How Congress Cut Trump’s Taxes:

The House Ways and Means Committee plans to release Donald Trump’s tax returns Friday and has already put out a report faulting the former president for paying little or no income tax in recent years. But the fault lies with Congress. The media mocks his tax losses as “proof” that he is not a good businessman.

Mr. Trump benefited from every tax loophole that Congress generously made available to every real estate business. The blame — or credit — for these benefits exposed by release of his tax returns is Congress which knowingly enacted all the tax shelters that legally allow real estate owners to minimize their income tax.

These include deferral of income, conversion of ordinary income into lower taxed capital gains, nontaxable income, tax credits, and artificial tax losses that ordinary citizens cannot obtain.

Entrepreneurs who purchase or construct a building can obtain depreciation deductions, together with deductions for mortgage interest on the loan. Using ’cost segregation,‘¹ they can accelerate the deprecation deduction. A large mortgage with a low down payment magnifies the interest deduction. As the property should appreciate in value, more than offsetting the expenses, it is arguable that a resulting tax loss is artificial. One can borrow against the appreciation to purchase more properties and investments, gaining more deductions.

Unlike the rest of us, a “real estate professional“ is exempt from the passive loss limitations on rental real estate.2 All their tax losses are deductible. Net operating losses can be carried forward indefinitely until used.³

Gains from selling real estate used in a business or for investment can be deferred indefinitely by exchanging it for another property (so-called 1031 exchanges), usually in a three-way transaction using intermediaries, that resembles an outright sale.⁴ Should the seller add equity or debt to the exchange, he can obtain a more expensive property with more depreciation and interest deductions. Property sold at a loss can result in an immediate tax deduction.

There are rehabilitation credits,⁵ such as for preserving an old building facade. Sometimes a developer will tear down an old building preserving lower exterior walls at great expense and erect a new skyscraper inside the facade. Credits helped Mr. Trump renovate the Old Post Office in Washington into a hotel. And there is a credit for low-income housing, which might not otherwise get built but for generous tax incentives.⁶

The Inflation Reduction Act of 2022 created new energy credits that can sold for cash by entities that cannot use them because they pay no income tax.⁷ Transferable credits will be an administrative nightmare for IRS, much like states that provide film production credits and have rarely clawed back inflated, fraudulent or improperly claimed credits sold to third parties.⁸

Conservation easements provide a triple benefit. The donor gets a large charitable deduction for donating a partial interest in property as he continues owning and using the property.⁹ The donor escapes capital gain tax on the donation because he didn’t sell it. The deduction for the donation can be excessive based on “highest and best use” (or, “highest and best imagination”) rather than “fair market value.”¹⁰ The new appropriations act limits abuse of this deduction to 2.5 times a taxpayer’s basis in property held less than 3 years, but only for partnership syndications, not individuals.¹¹ A better standard would require deduction values to be based on recent comparable property sales.

As a practicing CPA, I've seen how real estate deductions can result in zero income tax for clients with very high incomes. These are legal and proper deductions, even if they seem unfair. One reason for low tax liability is laws passed by Congress intended to stimulate job creation, housing, offices, all the materials that go into building and supporting them, and the great economic activity that real estate generates for decades following completion. Real estate is not an easy business and some go broke, while others do get rich while paying little income tax for energizing an economy that benefits us all.

By releasing Trump’s tax returns over his strenuous objections, Democrats have destroyed the expectation of tax return privacy. They are being disingenuous in suggesting there is precedence. Nixon voluntarily released his during the Watergate hearings.¹² Despite the machinations of Lois Lerner who denied exemption to conservative groups while she headed the IRS tax exempt branch, every application for tax exemption is prepared in the full knowledge that it becomes a public record once approved.¹³

A 39-page report on Trump’s taxes written by the Joint Committee on Taxation provides a road map on issues that might warrant examination in auditing Mr. Trump’s returns. Its report stresses, “we express no opinion regarding whether any adjustment, or increase or decrease in tax, would have resulted if these issues had been pursued on examination.”¹⁴

His tax preparers may have to answer why they signed returns with so many issues. Mr. Trump’s Form 1040s includes more than 400 K-1 pass-through entity forms and up to 27 sole-proprietor self-employed Schedule C's per year, among other complexities. IRS failed to audit his returns in a timely manner because it initially delayed, then assigned just one examiner (later increased to three).¹⁵ None of the audits have been completed.¹⁶ Again, blame lawmakers for making the tax code is so complex and arcane and his returns so complicated that it may well be impossible to provide a definitive analysis of Mr. Trump’s returns.

Democrats propose codifying a requirement to audit and release a president’s tax returns. This should be expanded to include every member of Congress.¹⁷ “There are not many Senators or Representatives who sell their vote for money, and it is pretty well known who those few are,” Senate Sergeant-at-arms David Barry wrote in 1933. Barry was promptly fired after a 49-year career.¹⁸ “An honest man does not get rich,” said House Speaker Sam Rayburn whose savings after 48 years totaled only $15,000 (equivalent of around $150,000 today) at his death in 1961.¹⁹ Publicity and audits of all members of Congress would go a long way in exposing the honest graft that influences and even dominates much of today's politics.

Other presidents had issues that would have warranted IRS examination. Franklin Roosevelt deducted losses from his “cotton plantation” in Warm Springs, GA and his “farm” in Hyde Park, NY just a mile down the street from the Vanderbilt Mansion.²⁰ Eleanor Roosevelt failed to report more than $100,000 she received from her radio broadcasts.²¹ How did Lyndon Johnson, whose income came from a government salary, become one of the richest men ever to occupy the Oval Office, worth an estimated $20 million in 1963?²² (Again, that’s the equivalent of nearly 10 times that sum in today’s dollars.) Ronald Reagan used two abusive cattle tax shelters to make his 1970 taxes negligible.²³ Jimmy Carter’s taxes were sheltered by investment tax credits from his peanut farm, which reduced his 1976 tax to zero.²⁴

Mr. Trump is not unusual in aggressively claiming tax deductions — only in being the most scrupulously examined president ever, with no credible allegations yet that he achieved any of his or his family’s wealth through corruption. How many members of Congress can say the same?

