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Trump used dubious method to avoid taxes
Did not declare canceled debts
By David Barstow
New York Times

NEW YORK — Donald Trump proudly acknowledges he did not pay a dime in federal income taxes for years on end. He insists he merely exploited loopholes available to any billionaire — loopholes he says Hillary Clinton failed to close during her years in the Senate.

But newly obtained documents show that in the early 1990s, as he scrambled to stave off financial ruin, Trump avoided reporting hundreds of millions of dollars in taxable income by using a maneuver so legally dubious his own lawyers advised him the Internal Revenue Service would likely declare it improper if he were audited.

Thanks to this one maneuver — which was later outlawed by Congress — Trump potentially escaped paying tens of millions of dollars in federal personal income taxes. It is impossible to know for sure because Trump has declined to release his tax returns, breaking a practice followed by every Republican and Democratic presidential candidate for more than four decades.

Tax experts who reviewed the documents for The New York Times said Trump’s tax avoidance maneuver, conjured from ambiguous provisions of highly technical court rulings, clearly pushed the envelope of what laws permitted. “Whatever loophole existed was not ‘exploited’ here, but stretched beyond any recognition,’’ said Steven Rosenthal, a senior fellow at the nonpartisan Tax Policy Center who helped draft tax legislation in the early 1990s.

Moreover, the tax experts said the maneuver trampled a core tenet of American tax policy by conferring enormous tax benefits to Trump for losing vast amounts of other people’s money — in this case, money investors and banks had entrusted to him to build a casino empire in Atlantic City.

“He deducted somebody else’s losses,’’ John L. Buckley, who served as the chief of staff for Congress’ Joint Committee on Taxation in 1993 and 1994, said in an interview. “He is double dipping big-time.’’

As Trump’s empire floundered in the early 1990s, he pressured backers to forgive hundreds of millions of dollars in debt he could not repay. While the cancellation gave new life to Trump’s casinos, it created a potentially crippling problem with the IRS — a dollar of canceled debt is the same as a dollar of taxable income. This meant Trump faced the painful prospect of having to report the hundreds of millions of dollars of canceled debt as if it were income.

But Trump’s audacious tax-avoidance maneuver gave him a way to simply avoid reporting any of that canceled debt. “He’s getting something for absolutely nothing,’’ Buckley said.

The new documents, which include correspondence from Trump’s tax lawyers, might also help explain how Trump reported a staggering loss of $916 million in his 1995 tax returns — portions of which were published by The Times in October.

US tax laws allowed Trump to use that $916 million loss to cancel out an equivalent amount of taxable income. But tax experts have been debating how Trump could have legally declared a deduction of that magnitude at all. Among other things, they have noted that Trump’s huge casino losses should have been offset by the hundreds of millions of dollars in taxable income he surely must have reported to the IRS in the form of canceled debt.

By avoiding reporting his canceled casino debt in the first place, however, Trump’s $916 million deduction would not have been reduced by hundreds of millions of dollars. He could have preserved the deduction and used it instead to avoid paying income taxes he might otherwise have owed on books, TV shows, or branding deals. Under the rules in effect in 1995, the $916 million loss could have been used to wipe out $50 million a year in taxable income for 18 years.

Trump declined to comment for this article.

The documents on this tax scheme were discovered during a search of casino bankruptcy filings. The documents offer only a partial description of events, and none of Trump’s tax lawyers agreed to be interviewed.

It is unclear whether the IRS ever challenged Trump’s use of this specific tax maneuver.

In any event, Trump can no longer benefit from the same maneuver. In 2004, Congress acted to ban equity-for-debt swaps by partnerships.

Among the members of Congress who voted to finally close the loophole: Senator Hillary Clinton of New York.