New York Times Story - Trump Tax Returns

The "old gray lady" known as the New York Times has published a story claiming that Donald Trump's 1995 tax returns contain a Net Operating Loss (NOL) in an amount in excess of $915 million. 

This is a blog that a part of me does not want to write.  I am opposed to the election of Mr. Trump.  I believe he presents a danger to our nation if he is ever elected to any office, let alone the highest office in the land.  But this story is misleading and I can't let that go by without commenting, no matter how much I loathe the notion of being a defender or apologist for Mr. Trump.

An excerpt of the story says:

"The state documents do show, though, that Mr. Trump declined the opportunity to contribute to the New Jersey Vietnam Veterans’ Memorial Fund, the New Jersey Wildlife Conservation Fund or the Children’s Trust Fund. He also declined to contribute $1 toward public financing of New Jersey’s elections for governor."

I prepare hundreds of tax returns annually.  Many of my clients give generously to various charities on their federal tax returns.  But when it comes to those voluntary checkbox items on the California income tax return, Form 540, I've never seen anyone take the "opportunity to contribute" to any of the 19 voluntary contribution items on Page 4, which include the:

California Seniors Special Fund
Alzheimer's Disease/Related Disorders Fund
Rare and Endangered Species Preservation Program
Emergency Food for Families Fund
California Peace Officer Memorial Foundation Fund
and 14 more.

To make this an issue regarding Mr. Trump in making him appear to be unusual in this regard goes beyond misleading and reaches the level of seriously slanting the story.  I suspect that if the NYT asked the same tax experts they consulted below, they would find most if not all of their own clients also fail to take this opportunity on their own returns.


Another excerpt of the story says:

"Tax experts hired by The Times to analyze Mr. Trump’s 1995 records said that tax rules especially advantageous to wealthy filers would have allowed Mr. Trump to use his $916 million loss to cancel out an equivalent amount of taxable income over an 18-year period."

The tax rules that allow the use of NOLs to reduce or eliminate taxes in the years before or after a loss is incurred do not disproportionately benefit the wealthy because they are rich.  They are beneficial to those who are engaged in business rather than working for an employer.  If you work for someone else and you are paid on a Form W-2, you will not have an NOL without having some other business activity.  So these rules do favor the wealthy because they are primarily those who put money at risk in a business entity and have the potential to suffer a loss.

The rules and regulations that govern the use of Net Operating Losses, the provisions involving carrying them back to prior years and forward into future years are Byzantine in the extreme.  But the concept is simple.  If you have an investment in a business and in one year you lose money, that loss can be used to offset income in the years before or after the loss.

Here is an example.  In 2013, John Taxpayer invests $500,000 into a new business activity.  In the following year, he suffers a loss of $300,000 because his expenses exceed his income in that activity in 2014.  That results in a negative income.  Income tax is paid on positive income.  

Then in 2015, Mr. Taxpayer has income of $400,000.  Normally he would owe income tax on that amount.  But because his 2015 positive income is partially offset by that loss of $300,000 from the prior year, his net taxable income is only $100,000 and that is the amount he is taxed on.

It is a matter of equity, of fairness.  If the two periods involved were months instead of years, we wouldn't be discussing this at all.  That's the simplicity of the NOL.  It simply allows a taxpayer to be taxed on the actual amount of income they receive over periods involving multiple years.

Donald Trump did not violate any laws in using the NOL provisions to reduce his tax liability.  No chicanery, nothing untoward.  He is guilty of many other things, but here he has simply followed the law.  If you don't like the idea of people being able to reduce their tax obligation on income in one year by using losses in prior years, then get Congress to change the law.

There is a similar provision in the tax law regarding Capital Losses and a quick review of the federal tax returns filed by Bill and Hillary Clinton from 2008 forward show they are taking advantage of this tax code benefit.  In 2008 they took a loss of $726,761 from the final disposition of their interest in the Yucaipa Partnerships.  That's a business venture Bill became involved in with Ronald Burkle, a major donor to Democratic causes, and to Clinton's two successful presidential campaigns.  The Wall Street Journal reported in 2009 that Bill Clinton has received partnership payments from the Yucaipa Foreign Fund of $12 million.

Since that 2008 loss, the Clintons have reduced their taxable income by $3,000 annually in using up their loss carryforward.  They've also been able to avoid tax on any capital gains they recognized during those years, although there have been very little of those.

One final thought.  If paying the minimum amount of income tax allowable under the law is bad, what does it mean when someone is paying hundreds of thousands more in taxes than they are required to do under the law?  Take a moment to read this article from Forbes.  According to its author, CPA Tony Nitti, the Clintons could have avoided paying $380,000 or so in self-employment taxes.

None of this changes the fact I wouldn't vote for Donald Trump in November even with a gun held to my head.  But fair is fair.