Arnold Schwarzenegger, who also refused to publicize his tax returns when he successfully ran for governor of California in 2003, said, “There’s a balance here between what is a prurient interest versus why this data is thought to be important to disclose.”²⁵

¹ IRS Pub. 5653, “Cost Segregation Audit Technique Guide,” 1 June 2022. P.L. 117-58, §§21201-21201. “The Most Expensive Mile of Subway Track on Earth,” NY Times, 28 Dec 2017; Other subway systems received lesser grants, eg, “MARTA gets $25M for Five Points Station Overhaul,” Atlanta Intown Paper, September 2022, 11. The law is 1,039 pages with $1.2 trillion funding for roads and bridges, broadband, drinking water resources, airports, electrical vehicles and more, with pork spending for each of the 50 states, some detailed at www.transportation.gov/briefing-room/usdot-releases-state-state-fact-sheets-highlighting-benefits-bipartisan. An additional $200M of local transit grants were buried in the 1,068 page Consolidated Appropriations Act of 2022 (P.L. 117-103) listed at www.transit.dot.gov/sites/fta.dot.gov/files/2022-04/fy-2022-full-year-apportionment-table-20-Community-Project-Funding-TIG.xlsx.

² IRC §469(c)(7), enacted in 1993. Entry on Form 1040 Schedule E, Line 43.

³ IRC §172(b)(1)(A)(ii)(II)

⁴ IRC §1031

⁵ IRC §47

⁶ IRC §42

⁷ “Building a Clean Energy Economy: A Guidebook to the Inflation Reduction Act’s Investments in Clean Energy and Climate Action,” The White House, December 2022, Version 1, p. 11.

⁸ Jay Starkman, “State Movie Subsidies Are a Flop,” Wall Street Journal, 20 July 20, A15.

⁹ IRC §170(f)(3)(B), Reg. 1.170A-7, -14.

¹⁰ Symington, 87 T.C. 892, 896-897 (1986), quoting Olson, 292 U.S. 246, 255 (1934). Jay Starkman, “Voluminous Data,“ New York Times, 9 Dec 1973, 1.

¹² IRC §6104

¹⁴ “Report to the House Committee on Ways and Means Chairman Richard Neal,” Joint Committee on Taxation, 15 Dec 2022, 1.

¹⁵ id., 21; “Report on the Internal Revenue Service's Mandatory Audit Program Under the Prior Administration (2017-2020),“ House Committee on Ways and Means, 20 Dec 2022, 1.

¹⁶ id, 38.

¹⁷ “Presidential Tax Filings and Audit Transparency Act of 2022,” 117th Cong. H.R. 9640

¹⁸ Donald A. Ritchie, Press Gallery: Congress and the Washington Correspondents (Cambridge, MA: Harvard University Press, 1991), 194.

¹⁹ Robert A. Caro, The Years of Lyndon Johnson: Means of Assent (NY: Alfred A. Knopf, 1990) 80.

²⁰ 1929-1937 Franklin Roosevelt income tax returns.

²¹ “Fish Lays Evasion to Mrs. Roosevelt,” NY Times, 10 Jul 1937, 4; Boris I. Bittker, “Refusal to Accept Compensation,” Federal Taxation of Income, Estates and Gifts (Boston: Warren, Gorham & Lamont, 1981), ¶75.2.4 (vol. 3); “Hearings, Joint Committee on Tax Evasion and Avoidance׏, 75th Cong., 1st Sess., Part 4, 426-431 (28 Jul 1937). A 1957 revision to Treasury regulations made the taxability crystal clear. Treas. Reg. 1.61-2(c), added by T.D. 6272, 1957-2 CB 18, 21; See Mertens Law of Federal Income Taxation (1991 ed.) §31.91 FN68, citing Treas. Reg. 118 (1939), §39.22(a)-2; George C. Johnson, 11 TCM 31 (1952).

²² Robert Caro, The Years of Lyndon Johnson: Means of Assent (NY: Alfred A. Knopf, 1990), xxix; “President Johnson, as Well as His Wife, Appears to Hold Big Personal Fortune,” Wall St Journal, 23 Mar 1964, 12; “Johnson Fortune Put At $9 Million,” NY Times, 10 Jun 1964, 25; “Johnson, Virtually Penniless in 1937, Left a Fortune Valued at $20-Million,” NY Times, 28 Jan 1973. Caro says Johnson was worth $20 million when he became president.

²³ “Data on Reagan Indicate He Paid No U.S. Tax in ‘70,“ NY Times, 16 May 1976, 1; “Reagan Refuses Tax Inspection,” Washington Post, 17 May 1976, A3; “Aide Denies Report That Reagan Paid No ‘70 Income Tax,” NY Times, 18 May 1976, 19; “Reagan Insists He Paid Some 1970 U.S. Tax,” Washington Post, 18 May 1976, A5;

²⁴ Jay Starkman, “Do Tax Returns Matter In Presidential Elections?” Tax Notes, 5 Sept 2016.

²⁵ “Few details on tax return. Governor reports how much he paid and gave to charity,” Sacramento Bee, 9 Dec 2004.

A version of this article (without footnotes) appeared December 29, 2022, on page A17 in The Wall Street Journal with the title, “How Congress Cut Trump’s Taxes”