By Sam Brunson

Image from 401kcalculator.org. CC BY-SA 2.0

For the last several months, I’ve been meeting a guitarist and sometimes other musicians at a Chicago park to play outdoor socially-distanced jazz. This Sunday, driving home, my wife asked me if we knew what Trump had paid in taxes. “Of course not,” I confidently responded. “It looks like we do now,” she said.

And with that, my work goals for this week changed. I’m sure everybody reading this has seen Sunday’s New York Times story (and probably also its follow-up from yesterday). Along with a ton of other tax people, I’ve been trying to make sense of and contextualize the story, both to myself and to the public. And I’ve largely been doing my thinking in real-time on Twitter.[fn1]

I thought that I’d assemble a lot of those Twitter threads here into one place. At most I’ll lightly edit them and I’ll link to the actual threads on Twitter, too. Because over there I included GIFs on almost every tweet and I think I outdid myself. The relevant content will be here, though.

Overly-Facile Conclusions (Note that this is the one thread without GIFs.)

[Responding to a David Axelrod tweet about the risk of inconsistent positions between tax returns and loan applications.] Okay, just one thought tonight on #TrumpTaxReturns: beware of too-facile conclusions because they’re probably wrong. Here, for instance: it’s clearly possible that President Trump inflated assets and revenues on bank documents for loan purposes. But it’s also possible he didn’t. For instance, the fact that he had tax losses doesn’t tell us anything about his revenue. In fact, the New York Times article points out that his businesses had revenue. In 2018, he disclosed $435m in revenue but claimed a tax loss of $47m.

The thing is, that’s not unusual. Revenue is the gross amount of money you bring in. But you reduce revenue by certain expenses. So even for financial accounting purposes, it’s possible to have eyepopping amounts of revenue with net losses. Remember Uber? In the second quarter of this year, it apparently had $2.24b of revenue and a net loss of $1.78b.

It’s also important to keep in mind that financial accounting differs from tax accounting. Put simply, the financial information you give to a lender or investor will look different from what you send to the IRS because the rules and conventions differ.

Should they? That’s a hard question to answer in a tweet-storm. So I’m going to avoid it for now. Based on the Times’s reporting, there certainly are troubling things about the way Trump has paid (or, more specifically, not paid) his taxes.

And a lot of smart people (also me) are going to be looking at this information (and, hopefully, if the New York Times ever makes it public, the returns themselves) to try to make sense of what’s going on. But anybody who tells you, tonight, with unearned certainty that one thing or another constitutes fraud or illegality or whatever is probably speaking beyond their expertise. Tax law is complicated, it’s nuanced, and it’s not really the province of hot takes. So tune in soon for some not-terribly-hot takes on #TrumpTaxReturns.

Criminal Tax Fraud (the very serious GIF-ing starts here)

Okay, first things first: let’s take criminal tax fraud off the table, shall we? I get that looking to criminal tax fraud is attractive; we’ve enjoyed using it to prosecute crimes we know about but, for whatever reason, can’t prosecute at least since Al Capone.

But here’s the thing: criminal tax prosecutions are hard. Like, really hard. There are two main criminal tax provisions that could possibly apply: a misdemeanor 7203 or a felony 7201. And a caveat: while I took a criminal tax class in my (abortive) LLM days, I was a transactional person, so I don’t have a lot of experience here.

Each of the criminal statutes includes the word “willfully.” In fancy-pants lawyer speak, we call that a mens rea requirement. So to be guilty of either criminal activity, Trump would necessarily have “willfully” avoided or evaded tax.

And what does “willful” mean? The Supreme Court has held that “willful” means “a voluntary, intentional violation of a known legal duty” (US v. Pomponio).

That turns out to be a pretty high standard. In short, that means that criminal conviction won’t happen where a taxpayer carelessly makes a mistake. (That’s good, right? Like, we all carelessly make mistakes.) And it won’t happen even where a taxpayer aggressively resolves ambiguous legal issues in their own favor.

