Article Summary –
Former President Donald Trump used questionable accounting practices to claim improper tax breaks from his Chicago tower, according to an IRS inquiry uncovered by The New York Times and ProPublica. Initially, Trump wrote off losses from the tower, which was a financial failure, twice, using a method that experts believe went too far. Then, his legal team attempted to merge the entity owning the tower into another partnership, to declare even more tax-reducing losses from the Chicago investment, which the IRS argued violated a law designed to prevent double dipping on tax-reducing losses.
Former US President Donald Trump’s Dubious Tax Strategy Could Lead to a $100 Million Bill
According to an Internal Revenue Service (IRS) investigation, Former President Donald Trump allegedly used questionable accounting methods to claim improper tax breaks from his Chicago tower. If proven, the tax implication could exceed $100 million. The 92-story Chicago skyscraper represents Mr. Trump’s last major construction project and due to cost overruns and poor timing with the Great Recession, it was a significant financial loss.
When Mr. Trump attempted to secure tax benefits from these losses, the IRS claim that he effectively double-dipped, writing off the same losses twice. The initial write-off occurred in Mr. Trump’s 2008 tax return when he declared the investment in the condo-hotel tower as “worthless,” leading to reported losses of up to $651 million for that year. In 2010, Mr. Trump and his tax advisers sought additional benefits from the Chicago project, which led to an extended investigation by the IRS.
Mr. Trump’s tax records have been a subject of intense speculation since the 2016 presidential campaign when he broke with precedent and did not release his returns, citing an ongoing audit. The first partial reveal of the audit’s contents came in 2020 when it was reported that the IRS was disputing a $72.9 million tax refund claimed by Mr. Trump starting in 2010.
Additional reporting on the Chicago tower reveals another component of Mr. Trump’s dispute with the IRS. The details of the investigation were compiled from a variety of public documents, including filings from a 2022 lawsuit brought by the New York attorney general, a reference to the audit in a 2022 congressional report, and a 2019 IRS memo discussing the legitimacy of the accounting maneuver.
The progression of the audit since December 2022 is unclear. Audits can span multiple years and taxpayers have the right to appeal the IRS’s findings. The case would only become public if Mr. Trump decided to challenge a ruling in court. In response to inquiries, Eric Trump, executive vice president of the Trump Organization, stated: “This matter was settled years ago, only to be brought back to life once my father ran for office. We are confident in our position, which is supported by opinion letters from various tax experts, including the former general counsel of the IRS.”
The resolution of Mr. Trump’s tax dispute could set a precedent for other wealthy individuals seeking tax benefits from partnership laws. These laws are particularly complex and continually challenged by attorneys pushing limits for their clients. The IRS has inadvertently invited these aggressive positions by rarely auditing partnership tax returns.
For Mr. Trump, the audit represents another potential financial challenge. In recent months, he has been ordered to pay $83.3 million in a defamation case and another $454 million in a civil fraud case brought by the New York attorney general. Mr. Trump has appealed both judgments and is also in the midst of a criminal trial in Manhattan.
Reporting by The Times over the past years suggests that Mr. Trump has frequently used aggressive and occasionally legally questionable accounting tactics to avoid paying taxes throughout his business career. To the tax experts consulted for this article, Mr. Trump’s accounting maneuvers in Chicago seemed dubious and unlikely to hold up to scrutiny.
From ‘$1.2 Billion’ to ‘Worthless’
In 2001, Mr. Trump agreed to buy land and a building that was the former home of the Chicago Sun-Times newspaper. He unveiled plans for a tower with 486 residences and 339 “hotel condominiums” in 2003. He predicted that construction would finish in 2007 and cost $650 million. Mr. Trump included the project in the first season of “The Apprentice” in 2004, predicting that upon its completion in 2007, the Trump International Hotel and Tower, Chicago, could be worth $1.2 billion.
He borrowed up to $770 million for the project — $640 million from Deutsche Bank and $130 million from Fortress Investment Group. He personally guaranteed $40 million of the Deutsche loan. Both Deutsche and Fortress then sold parts of the loans to other institutions to spread the risk and potential gain. However, the project faced financial difficulties. Mr. Trump had only sold 133 of the 825 units when his loans were due in May 2008. He asked his lenders for a six-month extension, which they granted. But they refused a second extension later that year.
Mr. Trump defaulted on his loans and sued his lenders, blaming the financial crisis and the banks for “creating the current financial crisis.” He demanded $3 billion in damages. That year, he concluded that his investment in the tower was worthless, at least per partnership tax law definitions. On his 2008 tax return, he declared business losses of $697 million. The Times and ProPublica estimate that the Chicago worthlessness deduction could have been as high as $651 million.
A Second Attempt at the Same Apple
In 2010, Mr. Trump merged the entity that owned the Chicago tower into another partnership, DJT Holdings L.L.C. He added other businesses, including several golf courses, into DJT Holdings in later years. Although these changes served no apparent business purpose, Mr. Trump’s tax advisers used the merging of the Chicago tower’s finances with other businesses as grounds to declare even more tax-reducing losses from his Chicago investment.
The financial challenges in Chicago persisted. More than 100 of the hotel condominiums never sold and about 70,000 square feet of retail space remained vacant due to poor design. From 2011 through 2020, Mr. Trump reported $168 million in additional losses from the project. The additional write-offs helped Mr. Trump avoid tax liability for his entertainment earnings, as well as his unpaid debt from the tower.
The IRS issued a memo in 2019, stating that Mr. Trump’s 2010 merger violated a law meant to prevent double dipping on tax-reducing losses. The IRS memo noted that Mr. Trump’s lawyers disagreed with the agency’s conclusions. If the IRS prevails, Mr. Trump’s tax returns could change significantly. The revisions sought by the IRS could result in a tax bill exceeding $100 million.
Experts opined that the IRS’s difficulty in keeping up with Mr. Trump’s maneuvers demonstrated that this area of tax law is too easy to exploit. Some suggest that “Congress needs to radically change the rules for the worthlessness deduction.”
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This article may have been created with the assistance of AI.