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Analyzing the President’s Tax Returns

David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: Trump's tax returns. For years, the secrecy surrounding President Trump's tax returns has been the source of criticism from transparency advocates, and fields speculation that the president's personal business might give rise to conflicts of interest. But now, we may have a clearer picture of the president's finances after recent reporting in The New York Times. The paper alleged it had received records that detailed the president's tax information spanning over two decades, which showed that President Trump paid no federal income taxes in 10 of the 15 previous years.

Now, before we begin, since we are not able to confirm the underlying information, we're starting from the assumption that the descriptions in The New York Times are accurate, and absent any information contradicting that reporting, we'll be relying on it throughout the episode. Here to talk about the president's tax information and its potential effect on the 2020 election is Joseph Thorndike, director of the Tax History project here at Tax Analysts, and University of Iowa law professor Andy Grewal. Joe, Andy, welcome to the podcast.

Joe Thorndike: Great to be here.

Andy Grewal: Thanks for having me.

David Stewart: Joe and Andy, why don't we start from your first reactions. So this report dropped on September 27. It's a couple days later now. Andy, why don't you start off with what jumps out at you from this story?

Andy Grewal: Yeah, I would say I found the report very interesting, but I was a bit underwhelmed. That is, if you told me in 2015 that President Trump made a lot of money through branding and "The Apprentice," but lost a lot of money in real estate ventures, I wouldn't have been surprised at all. That seems to be the main economic takeaway from the story. What I find more interesting here is the timing, the fact of the leak, and the fact that apparently his biggest tax dispute has been sitting in Congress for a while. So for me, what I'm really interested about the circumstances that might be surrounding the leak and any insights we might have on the tax audit process of the president as opposed to any of the allegations in the report related to tax liability.

David Stewart: Joe, what struck you?

Joe Thorndike: Well, you know, I share sort of Andy's take on this. In that, to start with the obvious, I think it confirmed a lot of what many people suspected anyway. Right? Like during 2016, it was all sorts of discussion about, you know, "Oh, Donald Trump didn't pay any taxes." And that point was made by Hillary Clinton in the debates. And then, this report comes out and it confirms that. That's sort of like the headline point here of this report. And I don't think anyone is particularly surprised by that. I think it sort of confirmed what might even be conventional wisdom at this point. Politically, I think that's not necessarily good for the president to confirm that sort of conventional wisdom.

But I do think, though, as Andy says, that what might be more interesting in the long run is what this says about how this came out. It came out through a leak. I think Andy and I, who don't necessarily see eye to eye on issues of presidential tax transparency all the time, probably do agree that leaks like this are not the way we want information to come out. And the fact that this is coming out this way. I mean, I think that that should give everyone pause. Now, what we want to do about that or a response to that is I think that's an open question. But I think that's a significant point that's kind of been papered over in the initial response to this story. That people have been so blown away by the information and its explosiveness that no one has really stopped to think very long about how this information came out.

David Stewart: Well, to that point, is there any idea of where this tax information might have come from? Andy, I'll put that to you.

Andy Grewal: Yeah, it's hard to tell from the outside. I would say, I would be very disappointed if anyone at the IRS or another state tax agency had made these disclosures. Even though we see leaks from national security officials, White House officials, and so on, the IRS has essentially been a protected vault over the last few years. So, given that the IRS hasn't leaked, and there was a leak related to Nixon many decades ago, I would be surprised if an IRS official broke their legal and ethical obligations. Which makes me think it might have arisen from a bank employee or someone else within the president's personal financial orbit.

Joe Thorndike: That actually makes good sense to me. It seems like an awful lot of information to emerge from the IRS without detection. The IRS has got pretty tight controls over celebrity tax returns and presidential tax returns in particular. So, I would be surprised if someone managed to get this much information from the IRS without being caught in the process. And actually, I put this question out to Twitter last night to see what people had to say. And most people seem to agree with Andy's idea here that it quite probably possibly came from a bank. It seems like the kind of information that a bank would have because a lot of the people who answered me on Twitter felt like this went beyond what, say an accounting firm would necessarily have. There was a lot of business information here that looked like it might be what a bank would be in possession of.

David Stewart: So, turning to some of the more substantive questions raised by these tax returns. One thing that raised a lot of headlines was these $750 per year payments for two of the later years in this cache of information. It seems that President Trump's taxes are zeroed out every year, so where do these $750 payments come from?

