The mystery of how Donald Trump managed to create a $916 million loss on his tax return in a single year may be solved. Trump likely engineered a equity-for-debt swap on his 1995 tax return, according to documents reviewed by the New York Times. The scheme allowed him to avoid millions in taxes, but experts say it stretches the bounds of legality and even his own advisers cautioned against it.
Faced with crippling debt over his casino empire in the early 1990s, Trump got bondholders to forgive hundreds of millions in defaulted debt. Normally, forgiven debt counts as income for tax purposes, offsetting any losses from his casino ventures and creating a massive tax bill.
But according to the Times, Trump likely did not have the money on hand to pay millions in taxes on forgiven debt. So he decided to exchange his defaulted casino bonds with equity stakes in his casino partnerships. Because the casinos were under water, these equity stakes were virtually worthless – meaning hid debtors essentially forgave his debt. But because they technically got something in return, Trump could claim that the debt wasn’t really forgiven and shouldn’t count as income for tax purposes.
Trump’s own lawyers cautioned that the strategy might not survive an IRS audit. “Due to the lack of definitive judicial or administrative authority,” they wrote in a note reviewed by the Times, “substantial uncertainties exist with respect to many of the tax consequences of the plan.”
It wasn’t clear whether the IRS ever took issue with it. The loophole that allows developers to swap defaulted debt for equity stakes and avoid huge tax bills was closed by Congress in 2004. Ironically, one of the U.S. senators who voted to end it was Hillary Clinton.
“He deducted somebody else’s losses,” said John Buckley, former chief of staff for the joint Congressional committee on taxation, explaining that he used his bondholders’ financial pain for his own benefit. “He is double dipping big time.” [NYT] — Konrad Putzier