But it goes even further: even a really stupid belief, if sincerely held, shields you from criminal tax prosecution. In Cheek, the Supreme Court held that a tax protestor who claimed that he truly sincerely believed that the law didn’t tax wages didn’t commit a crime.

I cannot emphasize enough how dumb that belief is.

Now did Trump willfully violate the tax law? Of course it’s possible. But he almost certainly can say that the tax law is complicated and he relied on experts and he sincerely believed that he was doing the right thing. That won’t protect him from back taxes and interest if he violated the tax law. It may or may not protect him from civil penalties. But it could arguably protect him from criminal conviction.

There’s a lot in the New York Times story. But without a lot more than we have, I suspect that he won’t be prosecuted for felony or misdemeanor tax crimes.


One thing that the New York Times report on #TrumpTaxReturns that seems weird is his personal guarantees of loans, guarantees that are largely coming due within the next 4 years. After all, guarantees came back to bite him before. So what’s up with those?

Last night, Omri Marian made a couple important points: there’s an advantageous tax reason for doing it and he may not actually be on the hook for the guarantees. I don’t have a lot of personal knowledge about the second point; I’m pretty sure that Omri’s right that it’s possible not to actually be on the hook and that taking that kind of position would be a tremendously aggressive tax position to take. I don’t have anything to add though.

I’m going to add a little color to the first part, though, because it’s important for understanding what’s going on. And frankly, partnership tax rules are probably the most complicated part of the tax law. So here goes:

First things first: what is a “guarantee”? It’s a promise to pay a debt if the actual borrower doesn’t repay the debt. So say my daughter wants to borrow money from the bank, but she doesn’t have established credit. The bank probably won’t lend to her. (Or at least it won’t with decent terms.) But I come in and I sign a document saying, “If <daughter’s name> doesn’t pay you back, I will.” If I have decent credit or sufficient assets, the bank’s going to be more comfortable lending to my daughter because it knows it will get its money back.

It’s important (well, “important” may be an overstatement) to note that I’m not primarily liable on the debt. That is, the bank can’t come to me and demand that I pay the debt back until after my daughter has defaulted.

A friend in real estate tells me that banks generally require a guarantee on real estate loans. Which is clearly possible; that’s totally outside my knowledge base.

But, as Omri pointed out, there may be partnership tax reasons for doing that. Which requires a shallow dive into the world of partnership taxation. See, for tax purposes, partnerships aren’t taxpayers. What does it mean that a partnership isn’t a taxpayer? It means that a partnership does not pay taxes. Rather, it sends a tax document to each partner telling each partner their share of its income. The partners then treat that income as if they earned it directly.

That’s a big advantage of partnerships–their income is only taxed once (as opposed to corporations, which pay taxes when they earn money, and whose shareholders then pay tax when that money is distributed to them).

Also, partnerships pass through their losses. So if you’re a partner in a partnership and the partnership has a loss (like, apparently, all of Trump’s partnerships), you can use that loss to reduce your taxable income from other sources. (It’s more complicated than that, of course, but that’s the general gist.) There’s a limitation, though: you can’t take losses in excess of your “basis” in your partnership interest.

“Basis” is another of those tax words with a specific meaning. The simplified version is, basis is the amount of money you’ve paid for your partnership interest adjusted by certain things.

One way that you can increase your basis: bear the economic risk of loss on partnership debt. One way to bear that economic risk of loss?

Guarantee the debt. So assuming the guaranteed debt is partnership debt, Omri’s point is that through the guarantee, Trump is able to use more of the partnership’s losses.

Now generally to get the benefit of economic risk of loss, the guarantee means you actually have to be on the risk. There are ways to structure around that, though. And, while we don’t have a lot of information about the guarantees, it would be really interesting to know how on the hook Trump is.


