Donald Trump said Hillary Clinton should have closed the loophole that let him pay no taxes for years. Actually…. (More)

“Why didn’t she ever try to change those laws so I couldn’t use them?”

So asked Donald Trump when he blamed Hillary Clinton for his tax-dodging:

The tactic of shifting blame is one he has used many times before in the campaign – including when he finally recognized that President Barack Obama was born in the U.S., then promptly blamed Clinton for first fueling the questions, a charge without substance.

“So now after years of failure she complains about how I’ve used tax laws of this country to my benefit. Then I ask a simple question: Why didn’t she ever try to change those laws so I couldn’t use them?” Trump told his audience. “The reason that she did not do that is her donors and contributors have used those same tax laws as I did, the same way,” he said.

It turns out this is Yet More Bullshit….

“Maybe Clinton … actually got them changed”

Business Insider’s Josh Barro explains:

According to a Tuesday column by Lee Sheppard in the tax industry publication Tax Notes [editor’s note: that site is paywalled], Trump may have benefited greatly in the 1990s from a tax loophole related to forgiven debts – a loophole that would have allowed him to deduct business losses on his personal income tax return, even if those losses were actually borne by banks that loaned Trump money and never got it back.

People often use “loophole” to refer to tax deductions they don’t like, but this one was a loophole in the true sense of the word: a tax break created by legislative accident.

This loophole was the subject of a 2001 Supreme Court case, Gitlitz v. Commissioner, in which the IRS argued the relevant tax law could not have possibly meant what it appeared to say, which was that business owners could in some cases deduct losses they had not actually borne.

After the IRS lost that case, the loophole was closed by the Job Creation and Worker Assistance Act of 2002, a bill that then Sen. Hillary Clinton voted for and President George W. Bush signed. But that law only stopped taxpayers from using the loophole going forward; they were still allowed to benefit from tax losses they had booked through it in prior years, such as 1995.

You should read Barro’s in-depth analysis. In the meantime, here’s the nutshell version. As I did Tuesday, I’ll use the simplified organizational chart at the top to help you follow the money.

Let’s say Trump That, Inc. is a subchapter-S holding corporation for a casino. It was a subsidiary of the Trump Organization, another holding company that’s also an S-corp. But other investors and creditors also had invested in or lent money to Trump That (the subsidiary), and they’re the smaller ovals-with-question-marks in the middle of the chart.

Alas, Trump That (the subsidiary) went bankrupt under a $1 billion mountain of debt. In reality this probably wasn’t a case of one subsidiary with $1 billion in debt, but several subsidiaries whose debt totaled about that. That detail doesn’t change the analysis, so I’ll keep it simple.

Typically, when a debt is forgiven the debtor must list the amount of the debt as taxable income. But not when a debt is dissolved in bankruptcy. The whole idea of bankruptcy is to get out of debt – albeit with a serious credit rating blot – so it makes no sense to hand the bankrupt person or business a tax bill for the amount of the debts written off by the court.

But – and here’s the giant loophole – in 1995 the laws for S-corporations allowed the owners to include the value of loans received in their investment ‘basis,’ for purposes of calculating net operating loss. So if you started a tiny business with $100 of your own money plus a $900 bank loan, and your tiny business went bankrupt, you could count the full $1000 as a net operating loss … back in 1995.

If Sheppard’s analysis is correct, most of Trump That’s (the subsidiary’s) loss was money lent from banks. Those debts were dissolved in bankruptcy, so the banks took the financial hit. But under the law in 1995, the Trump Organization (the holding company) could deduct the entire $1 billion off its income from the other subsidiaries, for a net $916 million net operating loss … and Donald Trump (the human being) could deduct that entire $916 million from his other income.

Again, I’ve simplified. In reality he could only take his pro-rata share of the Trump Organization’s net operating loss. If he owned, say, 85% of the Trump Organization (the holding company), then the $916 million would be his share of a larger loss. But again, that detail doesn’t change the analysis.

And here’s the point: Donald Trump (the human being) never lost that $916 million. Neither did the Trump Organization (the holding company), or Trump That (the subsidiary). Instead, Trump That’s creditors lost the money when the bankruptcy court wrote off that subsidiary’s debts.

If that sounds absurd, it is. The IRS thought so too, and they went after David Gitlitz when he and other investors in a Colorado real estate firm used the same loophole, back in 1991. The Tax Court found for the IRS, as did the 10th Circuit on appeal. But in 2001 the U.S. Supreme Court held that the law-as-written, while absurd, was still the law-as-written … and Congress would have to change it.

So the next year, when Congress was working up the Job Creation and Worker Assistance Act, they closed that loophole with Title V Section 402:

Provides that income from the discharge of indebtedness of an S corporation that is excluded from the S corporation’s income is not taken into account as an item of income by any shareholder and therefore does not increase the basis of any shareholder’s stock in the corporation.

In other words, if an S-corporation went bankrupt, its owners could no longer include debts discharged in bankruptcy in ‘their’ business losses. And Hillary Clinton was among the 89 senators who voted to close that loophole.

Thus, Trump’s claim that she never tried to close that loophole because “her donors and contributors have used those same tax laws as I did, the same way” …

… is Yet More Bullshit.


Image Credit – Donald Trump: Wall Street Journal, Chart: Crissie Brown (BPICampus)


Good day and good nuts