How Trump Avoided Taxable Income

If you're wondering how Trump avoided taxable income on $916 mm of forgiven partnership casino debt, it's pretty close to what I expected, with an unlikely variation. on short, a manipulation of the Tax Reform Act of 1985, that imposed an 'at risk' requirement to take depreciation deductions, and virtually eliminated tax-advantaged investments in real estate.

He took an aggressive, unprecedented position, ignoring analogous tax authority by trying a slightly different twist on aa outlawed loophole for corporations who swapped worthless equity for forgiven debt. This loophole was passed during George HW Bush in 1991, and was banned under Clinton in 1993. 

Trump's tax counsel, Willkie Farr & Gallagher(my old law firm), a top national/international law firm, advised him that it probably wouldn't survive an IRS challenge, and was likely to be challenged. He still chose to not report the forgiveness of the bond debt as income, and apparently, escaped scrutiny or challenge. 

With that much at stake, he must have spent a lot (more than he contributed to charity) lobbying for, and probably received, preferential treatment from the IRS. He initially benefitted from another special interest loophole- letting RE developers apply RE losses to offset non-RE income, which was previously limited to RE income. He got around the at risk requirement by using a partnership structure and guaranteeing some debt, and failed to report the $916 mm of forgiveness of debt income. 

This partnership equity swap variation of the real estate loophole for corporations previously closed in 1993 was finally banned in 2004.

If you're rich enough, because you win or lose with investors' money, and you don’t care about truth, integrity or fairness, you can spread enough money around Congress and staffers to manipulate the tax laws. Trump escaped paying tens of millions of dollars in federal personal income taxes. Figure 35% of $916 mm, plus another 5-10% state income tax. In total, probably $400 mm.

Imagine if Hillary or any Democrat had done this? We know Trump is not more generous or experienced or smarter or analytic than Hillary, but is he more patriotic and honest?

Gil Sandler

Member and Board Member NFRPP

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