One last thing before I shift to preparing for tomorrow’s class: the extensions. This suggests 2 questions: (1) How (or why) did he get extensions? (2) Why did he pay $1m in taxes and then request a refund?

Question 1 first: you know how April 15th is Tax Day? (Or, rather, other than this bizarro year we’re living in it’s Tax Day?) Turns out it’s not. Or at least it’s not Tax _Filing_ Day. See, every taxpayer qualifies for an automatic 6-month extension on filing. That is, as long as you send the necessary form to the IRS, you don’t have to file your tax return until October 15!

So why does anybody file their tax return on April 15? That takes us to Question 2. you may not have to file your tax return until October 15 (if you send in the form that gets you an automatic extension), but your taxes are due on April 15.

So irrespective of when you file your return, you need to pay your taxes by April.

Now for normal people (me and, I’m assuming, you), that’s not really a big deal. Almost all of the money I earn is wage income from my job. So I can figure out how much I earned on Dec. 31, and my employer will send me a W-2 by the end of January.

But wealthy people–people like Trump (or, at least, people like Trump is allegedly)–often own partnership interests. And as I explained in a previous thread, partners pay taxes on their share of partnership income. But partnerships don’t always send partners information about their share of partnership income in time for April 15. So on April 15, a partner in a partnership may legitimately not know how much they owe in taxes.

So often they’ll pay an estimated tax amount by April 15 and, if they overpaid, request a refund by October 15. Anyway, this is neither an apologia for nor a condemnation of Trump’s taxes; it is, I hope, some context for stuff that seems weird.

$750 (and the AMT)

Re: the $750 on Trump’s tax returns: I don’t currently have much substantive to say about it. But I do have a historical note: in 1969, the Treasury Secretary testified to Congress that 155 taxpayers who had income in excess of $200,000 paid no income tax.

That year, the story goes, members of Congress received more letters outraged about this tax nonpayment by the wealthy than they did letters about the Vietnam War. In response, Congress enacted the alternative minimum tax, which was meant to prevent wealthy people from having no income tax liability.

Now as far as I know, there’s no evidence that all of these 155 taxpayers were acting fraudulently or even aggressively. But the idea that very wealthy people could pay no income tax is inherently unfair, and struck people as such. What I’m saying is, even if it turns out Trump managed to reduce his income tax bill to $750 through a non-aggressive, thoroughly legal method, outrage against the unfairness is both fully predictable and, I think it’s fair to say, justified.

But It’s All Legal!!!1!

So some people have been asking Carissa Byrn Hessick why we should care about the president’s taxes if everything he’s done is legal. First, it’s not clear that everything has been legal. But assume it is/ I assume her interlocutors’ feeling comes from the SCOTUS opinion in Helvering:

Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.

Which is fine, I suppose. It’s a really popular statement that is quoted in judicial opinions, tax textbooks, articles, and all over the internet. And it’s not wrong. But it leaves out the next important part of the opinion:

Nevertheless, it does not follow that Congress meant to cover such a transaction, not even though the facts answer the dictionary definitions of each term used in the statutory definition.

What this means in short: just because you technically tick off all of the boxes in the Internal Revenue Code doesn’t mean that, when you put all of those boxes together, you’ve complied with the law. You can’t technicality yourself out of being a tax cheat. So even assuming Trump didn’t technically do anything wrong if you look at each piece of his returns individually doesn’t mean he didn’t do anything wrong.

At Least It’s Not Criminal

It’s important to keep in mind that there’s a difference between “not criminal” and “not illegal.” For a handful of reasons, his behavior was probably not criminal. But that doesn’t mean he followed the law. And it’s not clear that everything he did was legal. But at best he pushed the boundaries to the breaking point in some cases.

More Likely Than Not

I’m seeing a lot of talk on Twitter expressing a high level of certainty about Trump’s tax returns (either that they’re criminal or that there’s nothing wrong with them or something in the middle.)

None of the certainty is coming from tax people, though. Why not? Partly because of the way we give tax advice.

