever sent it committed a felony). It showed that he claimed a net operating loss (NOL) of about $900 million that year.
What followed was a collective explosion of talking heads over the weekend, with the theatrics inversely proportional to the pundit’s knowledge of tax policy.
In fact, a net operating loss is very common in businesses. As Alan Cole of the Tax Foundation pointed out this morning, about 1 million taxpayers had an NOL in 1995. It results from business deductions exceeding business income in a particular year. Under tax rules, this loss can be carried back up to two years, and carried forward up to twenty years. If this is a “loophole,” what are these political reporters suggesting? That a business loss should simply be eaten by the taxpayer? That Uncle Sam should be a full partner in your profits but not in your losses? How is that fair?
The main point is that none of this is unusual in the high stakes investment business Trump plays in. It only seems scandalous to someone whose idea of a complicated tax return year is when they get a stray 1099-MISC in the mail for a freelance column in Washingtonian Magazine.
And that’s a whole huge pile of … bullshit.
“Treating real estate professionals different from other taxpayers”
First, both McArdle and Ellis pretend that Trump’s business is no different from any other, such as McArdle’s hypothetical meatpacking plant that lost $500,000 in 2014 but profited $1.5 million in 2015. Yes, MeatPackCo could use the NOL from 2014 to offset the 2015 profit, and pay taxes on a net $1 million.
Probably. It turns out the amount of per-year NOL carry over varies with the business.
For example, the Clintons claimed a NOL of $700,000 in 2015, but they can offset only $3000 from that in any future tax year. I’ll save you the math; at a max $3000 per year, it would take 234 years for them to offset the entire 2015 loss. Oh, and they can only take that offset against income from the same kind of source.
Congress made this particular tax dodge possible by treating real estate professionals different from other taxpayers. Developers like Mr. Trump are allowed to use their real estate losses to offset income from activities unrelated to real estate. In Mr. Trump’s case that would include earnings from The Apprentice and money made from selling steaks and neckties. By contrast, under federal law, doctors, lawyers and others with real estate losses can use them to offset only real estate income.
But there’s a deeper problem with McArdle’s and Ellis’ analysis.
(the human being) … (the shell company)
Take another look at the chart in today’s featured image. No, it’s not an exact chart of the Trump Organization. That information is unavailable, and it would be far too complex regardless. So the Grafix Department simplified it, based on the information that is available to the public.
At the top of the chart, we have Donald Trump, the actual human being. He’s at least one of the owners of the Trump Organization, which is a shell company. It owns subsidiaries like Trump This, Trump That, Trump Stuff, Trump Etc. Typically each hotel, office building, condo or apartment complex, golf course, etc. would have its own ownership company. So would any other business that bears the Trump brand: his necktie business, his steak business, and so on.
Some of those subsidiaries would be LLCs, limited liability corporations. Others are probably subchapter-S corporations. Both LLCs and S-corps allow pass-through of some profits, and some kinds of losses, to the owner(s)/investor(s).
Note those plurals: owner(s)/investor(s).
Trump may be the sole owner of the Trump Organization. More likely, his children have at least some ownership share. There may also be other investors: others who bought into the Trump empire and/or creditors who lend to the shell company. They’re the large ovals-with-question-marks at the top, beside Trump.
Similarly, the Trump Organization may be the sole owner of some of those subsidiaries. But again, more likely there are other investors and/or creditors for each subsidiary. Some may have interests in several subsidiaries; others in only one. They’re the smaller ovals-with-question-marks in the middle.
According to the tax forms sent to the New York Times, in 1995 the Trump Organization (or whatever the shell company was called then) had a net operating loss of $916 million for that year. Now, that doesn’t mean every subsidiary lost money in 1995. It may be that Trump This lost $1 billion, while Trump That, Trump Stuff, and Trump Etc. earned a net $84 million profit. But because the Trump Organization is a real estate business, it can write off real estate losses against any other income.
But here’s where McArdle and Ellis shovel fast and furious, and hope you won’t notice: that $916 million was a business loss, for Trump Organization (the shell company). Donald Trump (the human being) didn’t lose that money personally.
Let’s say Donald Trump (the human being) put $5 million of his own money – through the Trump Organization (the shell company) or as a separate investor, one of those smaller ovals in the middle – into Trump This. And let’s say he found 19 other people who put up an equal amount, for a total of $100 million. With that investor money in-hand, Trump This (the subsidiary) got bank loans totaling $900 million, for an even $1 billion in total capital …
… and Trump This flopped, completely, its net value zero … a $1 billion loss.
Donald Trump (the human being) would have a personal loss of $5 million, the money he invested. The other 19 investors also lost $5 million each. But that’s all each one loses, because corporate personhood limits each investor’s losses to the amount he/she invests.
That’s why we recognize corporate personhood. If you buy 10 shares of WigiCorp at $1000 each, the most you can lose is $10,000. Even if WigiCorp takes a billion-dollar bath on a faulty product, your personal liability stops at the value of your WigiCorp investment. (Yes, there are exceptions for corporate officers who are found guilty of malfeasance, but those don’t apply here.)
So Donald Trump (the human being) lost $5 million when Trump This flopped, and the 19 other investors lost $5 million each. The other $900 million of that net-$1-billion loss is debt still owed to the banks who financed Trump This, who are also ovals in that middle row.
But the tax documents revealed to the Times show that Donald Trump (the human being) claimed the entire $916-million net Trump Organization (the shell company’s) loss from his personal income.
McArdle and Ellis play fast and loose with pronouns, hoping you won’t notice that Donald Trump (the human being) and the Trump Organization (the shell company) are separate legal persons. Donald Trump (the human being) could only claim the Trump Organization’s (the shell company’s) losses because the tax code lets real estate developers do that … more comprehensively than almost any other business owners.
So yeah, McArdle and Ellis are shoveling yet more Trump bullshit.
Image Credit – Donald Trump: Wall Street Journal, Chart: Crissie Brown (BPICampus)
Good day and good nuts