How Donald Trump Avoided Paying Taxes Using Other People’s Money
The story of how Mr. Trump sidestepped a
potentially ruinous tax bill emerged from documents recently discovered
by The Times during a search of casino bankruptcy filings.
Mr. Trump structured his companies to allow him
to have lucrative personal tax advantages, while limiting his personal
liability should business go bad.
THE LIMITED PARTNER
Mr. Trump can flow business gains and losses onto his personal tax returns.
The casino is owned by the partnership.
THE GENERAL PARTNER
Mr. Trump’s corporation serves to limit his personal liability.
For each of his Atlantic City casinos, Mr. Trump
formed a partnership between himself and a corporation that he wholly
owned and created for this specific purpose.
At the time, many businesses, particularly real
estate ventures, were structured similarly, with the goal of protecting
owners from losing personal money should their businesses go bust. But
Mr. Trump was playing on a vastly different scale than most; his
leverage was the stuff of legend.
“There’s nothing like doing things with other people’s money, because it takes the risk,” Mr. Trump said at a campaign rally in September.
With the partnerships in place, Mr. Trump went looking for financing.
O.P.M.
To finance the Trump Taj Mahal, Mr. Trump
issued $675 million in bonds at a 14% interest rate. This is one of many
ways Mr. Trump leveraged other people's money, known in investing as
O.P.M.
To purchase and finish construction on the Trump
Taj Mahal, for instance, Mr. Trump’s company sold over a half-billion
dollars in bonds – essentially i.o.u.s with interest – to individuals,
companies and banks.
Within the first year, Mr. Trump began missing
interest payments, a bad sign for investors. The Taj, though, was far
from the only Trump business that was hemorrhaging money.
PILING ON
Many of Mr. Trump’s other businesses also suffered losses that flowed onto his personal tax returns.
In the late 1980s and early 1990s, several of
his casinos and other properties suffered significant losses, the
majority of which ultimately ended up on Mr. Trump’s personal taxes.
Mr. Trump managed to turn these business losses
to his personal gain — in the form of something called a net operating
loss (N.O.L.).
TRUMP'S N.O.L.
Mr. Trump amassed nearly $1 billion in net
operating losses that he could use to offset personal income taxes for
almost two decades.
But there was a threat to Mr. Trump’s N.O.L.:
the debt forgiven by many of his creditors who were trying to salvage
what was left of their investments.
TAXABLE INCOME
When a debt is forgiven, it is seen as income by the government and subject to taxes.
Mr. Trump’s forgiven debt – which included the
renegotiated bonds used to finance the Trump Taj Mahal – was viewed by
the government as taxable income, and as such could be deducted from Mr.
Trump’s personal N.O.L.
Mr. Trump needed a way to protect his advantage. He found a valuable one.
NEW BONDS
Mr. Trump issued new bonds to replace the old
bonds. The new bonds have a lower return, essentially forgiving
millions in debt, which could potentially decrease Mr. Trump’s N.O.L.
THE SWAP
To avoid taxes on the forgiven debt and
protect the N.O.L., Mr. Trump used a partnership equity for debt swap
that was subsequently closed by Congress.
In a tax avoidance maneuver his own lawyers told
him was legally dubious, Mr. Trump managed to avoid paying taxes on the
forgiven debt by swapping partnership equity for debt. It didn’t matter
if the actual market value of the equity was less than the forgiven
debt. (Equity in an insolvent partnership could easily be next to
worthless). This type of swap was made illegal for partnerships in 2004.
Mr. Trump also was part of a determined and
successful lobbying campaign in 1991 to change several tax rules,
including one that would allow him use his N.O.L. to offset all personal
income, and not just real estate income. This cleared the way for him
to avoid paying federal income taxes on ventures including “The Apprentice” (and “The Celebrity Apprentice”), for which Mr. Trump claims he was paid over $200 million.
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