Trump's funny money

For a pessimist like moi, it's always "dawn-est" before The Dark. Tomorrow may bring disaster, especially if the promised Stone/Assange/Putin smear is well-constructed and persuasive. But right now, on this day, let us rejoice, for the disaster is all on Trump's side.

Trump's fake "Foundation." For months, the conservatives have screeched lies about the Clinton Foundation, which is one of the most honest and effective charities in the history of the world. By contrast, Trump's crooked Foundation really does seem to have functioned as a kind of slush fund. And now the New York Attorney General has shut it down...

The New York attorney general has notified Donald Trump that his charitable foundation is violating state law — by soliciting donations without proper certification — and ordered Trump’s charity to stop its fundraising immediately, the attorney general’s office said Monday.

James Sheehan, head of the attorney general’s charities bureau, sent the “notice of violation” to the Donald J. Trump Foundation on Friday, according to a copy of the notice provided by the press office of state Attorney General Eric Schneiderman (D).

The night before that, The Washington Post reported that Trump’s charity had been soliciting donations from other people without being properly registered in New York state.

According to tax records, Trump’s foundation has subsisted entirely on donations from others since 2008, when Trump gave his last personal donation. This year, the Trump Foundation made its most wide-ranging request for donations yet: It set up a public website, donaldtrumpforvets.com, to gather donations that Trump said would be passed on to veterans’ groups.

But the Trump Foundation never registered under article 7A of New York’s Executive Law, as is required for any charity soliciting more than $25,000 a year from the public. One important consequence: Trump’s foundation avoided rigorous outside audits, which New York law requires of larger charities that ask the public for money.

Question: Why did this criminal enterprise go unfettered in the years before Trump ran for the presidency?

Trump's taxes. After mulling over the matter all day, I'm starting to favor the theory that Marla Maples was the one who sent the tax return to that NYT reporter. But I would not study her Twitter feed for clues: She would not endanger her daughter's inheritance by fessing up to the deed (if, in fact, she dunnit). Even the subtlest hint of a confession would be against her interests. Better for The Donald to continue to consider her nothing more than a curvy airhead.

I'd like to direct your attention to some fascinating, in-depth analyses of these tax returns. Frankly, I'm far from an expert in tax law (especially when it comes to the upper end of the economic ladder). All I can do is present the arguments of those wiser than I, and then invite interested readers to offer their own rebuttals/insights/comments.

The most important question: Just how did Donald Trump come to lose nearly a billion dollars in 1995, a year in which the stock market was doing spectacularly well and most people were making money hand over fist? (Someone should remind the millennials who was president during that prosperous time.)

We know that, in the years leading up to this disaster, Mr. Poor Impulse Control was making scads of ridiculous purchases and investments (such as dear old Adnan's infamous yacht). But did that spending spree really add up to more than $900 million?

To answer that question, let us first look at this piece by John Hempton.

According to the New York Times the losses came

... through mismanagement of three Atlantic City casinos, his ill-fated foray into the airline business and his ill-timed purchase of the Plaza Hotel in Manhattan.

There is an issue here.

Donald Trump did not repay all the debt associated with those investments.

Either

* the loss is a real loss and the Donald was really was out of pocket by $916 million (in which case he has legitimate NOLs)

* or the loss was passed on to someone else by The Donald defaulting on debt - in which case Donald Trump should be assessed for income from debt forgiveness.


After all if the debt is forgiven it is not Donald Trump's loss. The loss is borne by the person who lent Donald money and did not get it back.

That - clearly stated by example - is why most income tax systems assess debt forgiveness as income.

Everything I've read has indicated that Donald Trump was NOT in a position to sustain that kind of loss in 1995. (I suspect that he probably still isn't. If he really were a billionaire, he wouldn't be running an MLM scam and he wouldn't be stiffing contractors.)

Now, I'm no lawyer, but the basic problem here seems clear enough: If someone else bore the loss, then why was Donald Trump granted the tax benefit?

Hempton suggests that Trump used an avoidance scheme known as "debt parking."

Here is how debt parking works. Suppose the debtor (in this case The Donald) is going to get his debt cancelled for (say) 1c in the dollar. When he gets the debt wiped out the debtor (ie The Donald) will have to report assessable income equal to the debt wiped out (in this case 99 percent of $916 million).

The alternative though is for the debtor to set up a dummy party. The dummy party might be his wife or children or some company or trust set up by them or more likely some completely opaque offshore trust.

