By: Sam Brunson
Please issue an opinion tomorrow so the law nerds will stop dropping “emoluments” in every other tweet for at least a day.
— Supreme Court Haiku (@SupremeHaiku) November 29, 2016
A week and a half ago, David entered the debate about Trump’s potential problem with the Emoluments Clause. He pointed out that, whether or not Trump’s business interests would run afoul of the Emoluments Clause, any divestiture of assets would probably trigger a significant tax liability. (We don’t know exactly what that would be, but given that many of his assets are real property interests, he has probably been depreciating them, so even if they haven’t appreciated in value, his adjusted basis is probably significantly lower than the fair market value of the assets. So when he sells them, the sale will probably trigger a significant taxable gain.)
David also flagged section 1043 as a possible solution. Basically, section 1043 says that if an employee of the Executive or Judicial branch divests assets to meet conflict-of-interest requirements, she doesn’t have to recognize gain on the sale of those assets as long as, within 60 days, she uses the proceeds of the sale to purchase Treasuries or certain investments funds.
It’s not at all clear that section 1043 is available for Trump. Federal conflict-of-interest laws don’t apply to the president, so it’s not obvious that selling his businesses is “reasonably necessary” to comply with such rules. Moreover, even if he could get into section 1043 (because, maybe, he issued an executive order requiring himself to divest?) as David points out, while section 1043 prevents the recognition of gain in excess of cost, the provision doesn’t use the words “adjusted basis,” so it’s not obvious that section 1043 applies to gain recapture.[fn`]
But pretend for a minute that Trump can use section 1043. And further, pretend that it allows him to defer recognition of all of his gain, not just his gain in excess of his original cost. That would help him on the divestment side, but as I talked to David yesterday, we realized that it’s not a whole lot of help.
Why not? Because Trump will be president for four or eight years. And even if he were willing to stick his assets into Treasuries for four or eight years, presumably he doesn’t want to spent the rest of his life with his assets in Treasuries.
But here’s the thing: there’s no nonrecognition provision for when he sells his Treasuries to buy back business assets.
What does that mean? Effectively, here’s what happens: when section 1043 applies, it says that a taxpayer doesn’t have to pay taxes on her gain on the divestments of assets as long as, within 60 days, she reinvests that money in qualifying assets.[fn2] But any unrecognized gain reduces her basis in the qualifying assets.
In plain English: assume that Trump can use 1043. Assume that he has assets that cost him $1 million, and he sells those assets of $1.5 million. Within two months, he buys $1.5 million of Treasuries. Absent section 1043, he would pay taxes on $500,000 of gain and would have a basis of $1.5 million in his Treasuries.
Section 1043 makes it so that he doesn’t pay any taxes on his sale of assets. But instead of a $1.5 million basis in his Treasuries, he takes a $1 million basis in the Treasuries. Basically, on day 1 he has a built-in gain of $500,000.
For what it’s worth, that’s probably a good answer. Trump (or anybody else who qualifies for section 1043) didn’t necessarily want to sell assets; rather, he’s divesting for the greater good. By not recognizing the gain, the tax law lowers the cost of complying with ethics requirements.
But at the end of his term in office, Trump is unlikely to want the kinds of returns Treasuries offer. But if he wants to reinvest in the assets he divested, or he wants to start fresh with new assets, he’s going to have to sell the Treasuries he held while in office. And there’s no nonrecognition when he sells those assets. Assuming they haven’t appreciated, he’ll sell them for $1.5 million, and now he’ll pay taxes on a $500,000 gain.
And he’ll pay those taxes even if he reinvests in precisely the assets he divested at the front end of his presidency. Sure, he gets the benefit of deferral,[fn3] but he also faces a very real—and unanticipated—cost.
That’s not to say he shouldn’t divest. There can be a cost to being a public servant, and, to the extent he truly believes he can be an effective public servant, he certainly should be willing to bear that cost. Other presidents have divested their assets, and there’s no reason that Trump cannot follow suit. But it looks like following suit will result in a real tax cost to Trump, likely at the front end, but if not, at the back end of his presidency.
BTW, before you feel too bad for Trump, remember: he presides over a Republican Congress they can change the law to make it apply at the front- and back-end. Should they? That’s a different question. But they can.
[fn] Honestly, it’s kind of dumb that the gain nonrecognition provision refers to cost rather than to adjusted basis, but the plain language is what it is. And there’s little (as in no) case law or regulatory analysis of section 1043.
[fn2] And like I said earlier, qualifying assets are basically Treasuries or certain investment funds.
[fn3] (which isn’t a huge benefit in our low-interest-rate environment)