Trump Plaza casino in 2007. Photo by William Warby.
We used to have an exercise in journalism school that I called “News or Not News.”
Our professor would pose a scenario, such as: The mayor’s wife is seen leaving a motel at 3 a.m. with the city council president. Is it news or not news?
Before you answer that question, I should point out that when I entered college, we were only a dozen or so years removed from a time when journalists knew about – but would not write about – encounters between famous, beautiful women and the president of the United States. The attitude in those quaint old days was that even if something was true and involved a public figure, if it did not impact the public’s business it probably wasn’t news.
The “News or Not News” exercise fails to really address the thought process behind today’s journalism. Today we often have something that “Could Have Been News:” Maybe it happened, maybe it didn’t, but if it did happen it Could Have Been News, so just report it anyway.
My Sunday New York Times was full of Could Have Been News. The Minnesota Twins, who could have made it to the World Series when they left spring training a few months ago, entered the regular season’s final day of play having lost 103 games. It took a bit of deductive reasoning on my part to find the Could Have Been story about the Twins’ World Series hopes. The Times did not publish anything relating to the Twins’ World Series prospects on Sunday other than the league standings, showing them 35.5 games behind the Cleveland Indians. The standings were enough, however, to tell the story of the Could Have Been news about the Twins’ championship dream season.
More prominently, the front page of the newspaper led with the headline, “Trump’s 1995 Tax Records Claim a $916 Million Loss,” with the subhead, “Deduction Means He Could Have Avoided Federal Income Taxes for 18 Years.”
According to the story (with a slightly different headline in its online version), someone anonymously mailed The Times the front pages of state income tax returns for New York, New Jersey and Connecticut that Trump filed jointly with his then-wife Ivana. Four Times reporters spent about a month doing something that they considered reporting – I can’t begin to imagine what in the story could have taken that long – before publishing their findings.
One thing they apparently did do, however, was spend some of their employer’s money to add false gravitas to their account. “Tax experts hired by The Times to analyze Mr. Trump’s 1995 tax records said that tax rules especially advantageous to wealthy filers would have allowed Mr. Trump to use his $916 million loss to cancel out an equivalent amount of taxable income over an 18-year period,” they wrote.
Absolutely true. Also obvious to almost everyone, except for the details about the exact length of the period over which the law in 1995 would have allowed Trump to claim the losses’ tax benefit.
Trump, as everyone who cares already knows, has refused to release any of his personal tax returns during his presidential campaign. But as also has been widely reported, he suffered massive business reversals in the early 1990s, stemming mostly from his Atlantic City casino holdings.
Like most investors in the real estate business, and in nonpublic companies generally, Trump conducted his commerce through partnerships and other pass-through entities that do not pay income taxes themselves; their income and losses are reflected directly on the personal tax returns of the owners, in this instance including Donald and Ivana Trump.
So the documents the Times journalists uncovered by opening their mail disclose that in 1995, Trump was still reporting what tax professionals call a net operating loss carryforward, or NOL. When he incurred the losses in prior years, the law then in effect let him go back three years to claim a refund of taxes he would have paid on those prior years’ income. He could not carry back the losses beyond three years, but he was entitled to carry them forward for another 15 years.
Is this a provision “especially advantageous to wealthy filers?” Sure, if you consider that, as a group, business owners are wealthier than wage earners. If you draw a salary, you have virtually no chance of reporting a NOL because you literally have nothing to lose. You go to work, you go home, you get paid. That’s equally true for janitors and for nonowner CEOs.
On the other hand, if you own a business you must almost always put your own money into the enterprise, which means you do have something to lose if things don’t work out. You pay taxes on your profits. You get to deduct your losses, against other income (if you have any) in the current year or against other years’ income. The current NOL rules allow carrybacks for two years and carryforwards for 20. They apply to all taxpayers, but of course if you are someone who generates bigger income and bigger losses – someone like Trump – the provision is “especially advantageous.” The rule keeps you from paying taxes on income that, when seen over the long term, you did not actually make.
Or as my friend Robert, who owns a local scuba shop, once told me: “It’s easy to make a small fortune in the scuba business. Just start with a large fortune.” Robert probably finds the NOL rules “especially advantageous” too.
So there really isn’t much news in the Trump tax story. He had big losses, which we knew. He could have deducted them against other income over a period of years, which anyone who cared also knew.
As for The Times’ speculation that the losses could have shielded income he earned many years later from sources such as his television show “The Apprentice,” well, that Could Have Been News. But my guess is that it probably didn’t work out that way.
I have no idea what income taxes, if any, Trump has paid in the past several decades, but I doubt his early 1990s losses shielded all his income for that long. Why? Because while Trump was busy losing $900 million or so on his casino investments, he wasn’t writing checks for sums that large. A lot of the money Trump’s businesses lost was borrowed. Eventually, Trump reached settlements with many of his creditors; he has discussed his negotiations with bankers in his books and elsewhere. When debt is discharged other than in bankruptcy (and Trump has never personally gone bankrupt, though some of his companies have), the Internal Revenue Service treats the reduction in debt as taxable income.
So because of the way the system works, Trump claimed tax deductions for losses of money that was not really his, and then offset the losses with income (the forgiveness of debt) that he never received. It sounds weird if you don’t deal with these matters regularly, but it is actually the most practical way to address the reality that businesses use debt to make money and sometimes – not deliberately, of course – to lose it.
If you want to avoid taxes on $900 million of income, just lose $900 million first. I’m giving you such a deal with this free advice!
There is, in fact, a more subtle and interesting issue about taxes in the real estate business that escaped the notice of the Times’ reporting team. Back in the 1970s, when federal tax rates reached 70 percent, many real estate deals were tax shelters. A wealthy client, stereotypically a doctor, would put up, say, $100, and the promoter would borrow another $300. With depreciation and other expenses, the investor could expect to report tax losses for most of that $400, saving 70 percent of that amount in taxes on other income. The $100 investment could buy a tax savings of $280 – without the real estate project ever making a nickel. Most of those projects were designed to just barely break even or to return only a small profit many years down the road, when it was expected the property would have been sold.
In the early 1980s, Congress tried to crack down on such investments by allowing partners to deduct debt only for which they were personally “at risk.” This killed a lot of tax shelters involving assets like cattle and freight cars. But the real estate lobby managed to get an exception for what was called “qualified nonrecourse debt,” which was debt secured by real estate. As one of my business school teachers observed, “Someone paid good money for that law.” There is no reason to believe that someone was named Trump, but he certainly took advantage of the rules a few years later.
Most real estate tax shelters died a few years later anyway, when the 1986 tax reform changed the rules again. But professionals in the field full-time, like Trump, were not affected by that change either. Still, these professionals pay taxes (eventually) when they realize profits, just like everyone else.
We don’t know who leaked Trump’s tax data to The Times. The paper says it does not know either, and I believe it. The threat from one of Trump’s attorneys to sue the paper for unauthorized disclosure was silly. Whoever held the tax records had a legal duty not to disclose, but this duty did not extend to the journalists.
I have my own theory – just a theory – about the source of the documents. I suspect the leaked material came from a filing the Trumps made with New York, their home state. New York did not require a full copy of the federal income tax return, which was not leaked to The Times. It did, however, require copies of other states’ returns to support claims for credit against taxes that New York residents pay to those other states. New York would have had copies of the Trumps’ New Jersey and Connecticut filings. Those states would not have had copies of Trump’s New York returns, however.
My speculation could be true. If true, it could even be news. So I guess by today’s standards, it is. You read it here first.