Tuesday, October 2, 2018

New York Times Special Investigation Report on Trump Family Tax Avoidance/Evasion (10/2/18; 10/3/18)

The NYT has this report:  Trump Engaged in Suspect Tax Schemes as He Reaped Riches From His Father (NYT 10/2/18), here.

Some interesting excerpts without getting too much into the details laid out:
The line between legal tax avoidance and illegal tax evasion is often murky, and it is constantly being stretched by inventive tax lawyers. There is no shortage of clever tax avoidance tricks that have been blessed by either the courts or the I.R.S. itself. The richest Americans almost never pay anything close to full freight. But tax experts briefed on The Times’s findings said the Trumps appeared to have done more than exploit legal loopholes. They said the conduct described here represented a pattern of deception and obfuscation, particularly about the value of Fred Trump’s real estate, that repeatedly prevented the I.R.S. from taxing large transfers of wealth to his children. 
“The theme I see here through all of this is valuations: They play around with valuations in extreme ways,” said Lee-Ford Tritt, a University of Florida law professor and a leading expert in gift and estate tax law. “There are dramatic fluctuations depending on their purpose.” 
The manipulation of values to evade taxes was central to one of the most important financial events in Donald Trump’s life. In an episode never before revealed, Mr. Trump and his siblings gained ownership of most of their father’s empire on Nov. 22, 1997, a year and a half before Fred Trump’s death. Critical to the complex transaction was the value put on the real estate. The lower its value, the lower the gift taxes. The Trumps dodged hundreds of millions in gift taxes by submitting tax returns that grossly undervalued the properties, claiming they were worth just $41.4 million.
JAT Comments:

1.  If the Trump family did commit tax fraud, the statute of limitations for all the taxes thus evaded is still open. The criminal statute of limitations has long since passed and, of course, the elder Trump is dead (can't send a corpse to jail). But the taxes can still be collected. And, not only that, the tax is subject to the civil fraud penalty (which for many of the years was 75% of the tax but for some years 50% of the tax). And both the tax and the civil fraud penalty are subject to compounded interest from the due date that the tax should have been paid. That will add up to a lot of money. (You financial geeks will remember compounding and the time value of money.) Indeed, I suspect that it could easily wipe out Trump's real net worth (not his claimed net worth which is false).

2. Of course, two things about this. First, the IRS rarely goes back so many years even when it can. There are several reasons for that, including scarce resources (Republicans have successfully starved the IRS of resources, see  Eric Levitz, The GOP Gutted the IRS — and the Rich Made Out Like Bandits, (NY Mag Daily Intelligencer 10/1/18), here). Second, Trump is in charge of the IRS and can simply order the IRS not to investigate, either directly or through his people at the IRS. (The only possible issue here is that Chuck Rettig, a great and good lawyer and not, I think, in Trump's pocket, is the newly installed Commissioner of Internal Revenue; hopefully, Rettig will not intervene to protect Trump or let anyone else intervene to protect Trump if the IRS career officials decide to investigate this matter.)

3. But, then, in any event, when the Democrats again seize the levers of power (they will), the IRS can do the investigation because, if fraud is involved, the statute is open forever. Forever means forever. Trump could be in great financial danger, if not now, then later. If only the IRS will act.

4. Of course, there is still the possibility that (i) the Trump family did not commit tax fraud or (ii) the IRS cannot prove that by clear and convincing evidence (the standard of proof required for civil tax fraud).

5.  If the IRS does investigate, it will need to interview Trump.  And, as suggested by current events, he will be less than truthful.  And that is a crime, either perjury if under oath or false statements if not.  So, in a case where the criminal statute of limitations is long since past, Trump can subject himself to criminal prosecution.

6.  I wonder if anyone will file a whistleblower claim on this matter and then, if the IRS "chooses" not to investigate, bring a proceeding in the Tax Court which might be hugely embarrassing to the IRS and to Trump.  (I would but I am pretty sure someone has already done that; if the claim is based on the article, then presumably the reduction in the award to no more than 10% will apply per § 7623(b)(2)(A); but, it appears that the pot would be large if the IRS collects proceeds, so 10% would be a handsome recovery.)

Addendum 10/3/18:

7.  Peter Reilly pointed me to his posting on the Sumner Redstone saga.  Peter J. Reilly, Sumner Redstone Liable For Tax On Long Ago Gift (Forbes 12/12/15), here; and Sumner Redstone Owes the Gift Tax from 1972 But Not the Civil Fraud or Negligence Penalties (Federal Tax Crimes Blog 12/13/15), here.  Redstone was wealthy, probably at the time wealthier than Donald.  Moreover, he was a Harvard Law grad and an alumnus of DOJ Tax Division.  Redstone was assessed gift tax liabiltiy of $737,625  without penalty.  He dodged the civil fraud penalty, but the statute was open because he had not filed the required gift tax return.  § 6501(c)(3).  Perhaps that could keep the statute open for some of the Trump family liabilities as well, even if civil fraud could not be proved to open up old years.  In Redstone, the IRS failed to prove civil fraud which could have supported the civil fraud penalty and possibly opened up some years where returns had been filed.  This should remind tax practitioners that the clear and convincing standard to prove civil fraud can be difficult for the IRS indeed.  (That is why there has been much litigation in the FBAR arena about whether the standard for the FBAR civil willful penalty is preponderance (more likely than not) or clear and convincing; clear and convincing is viewed as a substantially heavier burden than preponderance and, if so and if it applied would cause the IRS to prevail less frequently on those penalties; the courts seem consistently to hold that the preponderance burden applies.)

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