The Tax View of the Hush Money Payments and Cohen's Reimbursements and Bonus (8/21/18; 8/24/18)

The NYT reports today:  Carol D. Leonnig, Trump’s company approved $420,000 in payments to Cohen for the hush money, relying on ‘sham’ invoices, prosecutors say (NYT 8/21/18), here.  Basically, as I understand it, Trump ran the payments through his company.  And, according to the article, for his efforts on behalf of Trump personally, company executives decided to give Cohen "an additional $360,000 for expenses and other fees and taxes, plus a $60,000 bonus, prosecutors said." That could be to hide the payments for campaign purposes, but it also has a tax side that is commonly encountered or observed by tax crimes practitioners.  By submitting sham invoices to a corporation controlled by a person who is the personal beneficiary of the payments (Trump), the corporation was poised to claim as deductions what should be treated as nondeductible dividends to the person exercising that control (Trump).  So, potentially, tax is evaded at both the corporate and shareholder levels.  Assuming the Government can establish Cheek intent beyond a reasonable doubt, then that is tax evasion under § 7201.

Added 8/24/18 8:30am:

Catherine Rampell, No collusion? We’ll see. But what about tax fraud (WAPO 8/23/18), here.

What about tax crimes, though? 

There’s plenty of precedent for prosecuting those. And the Cohen filings this week raise serious new questions about whether Trump has criminal tax-fraud exposure. 

* * * * 

To be clear, we don’t know whether Trump has violated any tax laws. But there’s a red flag in prosecutors’ filings against Cohen regarding the fate of hundreds of thousands of dollars in taxes one would expect to have been paid Uncle Sam. 

It’s a little technical, so bear with me. The issue involves payments that the Trump Organization made to Cohen as part of an agreement silencing adult-film actress Stephanie Clifford (a.k.a. Stormy Daniels) and how the company accounted for them.
Cohen paid Clifford $130,000. Trump’s company ultimately reimbursed him for this payment to the tune of $420,000. 

Why so much more than the original hush-money amount? 

Because the Trump Organization peculiarly decided not to categorize the payment as a reimbursement for an expense Cohen incurred, the way a client might normally reimburse a lawyer for airfare while traveling on client business. Instead, according to prosecutors’ filings, the Trump Organization falsely called the entire payment a “retainer” and accounted for it internally as “legal expenses.” 

That is, they indicated they were merely compensating Cohen for legal services provided to the company.

But income for legal services, unlike reimbursement for airfare, would require Cohen to pay taxes on the payment, meaning he wouldn’t be made whole by a mere $130,000. So, the Trump Organization “grossed up” the total to cover Cohen’s taxes (on both the $130,000 Clifford payment and a separate $50,000 payment Cohen made for “tech services”). It also added a $60,000 bonus. 

“These are not normal business practices,” said Jenny L. Johnson Ware, a criminal tax lawyer. “None of this is how a company normally does business.” Other tax practitioners I consulted said the same. 

Why go through all this rigmarole? Well, maybe to hide something. 

Maybe Trump Organization execs were helping hide an excessive campaign contribution, one of the charges Cohen pleaded guilty to. Or maybe, as current Trump lawyer Rudolph W. Giuliani has argued, it was merely a payment for a personal legal settlement designed to “save” the “reputation” of Trump’s marriage. 

Under neither explanation, though, would the $420,000 be a legitimate business expense that Trump or his company could deduct on their tax returns. 

And yet: “The reason to go through the shenanigans of making this transaction look like legal expenses, to me, is to make something not deductible look deductible,” said Johnson Ware. 

Hence that red flag.

For context, Jenny Ware, here, is a great tax litigation lawyer.

JAT Comments:  My own two-cents worth (actually worth substantially less than that).

1. I don't know whether the corporation claimed the deduction or failed to treat the payments as dividends or Trump failed to report them as dividends, although if the corporation or he is on extension they have some ability to fix that particular problem.

2.  Cheek intent should not be that hard to prove beyond a reasonable doubt.

3. There are the company officers approving the payments based on the sham invoices.  Now there are other targets for the prosecutors who can flip on Trump for this and other potential misdeeds.  On the problem, though, as to whether the corporation and/or Trump can fix the problem as suggested in paragraph 1, I suspect that the prosecutors should be able to get the Cohen and the corporate executives to state that one of the purposes of the sham invoices to the corporation was to claim them as deductions on the return and not report them as dividends to Trump.  Think at least conspiracy which would certainly include the corporate executives and Cohen and, of course, likely Trump as well.  Conspiracy does not require that the offense object of the conspiracy have been completed; and the Sentencing Guidelines calibrates the sentencing range to the intended object of the conspiracy whether or not completed.  And, this could lead to other instances of pushing personal expenses through the corporation for a variety of reasons, including tax.

4.  In short, the Trump-related criminal investigations and prosecutions will be a great learning experience for tax crimes enthusiasts.  I say:  "MAKE TAX CRIMES GREAT AGAIN!"

5. Also, with tax crimes prosecutions, tax returns come in as evidence.  If the conspiracy (see par. 3) is to commit tax evasion or even tax perjury for Trump's personal or corporation returns, those returns come in and are available for the world to see.  Not that returns can offer a lot of detailed information other than numbers, but some good forensics might be able to coax some good information from them.  And, of course, the prosecutors will have IRS criminal and civil agents who can get behind the numbers and follow the money.