What can we learn about U.S. tax law from the complicated picture of former President Donald Trump’s taxes that emerged from a study published in The New York Times about his personal and corporate returns?

On Sept. 27, 2020, 48 hours before the first presidential debate between former Vice President Joe Biden and then-President Donald Trump, the initial article in a series by The New York Times reviewed Trump’s tax documents. The report spotlighted serious legal, financial, and political risks and a history of startlingly low tax payments. According to The New York Times, Trump paid no federal income tax for 11 of 18 years through 2017 and paid only $750 in each of 2016 and 2017. During the same period, he pumped cash from licensing and TV revenues, securities sales, and huge loans into losing businesses and incurred hundreds of millions of dollars of personally guaranteed loans from unidentified lenders that come due over the next four years.

How could Donald Trump have avoided income taxes while earning more than $427 million from “The Apprentice,” licensing and endorsements between 2000 and 2018? The tax law affords a “real estate professional,” a person actively engaged in the real estate business, special rules and benefits unavailable to other individuals. Thus, Trump could have claimed tax losses from his real estate business to offset income from other sources.

Employees and taxpayers engaged in other lines of business generally must net their income and losses separately for each source of income. Because of the special tax rules, the former president was only one of many in the real estate industry who have paid little-to-no income tax. The revelations cast a light on the special write-offs available to business owners and other wealthy individuals, particularly real estate professionals, whose tax planning can result in tax liabilities that are lower than those of average-income taxpayers.

Former President Trump has stated, for good reasons, that he “loves depreciation.” Tax-law rules on depreciation allow the cost of constructing a building to be deducted as a “loss” over 27.5 years for residential realty and 39 years for commercial buildings, even when the building’s fair market value is increasing over time. Trump properties are held through “pass-through” (also called flow-through) entities—partnerships and LLCs—the standard industry practice for escaping corporate taxation and enabling an individual partner or LLC member to report the entity’s income and deductions, benefitting significantly from the latter, on the individual’s personal tax return.

Additionally, tax law allowed taxpayers to carry back or forward net operating losses(NOLs); however, it should be noted that for tax years after 2020, NOLs can only be carried forward. According to The New York Times, Trump claimed losses of $915.7 million in 1985 that probably offset decades’ of TV, branding, and investment income estimated at $600 million. Although he paid taxes of $70.1 million from 2005 through 2007, the NOL rules allowed him subsequently to carry back NOLs to these years and receive a refund of the full amount. As discussed below, this refund appears to have been contested retroactively in the former president’s ongoing IRS audit.

Alan Garten, a lawyer for the Trump organization, questioned the Times account, in which he characterized all or most of it as “inaccurate.” He contended that Trump paid “tens of millions of dollars” in personal federal taxes since 2015. The Times suggested that Garten may have been referring to Social Security, Medicare, and household employee taxes—as well as federal alternative minimum tax (AMT)—not income taxes. Garten also inaccurately equated the use of tax credits to tax payments.

Although not clearly explained, the tax estimates as reported by The New York Times appeared to reflect Trump’s regular federal income tax liabilities but may have excluded the Alternative Minimum Tax (AMT), a tax intended to prevent wealthy individuals from wiping out their tax liabilities with huge losses. However, Trump’s total AMT was only $23.4 million between 2000 and 2017; subsequent refunds appear to have reduced that amount.

Questionable Tax-Reduction Strategies

The article in The New York Times described a number of operational and transactional tax claims that could present substantial audit issues for the former president and his business organizations. They also highlighted routes that the tax laws provide for entrepreneurs to reduce their taxes.

Casino ‘Abandonment’ Loss

The investigation conducted by The New York Times put a spotlight on certain questionable tax-reduction strategies on Trump’s returns. The $70.1 million refund obtained for 2005-2007 appears attributable to the carryback of approximately $700 million of business losses claimed for 2009. These losses likely were based on a claim of complete “abandonment” of the Trump Atlantic City casino business.

They would be allowable, provided Trump received nothing in return for giving up his interest in the business. However, bankruptcy proceedings records indicate that Trump received 5% of the successor company’s stock, which would have disqualified any abandonment loss and limited his deduction to a $3,000 loss for the year.

Consulting Fees vs. Employee Comp vs. Gift

Unspecified “consulting fees,” seen throughout the returns, may indicate a common strategy to reduce business income and taxes. The deduction of consulting fees paid to Ivanka Trump totaling $747,622 raised several questions. As an employee of the Trump organization, Ivanka should not have been paid as a consultant, that is, as an independent contractor.

