HOW TRUMP DID IT
How a Billionaire Legally Avoided Paying Income Taxes for Years
This article is strictly non-political and has absolutely nothing to do with politics or the current (ugly) election season. Instead, I plan to explain in detail how Donald Trump, a billionaire with a vast real estate empire, legally avoided paying income taxes for years. Many people have specifically asked me as an accountant to explain how Trump did it. Here’s the answer:
The tax law (Internal Revenue Code Section 172) allows taxpayers to carry forward (or back, subject to limits) a net operating loss “NOL”. A net operating loss exists for a given tax year if total losses and deductions exceed income. IRS Publication 536 provides detailed information on the many complex rules which apply to net operating losses.
The general rule is that NOL’s can be carried back two years and carried forward up to twenty years. Thus, a taxpayer like Trump could have substantial income in future years that would be completely offset by an NOL carry forward. Media reports suggest this is what happened in his case.
My website has an in-depth article in the Café section called “Cashing In On Business Losses” which discusses in detail the tax benefits of net operating losses.
Where Does the Tax Law Come From?
Whatever you may feel about Trump, it’s a fact that tax rules are enacted by Congress, signed into law by the President, administered by the IRS, and enforced by courts and cops. The tax law applies to everyone, everywhere (if you are a U.S. citizen.)
One unsavory feature of the tax system is that well-paid and well-connected lobbyists try to influence members of Congress behind closed doors. These lobbyists seek tax breaks and loopholes for special interests and industries who try, in effect, to ‘buy the law’ which applies to them.
This unfortunate fact leads to the widespread belief that our entire income tax system is corrupt and rotten to the core. Because the income tax system is a classic product of ‘teamwork,’ no one individual is responsible or can be blamed for its perceived flaws and unfairness.
Cancel the IRS?
Disgust with our tax system leads to an extreme reaction where some people (including demagogues) call for abolishing the IRS. But if the IRS is eliminated who will raise funds to pay for the Marine Corps, the FBI, NASA, the National Institute of Health, Social Security, not to mention the salary of the Senator who made this proposal? Such schemes are dishonest and fail to acknowledge the fact that ‘freedom isn’t free’.
A Place With No Taxes
There is a region in northeast Africa called Somalia that has no functioning central government. Somalia is a lawless area where warlords and armed gangs roam free and innocent civilians are caught in the crossfire between warring factions. It is also a fact that Somalia has no effective tax system. There is no IRS in Somalia.
Although Somalia has no taxes few people would care to live there. You would have to spend a small fortune to ensure your personal safety. A few bodyguards aren’t good enough if you plan to relocate to tax-free Somalia. The local warlords are known to be especially vicious and bloodthirsty.
You would need nothing less than your very own private army with tanks, helicopter gunships and rocket launchers. A used tank is quite expensive. And after you buy it there are additional costs for maintenance, ammunition and fuel. Even the best tanks get a lousy 5 to 8 miles per gallon. Further, you must pay your private soldiers better than what competing warlords pay their soldiers.
The cost of living in tax-free Somalia may exceed the taxes you owe to the IRS.
Friendlier Tax Havens
There are friendlier tax havens around the world that are not beset by the kind of violence raging in Somalia, and include the Cayman Islands, Monaco, Belize, etc. While it’s true these places offer special tax breaks to residents there is one further fact to be aware of: U.S. citizens are taxed on worldwide income. All of these tax havens have extradition and other law enforcement agreements with the U.S. government.
If you remain a U.S. citizen it doesn’t matter where you live – you must still file and pay taxes on all sources of income (subject to tax treaties and various other exemptions such as the Foreign Earned Income exclusion.)
If you give up your U.S. citizenship you may owe taxes to the IRS. There is an ‘exit tax’ which applies to high-asset and high-income individuals who renounce their U.S. citizenship. The IRS treats such individuals as having sold all their worldwide assets at fair market value on the day before they give up U.S. citizenship. See IRS Form 8854.
Also be aware of the extensive reporting requirements if you have a foreign bank account with funds which exceed the reporting threshold. (Form 114, Report of Foreign Bank and Financial Accounts.)
U.S astronauts serving on the International Space Station still owe U.S. taxes to the IRS and must file a U.S. income tax return to report salary earned while working in space.
It Is Lawful to Pay the Legal Minimum Tax
One of the most important income tax cases heard by the U.S. Supreme Court in the 20th century was the landmark case of Gregory v. Helvering. In this important case, Associate Justice George Sutherland famously stated that every taxpayer has the right to search for, find, and pay the legal minimum tax, not one cent more.
The legal right of a taxpayer to decrease the amount of what otherwise would be his [or her] taxes, or altogether avoid them, by means which the law permits, cannot be doubted.
George Sutherland, Supreme Court Justice (1922-1938) Gregory v. Helvering, 293 U.S. 465, 469 (1935)
Certified Public Accountant Master of Business Administration
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