The New York Times is reporting that it has obtained copies of President Trump’s individual and business tax returns, concluding that President Trump has reduced his final tax liability to zero in ten of the last 15 years (and just $750 in recent years) after subtracting huge sums in business losses, deferral of unpaid debts, business expenses, and other deductions. Neither the Times nor President Trump have released the actual returns, and President Trump this evening denied the allegations.
What’s clear is that Congress cannot allow partisanship to color their perception of what is and is not sound tax policy. This story will certainly revive discussion about the complexity and malleability of the tax code with arguments about when avoidance crosses the line into evasion and the balance between Congressional policy and IRS enforcement.
For example, the Times reports that President Trump reduced his tax liability recently by taking $9.7 million in tax credits, primarily composed of historic preservation tax credits relating to the development of the Old Post Office Building in Washington, D.C. Passed in 1981 to encourage rehabilitation of older buildings, the tax credit has been utilized with 43,000 historic properties, according to the National Park Service.
The Times reports that Trump also took the conservation easement deduction, agreeing in 2015 not to develop “more than 200 acres of lush, almost untouched land just an hour’s drive of New York City.” Trump had sought to build a golf course and private homes on the land, but after encountering neighbor resistance donated the land instead and took a $21 million charitable tax deduction. The New York Attorney General is challenging that valuation as inflated.
Land trusts have properly utilized conservation easement deductions to protect over 27 million acres of vital wildlife habitat, open spaces, wetlands and rangelands, historically important property, and areas for public enjoyment. As we’ve said previously, there are ways to ensure conservation easement valuations are above board. As NTU President Pete Sepp wrote, “[t]he Fair Market Value of a property is calculated at its ‘highest and best use,’ defined by the Appraisal Institute under four criteria of ‘legal permissibility, physical possibility, financial feasibility, and maximum productivity.’”
While Congress created the conservation easement deduction, the IRS has launched a “war” on easement deductions, taking a “zero valuation” stance in audits and collection due process actions against taxpayers, for sometimes absurd reasons. In effect, the agency has decided it doesn’t like a provision of tax law passed by Congress and has committed to using every means at its disposal to “repeal” it administratively. Regardless of one’s views about the deduction as a policy matter, President Trump’s returns shouldn’t distract from the fact that the IRS is trying to remake tax law on its own.
The biggest item the Times attributes as responsible for President Trump’s tax reduction, however, is business losses. For example, the Times reports that the aforementioned Washington, D.C. hotel has lost $55 million through 2018, and that $315 million in losses from golf courses and other properties have offset profitable enterprises such as licensing deals, Trump Tower revenue, and income from the television show “The Apprentice.” The Times says Trump claimed a $1.4 billion business loss deduction as a result of the Great Recession in 2008-09 to wipe out taxes on most other income, with claimed refunds large enough to trigger needed approvals from the IRS and a congressional committee that are still pending.
These loss provisions, known as net operating loss (NOLs) deductions, are in fact key features of the tax code, as we noted earlier this year. NOLs smooth profits and losses across tax years so that businesses are not taxed on phantom profits that didn’t actually happen. Additionally, NOLs have limits: before 2009, they could only offset income for two prior years; a bill signed by President Obama that year allowed greater “carrybacks” that the Times says is the basis for President Trump’s large deduction that same year. The 2017 Tax Cuts and Jobs Act capped NOL carryforwards for large businesses at 80 percent, but those caps were suspended as part of COVID relief legislation passed earlier this year. A 1986 reform closed the door on earlier NOL abuse, adding the requirement of active involvement by an investor to be able to deduct business losses and offset other income.
The discussion of President Trump’s taxes may or may not have electoral consequences, but there is danger of knee-jerk legislative responses. Law students in their first tax class learn that avoidance is legally reducing your tax while evasion is illegally doing so. Congress created the labyrinth that is our tax code, pushing specific deductions and credits to encourage various activities and opening the door to phone-book-sized tax returns. IRS audits and New York investigations may ultimately determine some of these tax reductions to be improper. For the rest, we should be vigilant about a crackdown on abuses not leading to empowering the IRS to make law on its own or letting Congress squash a wide range of legitimate activity.