And that dummy party goes and buys the debt for say 1.1 cents in the dollar. Then they just sit there.

They don't force the debtor (ie The Donald) to repay. They don't make a profit or loss on the debt. And because the debtor never has his debt forgiven he never gets the assessment on debt forgiveness and he gets to keep his NOLs even though the losses did not come out of his pocket.

Every tax system worth its salt has some rules on "effective debt forgiveness" to prevent debt parking. And - from my experience which is now over twenty years old - none of them work entirely.

Now if Donald really has all those tax losses its pretty clear that the debt must be parked somewhere.

There is a vehicle out there (say an offshore trust or other undisclosed related party effectively controlled by Donald Trump) - which owns over $900 million in debt and is not bothering to collect it.

Color me stunned. I hope that Hempton will not mind my quoting his piece at such great length; I do so because the principle he outlines is important to comprehend.

Trump's wife at the time was Marla Maples. Could she have been party to a "debt parking" scheme? Doesn't seem likely. But at this point, who knows?

There are a couple of related articles worthy of your perusal. Keep the Hempton piece in mind as we follow the argument presented by Robert Reich, who reminds us of the ones who really got slammed back in '95...

Ordinary investors in Trump’s business empire saw the value of their shares plunge to 17 cents from $35.50, bondholders got pennies on the dollar, and scores of contractors went unpaid.

But Trump got a bonanza because the tax code allows “net operating losses” to cancel out taxable income in future years. And the bankruptcy code allows wealthy people to stiff the people they owe by reorganizing their debts under Chapter 11.

That part I know about. I've been among the stiffed, back in a former life. But I didn't feel bad about what happened, because in that case, the business owner who went the Chapter 11 route really had tried hard to keep his firm afloat, and took a very humbling personal hit. Trump did not.

Trump didn’t do anything illegal. Real estate losses are notoriously easy to create. Trump bought buildings with borrowed money. He could then deduct interest paid on that debt. On top of that, he could take depreciation deductions, even when his real estate was appreciating in value.

Presto! Trump claimed almost a billion dollars of losses that would cancel his gigantic income gains for years to come.

Who loaned Donald Trump the better part of a billion bucks?

We now turn to a piece by Marty Rudoy titled "How Donald Trump Made A Fortune By Losing A Billion Dollars." He says that -- by far -- the largest part of the loss concerned the Plaza Hotel.

The large loss apparently relates to Trump’s sale, in 1995, of New York’s legendary Plaza Hotel to Saudi and Asian investors.

Trump acquired the hotel in 1988 for $400 million. He sold it in 1995 for $325 million.

So he lost $75 million, right? Not exactly.

One of the perks of real estate investing is that temporary tax losses can be generated by depreciation, even of an asset that climbs in value. When the depreciated asset is sold, the depreciation is recaptured and taxes paid, although if like kind real estate is purchased within a short time of the sale, the profits can again be deferred in what is called a 1031 exchange. (Ask your tax accountant)

It is unclear how the relatively small sums dealing with the purchase and sale of The Plaza can be spun into a $915 million tax loss, so the answer may be related to financial magic.

As it happens, Trump took out loans against The Plaza to purchase the Eastern Air Lines Shuttle (renamed Trump Shuttle) and to finance the construction of the Taj Mahal casino in Atlantic City.

Indeed, the 1995 purchasers of The Plaza seem to have assumed as much as $440 million in debt along with their purchase at $325 million, making the total purchase price closer to a $765 million value.

Jesus. Who would buy the thing under those circumstances? And how the hell was Trump able to fund other enterprises by taking out loans against a property he didn't really own?

You see, that's the key point: Trump never owned the Plaza.

“After the Citibank consortium agreed to forgive the past interest payments on debt, Mr. Trump still retained the 51 percent interest on paper, but since he had no equity in the hotel — having put up no cash when he bought it — the banks effectively owned the property.”

So it appears that Donald Trump lost nearly a billion dollars by buying, mortgaging and selling a hotel he didn’t invest in and didn’t really own.

Do I understand this correctly? Trump put up no money of his own to purchase a property, the sale of which allowed him to write off a more-than-$900 million loss over the next eighteen years?

How is this even possible?

How is it that our laws allow this kind of chicanery?

And how the hell did a dope like Trump learn such trickery?

There's much more; I had originally intended to write a much longer post. But we already have enough questions to ponder. Despite all the words that have been written about the NYT's great scoop, nobody seems to understand Trump's Plaza Hotel deal, and how it led to a $915 million tax loss.