Donald Trump, a tax-avoidant opossum testicle dead-set on becoming president, crows about the many millions of dollars he has saved by not paying federal taxes — a despicable move, but not necessarily an illegal one. But in the early 1990s, Trump did not report hundreds of millions of taxable dollars with the aid of an unscrupulous, ill-advised tax maneuver — one that is no longer legal.
According to the New York Times, Trump was teetering on the brink of financial ruin when he employed a tax avoidance measure that enabled him to conceal hundreds of millions of dollars of taxable income. He did so against the advice of his own lawyers, who warned that such a shifty move would be condemned in an audit.
But the end result was worth the risk: Trump saved tens of millions of dollars that he otherwise would have had to pay in federal income taxes. Of course, we don’t know the precise amount because Trump remains steadfast in his refusal to release his tax returns. For over 40 years, every Republican and Democratic presidential nominee has honored this tradition, but as we know by now, Trump is not much interested in honor.
Although Trump did not technically break any tax laws, he drastically contorted them to suit his purposes.
“Whatever loophole existed was not ‘exploited’ here, but stretched beyond any recognition,” Steven M. Rosenthal told the Times. Rosenthal is a senior tax fellow at the Tax Policy Center, a nonpartisan organization. In the 1990s he also aided in the drafting of tax legislation.
But perhaps the most odious aspect of these dealings is Trump’s profit off the losses of others. American tax policy does not condone the bestowal of tax benefits for losing someone else’s money. Investors and banks had shelled out hundreds of millions of dollars for the casino Trump planned to build in Atlantic City. When that endeavor foundered, Trump weaseled his way out of repaying his backers (a likely necessity, as Trump was strapped for cash during the 1990s).
However, the predicament was far from solved. True, Trump had escaped tremendous debt, but the IRS interprets canceled debt as taxable income. Trump, thus, had to report those hundreds of millions of dollars when he filed his taxes.
How he avoided reporting this exorbitant sum involves deeply technical tax vocabulary. But here is a lucid account of the procedure, via the Times:
“It is unclear who first glimpsed a way for Mr. Trump to dodge a huge tax bill. But the basic maneuver he used was essentially a new twist on a contentious strategy corporations had been using for years to avoid taxes created by canceled debt.
The strategy—known among tax practitioners as a ‘stock-for-debt swap’—relies on mathematical sleight of hand. Say a company can repay only $60 million of a $100 million bank loan. If the bank forgives the other $40 million, the company faces a large tax bill because it will have to report that canceled $40 million as taxable income.
Clever tax lawyers found a way around this inconvenience. The company would simply swap stock for the $40 million in debt it could not repay. This way, it would look as if the entire $100 million loan had been repaid, and presto: there would be no tax bill due for $40 million in canceled debt.
Best of all, it did not matter of the actual market value of the stock was considerably less than the $40 million in canceled debt. (Stock in an effectively insolvent company could easily be next to worthless.) Even in the opaque, rarefied world of gaming impenetrable tax regulations, this particular maneuver was about as close as a company could get to waving a magic wand and making taxes disappear.”
In 1993, Congress voted to eliminate stock-for-debt swaps, rendering Trump’s magic tax trick completely illegal. And in 2004, it passed measures to close the loophole on equity-for-debt swaps, yet another sleight of hand Trump has used to his benefit. Hillary Clinton, notably, is one of the Senators who voted in favor of this latter ban.
Meanwhile, Trump has repeatedly asserted, smugly, that his ability to dodge taw laws points to Clinton’s political inefficiency.