Andy Grewal: Yeah, that's an interesting question. I mean, I think it's highly unlikely that in two consecutive years, the actual precise tax liability of a person with finances like this turned out to be exactly $750 or any specific number repeated that way, other than potentially zero. So, that's an interesting question. I have no idea. I think maybe politically it was decided that zero would look bad, s why not throw in $750? But even $750 as we can see from the political response seems kind of tiny. If you wanted to make a political statement, maybe $1 million would have been better.

Joe Thorndike: The New York Times today published a story that put a little context around that $750. And I have to say as an aside here, the Times story, which I don't mean to be critical of the Times in saying this, but they are unwilling to release the returns probably for good reasons. But the stories don't actually include very much detail at all in some ways, at least not much tax detail really. But in this case, they decided to try to put a little detail around that $750 number and when they did it, it didn't really explain anything. They said they took a look at 2017 and they said, "OK, well here's what his income was that year and here's what the losses that he was claiming. And it wiped out everything he had. And then he owed alternative of tax. But then he had some general business credit that he could apply against that, which more than wiped that out."

But when they did the calculation, they just sort of magically added $750, which is pretty much where we started in the beginning. Right? Like, they just sort of randomly chose this number $750 to make a payment. I think Andy's right. The sort of Occam's razor answer here is that they did it to avoid having a zero tax payment. And all I can say is that if that was designed to solve a political problem, I think it created its own new political problem because it is such an arbitrary and quite small number that it's open to easy ridicule. And that's exactly what's happened of course, in the last couple of days. There's a reason why it's on bumper stickers and lapel pins and whatever else it's on right now. So, it's honestly a weird thing. And I think if we ever find out the real story, I think we'll find out that that was just a political miscalculation.

David Stewart: So, Joe, is it possible that this, the number itself didn't really matter, but this was so that President Trump could legitimately say, "I have paid taxes for these years," and hope that the actual number does not come out in the future?

Joe Thorndike: Yeah, I think that is probably what it's all about. Now, you know, he's not the first president to look at a zero tax liability on their return and think, "Uh oh, that's going to be a problem." Jimmy Carter had exactly that problem in 1977. And when he was filing his 1976 return, he too made a sort of like voluntary payment that he didn't really have to make, but it made a little bit more sense. He applied a 15 percent rate to his adjusted gross income, which was notionally related to the alternative minimum tax at the time. So, they had a rationale for it. It ended up being like $6,000 in 1977. Again, all sort of made some sense. And again, all of that was done in public. Right? Which is different. So, this is interesting, right? Like they wanted the president to be able to say, truthfully, "No, I paid something this year," but this is all going on behind the scenes and out of public view. It's just a strange political calculation. The moral of the story is, I guess, maybe you shouldn't take political advice from your accountants, but it doesn't seem to have worked very well.

David Stewart: So aside from the Carter precedent, is there any other case of a president paying basically zero or close to zero tax?

Joe Thorndike: No one that we're aware of. And I mean, of course, our record on this doesn't go back very far. It only goes back as far as Nixon. Now, Nixon did pay close to zero. I mean he paid, I think it was something like $792 or something one year. But I can't do the adjustment in my head. I think that comes out to be more like $3,000 in today's money, which is low for the amount of money that Nixon made at the time. That's the closest precedent that we can come to. The numbers are much smaller. Nixon's is nothing as close to as rich as Donald Trump. And so, I think the situation is substantially different. There are other similarities. That low number of Nixon's tax payments, well, that was leaked in the same way that Trump's tax information was leaked. And I think you don't want to come back to this again. It says something about the leakability of presidential tax information. It's a very strong pull to get that stuff into the public realm. I'm always dubious when people say, "Oh yeah, this stuff is definitely going to be leaked." It's not definitely because there's awful lot of penalties associated with leaking this information for most people. But I think that we should maybe stop and take a lesson from this, that this is hard information to keep under wraps when the person you're talking about is the leader of the free world.

David Stewart: So, let's move on to the other questions raised in The New York Times reporting. But let's first start from a baseline of where do we draw the line between what we might consider to be aggressive tax avoidance and tax evasion?

Andy Grewal: That question has been debated I think even since biblical times. So, it's unlikely we'll settle that on this podcast. From my perspective, the report identifies various soft spots. And I'm a little uncomfortable with media or pundits or scholars like me trying to play the role of IRS auditor and declare something illegal or legal based on the limited facts we have available. Instead, what's most important to me is that if there are soft spots on the return, that the IRS professionals be able to investigate, audit, acquire information in a professional manner unimpeded by political influences.