One part of transactional tax work is to provide tax opinions to clients. The opinions are meant to help clients decide what to do, to help guide accountants when they file tax returns, and to help protect clients from penalties.

I don’t know if the way we write tax opinions is unique–tax law is the only kind of law I practiced–but if you’re not an attorney, it probably sounds weird. Basically, we offer 4(-ish) levels of confidence: Will, Should, More Likely Than Not, and Substantial Authority. These levels of confidence aren’t precise, but roughly:

  • Will = >90% chance that a court will agree with the position
  • Should = >75% chance
  • More Likely Than Not = >50% chance
  • Substantial Authority = > ~33% chance [Note that I was informed on Twitter that Substantial Authority is probably more like 40%]

Mostly tax attorneys don’t give Will opinions. It’s not because there is nothing in the tax law we’re absolutely confident about, but it’s because what client is going to pay for advice about something that obviously correct? (Sometimes you get to write a Will opinion because the counterparty in a transaction requires a Will-level opinion.)

But most of tax practice is confronting and dealing with uncertainty and ambiguity and helping your client navigate those shores as well as possible. So constitutionally, tax people are reluctant to make grand and absolute pronouncements.

And, of course, like every other area of law, you can give clients the best advice possible but you can’t force them to take it.

The Broccoli Thread (Passive Activity Losses)

Okay, it’s time for an eat-your-broccoli #TrumpTaxReturns thread. It’s relevant and edifying, but maybe not a ton of fun. (That said, I’ll sprinkle the sugar of GIFs over the broccoli to make it, um, more appetizing?) (Seriously, these things are a lot more fun on Twitter with all of the GIFs!)

So what is our broccoli on this thread? Passive activity losses. (I can hear the groaning already.)

One of the big deals in the New York Times reporting on #trumptaxreturns is that Trump had money-making endeavors (basically The Apprentice) and money-losing endeavors (golf courses, casinos, pretty much whatever business endeavors he decided to get into.)

Now if you have a couple different businesses and one’s making money while the other is losing money, it’s great if you can reduce your taxable income from the money-making business with your losses from the money-losing business.

In fact, this is a popular tax shelter technique. You borrow money to buy an asset that creates non-economic tax losses and use those losses to offset income from your profitable business. Wait, did I just write that? What a yucky word-salad. (I told you this would be an eat-your-broccoli thread.)

Basically that means you create artificial deductions (ones that don’t reflect any real loss on your part) and use those to reduce real income from another business.

Anyway, Congress isn’t entirely cool with this, so it created the passive activity loss rules. Here I could get technical but I’m going to try not to. The passive activity loss rules say essentially that you can’t use passive activity losses against real business income. (You can read the actual statute here if you want to torture yourself.)

And how can you tell if a loss-producing activity is passive? Basically, it depends on how much you do it. If you put 500 hours/year into the business, it’s not a passive activity. If you put in 100 hours and you do more work in the business than anybody else, it’s not passive. Etc.

So how is this relevant to #TrumpTaxReturns? Well, according to the Times, he used losses on his golf courses to offset income from The Apprentice.

Now I’m definitely not a Hollywood mogul–or a golf course mogul for that matter–but I’ve heard that filming a show takes time. Did Trump have 500 hours/year to put into his real estate businesses?

I mean, it’s clearly possible. It’s a factual question that the IRS would have to look into. But there’s at least a real risk that the losses he used against his income couldn’t be used against that income. If he did the work, he’s probably cool. But if he didn’t, well, if I were the IRS doing the audit, I’d probably look at that fairly closely.

[fn1] I also emailed my FedInc students yesterday and told them that we’d spend as much of today’s class as they wanted discussing the Trump Tax Returns story and answering their questions. And we spent the whole class on it; they had really smart thoughts and questions about it and, frankly, it’s both intensely relevant and it puts some of the issues (yay for “ordinary” and “necessary”!) into a real-world context.

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