Unlike employee compensation, consultant fees avoid withholding taxes due from the payor. But to be deductible, they must be reasonable, market-value amounts. Although a consultant must report and pay tax, Ivanka may have been able to avoid any tax liability. As a real estate professional, Ivanka may have had sufficient real estate losses to offset the payment. This fee deduction may cause the IRS to raise another issue. Officials may question that the fee—which far exceeds the annual gift tax exemption of $15,000 for 2020—contending that it was really an asset transfer to a family member, on which the transferor owes gift tax.

Business vs. Personal Expenses

Although not all of Trump’s business expenses are explained, the article identified items that might properly be nondeductible personal expenses. It noted that the IRS might disallow deductions for aircraft used for personal travel and grooming costs for TV appearances on that basis. Because deductions for legal fees are reported as a lump sum, The New York Times questioned whether the total included fees paid to attorneys to represent Donald Trump, Jr. in investigations and the former president’s personal legal settlements to obtain nondisclosure agreements from plaintiffs.

Residence or Investment?

The Trump Seven Springs residential estate in Bedford, N.Y., presented additional issues. Although Forbes reported Eric Trump described the property as a personal residence, Donald Trump characterized it as an investment and deducted property tax of $2.2 million as a business expense. Property tax deductions for personal residences are subject to the ceiling of $10,000 on state and local tax deductions.

Valuation of Conservation Easement

A 2015 charitable deduction of $21.1 million for a conservation easement, one of four giving up the right to develop some of the Seven Springs estate, also may attract IRS scrutiny. Such a deduction reflects the decrease in a property’s fair market value after the donation. Tax experts debate whether some conservation easements actually increase real property values, particularly where they protect the natural attractiveness of the donor’s remaining land. In view of the widely reported questions about allegedly self-serving inconsistencies in valuations of Trump properties for different purposes, the value claimed for the Seven Springs’ easement may be challenged.

The IRS and the Endless Audit

The complexity and scale of the Trump business organization and finances—along with his many aggressive tax positions, some legitimate and others questionable—would understandably require an extended lengthy audit. Both the IRS and Trump attorneys probably would intensely defend their positions. However, the time that the Trump audit has taken is notable. At least a partial cause may be that the interplay of loss carrybacks and carryforwards requires exceptional extensions of the statute of limitations for years that might be affected by the resolution of claims in subsequent periods.

The New York Times disclosed that the refund of $70.1 million for 2005-2007 apparently was referred, as required by law, to the Congressional Joint Committee on Taxation (JCT), only after it was paid—and not prior to payment—for review by the Committee’s nonpartisan, expert professional staff. The timing suggests that the IRS had not initially contested the refund claim or that it reached a tentative resolution with the Trump organization for at least one tax year. However, discussions between IRS officials and JCT staff appear to continue. The possibility that the JCT staff—the same group that in 1974 reviewed President Nixon’s taxes and found certain deductions improper—may disagree with the proposed refund might be unsettling to both the IRS and the Trump attorneys.

The Bottom Line

According to The New York Times’ analysis, former President Trump did earn hundreds of millions of dollars over the last decades, most received from “The Apprentice” and licensing fees. However, at the same time—with the exception of Trump Tower and interests in two properties owned with and operated by Vornado—the Trump real estate business produced enormous losses.

Now that Trump’s ”Apprentice” income has largely ended, licensing fees are declining, and most of his securities investments have been sold—while huge real estate operating losses are mounting—his liquid holdings appear quite limited. Moreover, apparent inconsistencies between his tax return losses and his federal financial reports of annual income in the hundreds of millions raise both reputational and legal issues.

In this diminished financial position, the former president may face enormous liabilities. He will be personally liable on personal guarantees of $421 million in loans, most of which mature over the next few years. His exposure to lenders uncannily repeats his bankruptcy situation in the 1990s. In addition, the Times estimated that his federal tax liabilities could exceed $100 million.

The reports of Donald Trump’s tax avoidance and looming financial exposures may disturb ordinary voters, who pay far more than $750 in annual income tax, and undercut his self-proclaimed image as a successful, astute billionaire.

With the election over, Donald Trump is out of office. However, the investigations and the enormity of the former president’s financial exposure, which he denied—and the refusal to identify his potential vulnerability to his unidentified lenders—have prompted concern about their impact on whether there were any conflicts of interest while in office.

Even more than The New York Times revelations about questionable tax practices, its explanation of the opportunities that the tax code offers wealthy business owners to avoid taxes lawfully—opportunities that are unavailable to average taxpayers—could generate broad support for tax reform in the years to come.