So, at least based on what I saw, the issues raised with respect to a SALT deduction or paying consulting fees, nothing jumped out at me in the same way as it would be one of those crazy tax shelters from the 1990s. If there are tax dodges here, they don't seem terribly clever. A lot of them seem to involve really paying someone a consulting fee, for example. Actually paying money isn't the best way to avoid taxes. There may be various complications and so on, but really my biggest concern, which has been allayed I think based on the limited information we have, is that the IRS can investigate and identify issues appropriately.

Joe Thorndike: I think Andy's right. That is the real question here. I mean The New York Times is careful about the charges it throws around. Right? I mean, it raises a lot of possibilities of what might be going on. But I think their articles repeatedly saying, "Well, we don't really have the full story here, but this might be going on or this might be going on." You know, they are couching. There are a lot of caveats around what they're saying. And if they can't even really say, and they've seen the materials, it's impossible for anybody else to really say. The world is full of people speculating about this right now, but it does really seem mostly just like speculation.

I think the question really is how well has the president been audited? And how well is he audited before he was president? How well has he been audited since he's been president? And you know, I don't know that these articles to date have really answered that question either. But that is, I think, the key question here really. Which is if we can depend on the IRS to do an adequate job auditing the president, then to some degree, we may not need all of this kind of presidential tax disclosure, in this case involuntary presidential tax disclosure. And again, that question into my mind, it's very much an open question is — and I think Andy suggested that he's feeling better about the IRS's ability to do this kind of audit even on a sitting president. I'm less sanguine about that, I guess. I guess I'm not reassured yet. And the article doesn't either make me feel better or worse about that in particular. To me, it still seems an open question whether the IRS is doing a good job with this.

David Stewart: As The New York Times reports, the president may have been paying his daughter Ivanka through consulting arrangements with some of these overseas transactions and what have you. Is that an unusual arrangement to have? And also does it make it a little stranger that she's already an employee of the business that is basically paying these consulting fees?

Andy Grewal: It's hard to know. As you pointed out, there was payments in a couple of capacities. One to Ivanka in her employment capacity and apparently as an independent contractor. I don't have the facts, but I would think it means that perhaps Ivanka has a corporation which provides services that were relevant to these deals. And for those apparent business reasons, a corporation owned by Ivanka was retained to provide services. If that's true, that would explain why you would have a payment to Ivanka as an independent contractor as well as payroll expenses. But without knowing the intricacies of international real estate development and the skills that Ivanka brings or doesn't bring to those transactions, it's just hard for me to read anything positive or negative into it. It just seems like something that an auditor should appropriately examine.

Joe Thorndike: Andy, at the risk of jumping ahead, do you have any thoughts about the SALT deduction for the property that the family owns in suburban New York?

Andy Grewal: Yes, there's an issue because we know that the SALT deduction was limited with respect to personal residence non-business property. And from the report, it sounds like SALT deductions were claimed with respect to a property that at least is not apparently for business use. I believe there are references that the family refers to it as its getaway or something along those lines. So, if it's the case that, that property, which I know absolutely nothing about beyond a couple of paragraphs in The New York Times article, is used for personal purposes, then of course deductions should be denied when the statute so requires. But I just don't feel comfortable speculating beyond that.

David Stewart: I guess another area that made a lot of headlines, even though it wasn't a very large number involved, but it does appear that there's been a sort of co-mingling of personal and business expenses in these tax returns. Does the fact that Trump is sort of a lifestyle brand allow for a wider range of deductions to be taken?

Andy Grewal: Yeah, I think this issue has arisen with respect to haircuts specifically. Certainly I think it's the case if someone just went to Supercuts and tried to claim a deduction on his or her tax return, it would be odd to deduct that. More sympathetically, it sounds like before appearing on any given episode of "The Apprentice," a stylist had to be brought in to style his hair in a specific way for whatever three hours of taping. If that's the case, then I don't think there's anything wrong with the system of putting aside someone hiring their own stylist. I think it's probably pretty common that Hollywood studios or TV studios hire persons to do their representative's hair. So, I think it's certainly entirely possible that personal grooming expenses can be properly deductible. And if that's the case that it was done specifically for appearances as opposed to just in general upkeep of personal appearances, then I'm not bothered by the allowance of a deduction.

David Stewart: Joe, do you have any other examples of maybe aggressive positions taken in other presidential or other politicians' tax returns?

Joe Thorndike: Not really. But again, it's a little hard to say. So yes, there were some very aggressive positions taken by Richard Nixon. Nixon's always the poster child here for playing fast and loose with the tax laws. The thing is, is that every president since Nixon who has released their returns has pretty much prepared those returns with the knowledge that they were going to be publicly released. And I think that that breeds a certain conservatism in the way that most returns are prepared. So, although there have been issues in presidential tax returns, including around deductions, although I can't off the top of my head think of deductions particularly that have been controversial. I think it's safe to say that we don't have a lot of examples of aggressive or even somewhat aggressive presidential tax positions because presidents have been very careful not to get themselves in that position.

