Getting to the bottom of Trump’s tax secret

Recent revelations in the New York Times about President Trump’s $1.17 billion tax losses during the period from 1985-1994 have revived demands that he release his tax returns. 

Moreover, many have discredited the attempt of his advisors to attribute the losses to generous depreciation deductions. His losses of $1.17 billion were far too large to be attributable merely to tax depreciation deductions. 

Rather, a significant portion of his losses likely were operating losses. Indeed, Trump has hinted publically at least once that he struggled financially during this time period.

{mosads}But lurking behind the veil of secrecy created by Trump’s failure to disclose his returns lurks another, more troubling, secret. Because of tax law nuances, it is possible that either Trump’s losses were significantly higher than the reported $1.17 billion (approximately $2 billion during that period) or, alternatively, that Trump was insolvent. 

Neither alternative comports with Trump’s self-portrayed image as a successful entrepreneur or his claim in 1992 that his net worth was $1.5 billion.  

To understand why Trump’s losses were possibly much higher or why he was likely insolvent, we need to explore the structure of some of his debt and the tax laws that existed during that time.

In 1992, Trump personally owed $885 million to lenders. Lenders reduced his personal debt from $885 million to $115 million in that same year, a decrease of $770 million. 

If the cancelled $770 million in Trump’s debt arose from his personal guaranty of loans to his resorts, cancellation of Trump’s obligation to fulfill his guaranty would not directly result in taxable income to him.

But, if the cancelled $770 million debt was in fact attributable to loans that had been made directly to Trump, our tax laws in 1992 would have forced him to recognize $770 million as taxable income with two exceptions.  

The first exception would have permitted him to avoid income if he had filed for personal bankruptcy. The second exception would have applied if he was insolvent (his liabilities exceeded his assets) to the extent of $770 million. 

We know that Trump did not file for personal bankruptcy. Thus, if the loans were to Trump, we are left with two alternatives, neither of which is very flattering for the president.

The first is that he recognized taxable income of $770 million and thereby reduced the tax losses that he was reporting from almost $2 billion ($1.94 billion to be exact) to $1.17 billion.

In other words, Trump managed to lose almost $2 billion during the period from 1985-94, but reported “only” $1.17 billion of losses because of the income he recognized from the discharge of his debt.  

The second alternative is that he did not have to report the $770 million as taxable income from the cancellation of his debts because he was insolvent by at least that amount. 

This, of course, contradicts his claim that his net worth at that time was $1.5 billion. It is consistent, however, with a quote attributed to him by the Washington Post in which he reportedly told Marla Maples in 1992 as they passed a beggar in the street: “You see that man? Right now he’s worth $900 million more than me. … Right now I’m worth minus $900 million.”

Either alternative belies great financial success. Moreover, these alternatives explain, at least in part, the president’s reluctance to disclose his tax returns. There is, of course, an easy way to refute this: Disclose the returns. 

James R. Repetti is the William J. Kenealy, S.J. Professor of Law at Boston College Law School.