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Garbage Journalism, Squared

print edition of The New York Times for May 15, 2016 on a wooden surface
photo by David Farré

Earlier this week a friend of mine who reads this blog forwarded me The New York Times’ story “Donald Trump Used Legally Dubious Method to Avoid Paying Taxes.”

I know he strongly dislikes Trump, and he has plenty of sound information on which to base his opinion without this particular article. But as his friend, and as a tax professional, I felt he deserved a thoughtful response.

Regular readers will not be surprised that I find the coverage of Trump’s tax positions (or what the paper thinks are Trump’s positions, since the reporters are relying on very limited leaked information and public filings) sorely lacking. I have been pointing out the paper’s inability or unwillingness to present tax issues fairly since long before Trump made his first stump speech. I am way beyond tired of critiquing the paper’s coverage of tax law and tax cases; it is frequently garbage. I think the same label could be applied to a considerable amount of the paper’s coverage of Trump’s campaign, for that matter.

So what we have in this instance is garbage squared, or maybe cubed, due to the particularly unfortunate timing that made it appear that the Times was merely seeking to shift the debate at the last minute in favor of Trump’s opponent, a candidate that we can safely assume most of its newsroom supports and who its editors endorsed in an unbroken 60-year streak of supporting Democrats for the presidency.

Let’s stop and think about what the Times reported and whether it even made sense on its face. Then we can look at some points the reporting team either got wrong or left out.

First, the headline describes the Trump tax position in question as “legally dubious,” and the body of the story – citing a source at the supposedly nonpartisan Tax Policy Center – says that position “stretched [the tax law] beyond any recognition.” Based on the Times’ previous reporting, Trump claimed tax benefit for a loss of over $900 million. When someone claims a $900 million loss and associated tax benefits, the Internal Revenue Service notices. So if the law was “stretched beyond any recognition,” we would expect the IRS to do something about it.

Maybe it did, but more likely it didn’t. Technically, what Trump reportedly did was claim an exclusion from taxable income of the benefit he received from having his debts compromised, coupled with being able to deduct his losses against income in future years. Trump would have had two alternatives if the IRS objected: either accept the IRS position or fight it. If he accepted it, then there was no tax benefit. If he challenged it, then either the IRS must have conceded the point or a case of this magnitude would have almost certainly gone to court. Any tax case with the Trump name would have received plenty of attention at the time, not to mention now. But there was no such case.

So why didn’t the IRS challenge Trump? Because it probably agreed that, as Trump’s tax advisers told him according to the Times’ account of a confidential tax opinion letter it obtained, there was substantial authority in the law for him to take the position that the settlement of his debt did not result in taxable income. Had the IRS fought him on this, the agency might have won, but it also might not have. Senior people make decisions in cases this large. We can infer that they decided challenging Trump would have risked setting a precedent unfavorable to the government. So they didn’t.

Second, the article notes that Congress subsequently changed the law in question. If Trump’s position was contrary to law at the time he took it, there was no need to change the law later. Taxpayers certainly didn’t ask Congress to make this change; such a request would have come from Treasury. So much for the argument that the law was stretched “beyond recognition” by Trump’s position.

Third, Trump’s advisers told him his position had “substantial authority.” The Times reporting mischaracterizes this standard, as well as other jargon used by tax advisers. The Times confuses substantial authority and reasonable basis, but that’s ultimately one of its smaller errors. The article claims that a standard of “more likely than not” means there is a greater than 50 percent chance a position will be approved – by the IRS – and that “substantial authority” means greater than a one-in-three chance of approval – by the IRS.

This is simply not true. No tax adviser knows whether the IRS will challenge a position, or on what grounds. Someone at the IRS may think a taxpayer will just cave under pressure and thus take an unjustifiably aggressive position. Or someone else may decide the risks of losing even a pretty strong case against a taxpayer outweigh the potential benefits of winning it. The IRS may just not audit a return at all or may simply not notice a particular issue, though either would be inconceivable on a return like the one we are discussing.

Most tax advisers don’t try to soothsay how the IRS will respond to a position, if it responds at all. The IRS can do whatever it pleases. Our job as tax advisers is to evaluate how the courts would resolve a dispute between the IRS and a taxpayer should it come before them.

Substantial authority, which is actually a guess that the chance of success on the merits is greater than one-third but no better than 50-50, is sufficient in most cases for a taxpayer to take a position on his or her return without any special disclosure. If a client has substantial authority to take a favorable position, my usual advice is to take it. Why leave money on the table for the government? There are clients who are so risk averse that they may decide they want a higher level of assurance before taking a favorable position, and that is their call to make.

A taxpayer can take even a position lacking substantial authority but having a “reasonable basis,” representing about a one-in-three chance of success, with certain disclosures, without exposure to penalties.

Fourth, the aforementioned Tax Policy Center is “nonpartisan” only in the sense that it isn’t directly aligned with either the Democratic or Republican Party. It is a joint venture of the Urban Institute and the Brookings Institution. Most people informed about those entities would describe their leanings as politically liberal. There is nothing wrong with that, other than the Times’ incomplete and misleading description of the organization.

Fifth, the Times falls back on the canard that Trump’s position was somehow cooked up by “the endlessly creative club of elite tax advisers” who help rich people avoid taxes. There was nothing secret about the position Trump supposedly took; the article even quotes from a critical analysis in the trade journal “Tax Notes” that commentator Lee Sheppard wrote in 1991. This “endlessly creative club” of advisers does not create the tax laws; Congress does. Highly skilled tax professionals certainly are well-paid, and they deserve to be, since their advice on how to comply with the law while paying the minimum required tax can be worth a great deal of money. They owe their clients no less, and taxpayers owe the government no more than is stipulated by the laws that the government itself writes.

Sixth, the Times outright omits a key fact about tax law relevant to Trump’s case. Trump got his creditors to accept equity in place of debt that he wasn’t going to be able to repay. His supposed abuse was that the equity he gave them was worth less than the debt that was being discharged, and that he should have reported income for the difference. But what the Times fails to point out is that the law, then and now, excuses from tax any income arising from debt discharge in the case of a debtor who goes through Chapter 11 bankruptcy or who is insolvent. So if Trump could not have paid back that debt at the time – which, by all accounts, he couldn’t – the debt discharge would have been nontaxable anyway. The debt-for-equity swap merely gave creditors something they were willing to accept in lieu of whatever they would have gotten had they pushed the Trump and his entities into insolvency or Chapter 11.

Seventh and finally, I merely observe the irony that in the same edition in which The New York Times Editorial Board decried FBI Director James Comey for having “failed to consider the impact of the innuendo he unleashed just days before the election,” the front page of the paper was doing the very same thing. Let me correct myself. It isn’t irony; it’s hypocrisy. It is also the state of the New York Times today. The paper that credits itself with the highest standards in journalism has gone beyond garbage. It has achieved garbage squared.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s most recent book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book, Looking Ahead: Life, Family, Wealth and Business After 55.

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