They know that what they're doing on their tax returns is likely to be made public because they're going to make it public. They've come to terms with that since Nixon. And so they've really prepared very uncontroversial returns for the most part. Some of them, when Jeb Bush ran, he released 33 years or something like that of tax returns. It's pretty clear to me that he had been preparing to run for president for 33 years. I think that that's what you typically see. Some of the presidents have had somewhat more complicated returns, but for the most part there's not been anything like this. And I think that's probably because Donald Trump's returns were not prepared for the idea that they would be aired publicly at any point. So, Donald Trump is unusual compared to other presidents in any number of ways. But certainly I think in the tax way, he stands alone. His tax returns are not like anyone else's.

David Stewart: So, turning to the bigger ticket item that was discussed in The New York Times, there is this outstanding dispute over a $70 million refund. Now the president has been saying that he won't release his taxes while he's under audit. Does this seem like this is the issue that he's pointing to when he says he can't release his tax returns?

Andy Grewal: Well, he has made oblique references in interviews to, "Oh, I thought I had a deal with the IRS. Then I became president and everything got stalled." The New York Times account supports that because it refers to a potential settlement in 2016 that was installed by the Congressional Joint Committee on Taxation. So, this may be the reason he was pointing to. That being said, I can't read his mind, but I doubt that if that was in fact resolved that Donald Trump would release a whole trance of tax returns himself. So. I suppose it can provide the cover for that claim, "I'm under audit." But I don't necessarily know that it would actually make any difference in his disclosure or nondisclosure decision.

Joe Thorndike: I mean, I think that certainly seems the most obvious truth to me. It seems unlikely to me that President Trump has ever really had any serious intention of releasing his tax returns. Lots of Trump critics have been running around for years saying, "He's not under audit." Personally, I never doubted he was under more or less continuous audit. That didn't seem implausible to me. It just seemed that the audit was not the reason. It was just a fig leaf for not wanting to release his tax returns. And, you know, as we established, it is not legally required of him to release his tax returns. He's well within his legal rights to do exactly as he has said, which is to not make the voluntary release that every other president has made since the 1970s. Just forgive me for jumping on my little hobby horse here. I mean, this whole episode just says to me this is not the way that we should go about pursuing presidential tax transparency which I'm a big fan of, for any number of reasons, which I'll be happy to tell you about if you want to hear it.

But I believe the presidential tax returns should be in the public records, but I don't believe that they should be put there by people leaking them there. I think that's a very bad idea. And I actually don't believe that they should be put into the public record by guilting or shaming or badgering presidents and candidates into voluntarily releasing their returns. I think that this in fact should be a legal requirement. We should simply expect and demand of presidents that they release this information, just like we expect them to do other kinds of financial disclosure. But, I think for trying to get at this long running audit and what role it may have played in keeping the president's return secret, I don't really think it has anything to do with.

David Stewart: Turning to the substance of this dispute, Andy, do you have any sense of the contours of what might be under dispute right now?

Andy Grewal: Yeah, so there may actually be a good teachable moment here if people dug into the bowels of the issue, because really there's a very arbitrary line in the tax code. Whereas if you leave a business and you get nothing back, then you get something called an ordinary loss deduction. While if you leave a business and by some happenstance you get tiny bit back or the business pays off one of your liabilities at the end, you get totally different capital loss treatment. That is an economically meaningless distinction, but because of the so-called sale or exchange requirement under the tax code, you get wildly different consequences. Arguably if we wanted to learn something about the tax law, we could look at this purported dispute and see how the tax code draws an entirely arbitrary line between economically similar transactions. And you would have drastically different tax results. And maybe the tax code shouldn't work that way. That would be my, I suppose, thoughtful takeaway from it. That this specific dispute about whether something's a sale or exchange versus an abandonment isn't really a tax shelter issue. It's an issue of an arbitrary line drawn in the tax code.

David Stewart: Now is there anything that we should be taking away from the additional reporting on the significant level of debt that President Trump's tax returns show? And the large losses that his businesses appear to be producing year after year? Is there some significance to that?

Andy Grewal: Well, this is part of why I'm, so I suppose, jaundiced or skeptical about the value of reporting tax returns like this. All the list of president Trump's lenders and the amounts of the loans have all been out in the open in OGE disclosures. The Times report refers to $421 million of outstanding debt. Doesn't the name the debtors and various predators. And the Times doesn't identify the relevant banks, but you could find that through a few minutes of googling. And if it was an issue, and it may be an issue, we should have been thinking about it through thoughtful examination of those disclosures. But now it seems like things have ramped up in a perhaps less thoughtful way.

David Stewart: So, I guess this brings us to the final and the big picture question of the day. Does this disclosure of tax information from the president have any effect on the upcoming election?

Andy Grewal: So, I would have to leave that to the political pundits to determine. But maybe to identify a source of disagreement with Joe, I don't know that the public is better off through these disclosures. It might be. If it was a case that we all got this report and across the country, 100 million people sat together in small seminar rooms and talked about the tax law, I think that would be a good development. But it seems like what's happened here, as I expected, is that each side will pull on pieces and try to sling mud. And if the idea is that beating Donald Trump is a good thing and this disclosure helps beat him, then somebody might think that this is actually a great public service. I'm more inclined to think about whether the public is actually educated about the tax system through disclosures like this. And I can't be certain, but I don't think the public is better off and is learning something substantial about how the tax law works through these politically charged battles.

Joe Thorndike: I'm going to side step the are they better off or worse off? And just take a stab at will it actually make a difference or not? And of course I'm now in the line of pure speculation. But that is where an awful lot of people are going with this story. And I guess, the issue is is this going to leave a mark? I guess he's our new Teflon president. It used to be Ronald Reagan who was the Teflon president, but now I think it's Trump. But will Trump escape this? Will this not really matter at all? And I think that it's important not to overstate the case here. Right? This is not going to be some sort of hammer blow that decides the election. Right? There's a lot of things go into elections. And this will be one more thing. And it's not going to be decisive, but that doesn't mean that it won't necessarily be important.

There's not a ton of polling on this so far, but there has been some. And the early polls are not great for the president. There's a YouGov survey that just came out yesterday I think, and 58 percent of respondents said they thought that the Times story was completely or mostly true. And 11 percent said it was completely untrue. And another 8 percent said mostly untrue. So, the bottom line there is that most people are buying this as being at least broadly accurate. I think that's because it probably fits a narrative, again as we'd said earlier on about Trump, this idea that he didn't pay any taxes. Well that was already in popular circulation, so.

More to the point actually of the people, regardless of whether or not they believe the story, 52 percent said it was inappropriate for the president to pay no taxes even assuming that he broke no laws. While 35 percent said it was perfectly acceptable assuming that everything he did was legal. These are interesting numbers to me as a historian. Right? Because they bring up that quote about not needing to arrange your affairs and pay the tax man more than he's due. That sort of thing. Clearly Americans don't necessarily see the tax law and tax paying in the way.

I think that this is possibly a troublesome issue for the president. Because this one thing I come away from in studying U.S. tax history, it's that whether they should or not, Americans care an awful lot about tax avoidance. They may hate paying taxes. Everybody in the whole world hates paying taxes. But what they really hate is other people not paying tax. And I think that this is the kind of issue that really can become troublesome for a politician. It was troublesome for Nixon. I think it may prove difficult for President Trump as well. We won't ever really know because the election results will not tell us the answer to that. There too many variables. But I do think it's something that's worth thinking about. And if I were President Trump, I'd be at least somewhat concerned about it.

David Stewart: Well all right. Joe, Andy, thank you for being here.

Joe Thorndike: It was my pleasure.

Andy Grewal: Thank you.

David Stewart: And now, coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now from her home is Acquisitions and Engagement Editor in Chief Faye McCray. Faye, what will you have for us?

Faye McCray: Thank you, Dave. In Tax Notes Federal, Kyle Pomerleau examines presidential candidate Joe Biden’s proposed minimum “book tax” on large multinational corporations. Katelyn Towe argues that a wash sale rule should apply to cryptocurrency transactions to prevent abuse of the code’s realization and loss provisions. In Tax Notes State, Nikki Dobay and Jeff Newgard argue that targeted tax regimes in the Portland, Oregon, region are overly complex and undermine the regional economic and business climate. Five practitioners point out the flaws in the retroactive provisions of the CARES Act. In Tax Notes International, Pieter Deré and Jean-Philippe Van West discuss a recent Belgian case addressing the treatment of tax-sparing clauses in Belgium’s tax treaties. Eng Kiat Loh discusses Singapore's program of providing cash subsidies to businesses during the COVID-19 pandemic. And on the Opinions page, Marie Sapirie describes the proposed healthy workplace tax credit. Joseph Thorndike examines Stefanie Stantcheva’s approach to understanding taxpayer feelings about the income tax and estate tax.

David Stewart: You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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