Donald Trump
Donald Trump ()

Re: “Trump’s Tax Returns: Inferences and Evidence,” by Steven J. Harper

First, let me start by saying that I am an adamant admirer of Steven J. Harper. I read his blog, “The Belly of the Beast,” almost daily, I own his excellent book, “The Lawyer Bubble,” and, most importantly, I strongly believe that he has very insightful points about the legal profession and how it must change to adapt to present economic conditions.

However, Harper is not a tax lawyer; he does not represent tax clients under audit by the IRS; and he does not represent tax clients in tax litigation matters against chief counsel or the U.S. Department of Justice (Tax Division).

I submit that Donald Trump has extremely legitimate reasons for not releasing copies of his federal or state income tax returns that are under audit, or those for which the statute of limitations has not already prescribed. In the later instance, the statute of limitations may be over six years from the date of filing.

First, it is indisputable that if he were to release copies of tax returns under audit, many tax lawyers, tax accountants and forensic accountants would spend hundreds, if not thousands, of hours pouring over every deduction and credit item claimed on those returns. The IRS does a good job of issue spotting and audit identification, but nothing like the results from outside intensive scrutiny by these tax persons.

Secondly, Trump is a real estate professional, which entitles him to claim all of the IRC tax benefits accorded to real estate dealers. These benefits include: depreciation, accelerated depreciation, immediate expensing of otherwise capitalizable and amortizable items, ordinary loss treatment on the sale or disposition of loss properties, and other benefits codified in the IRC. Congress decided to accord these tax incentives, benefits and credits to real estate dealers. Trump is merely utilizing these congressional-approved tax incentives, benefits and credits to his business advantage. There are hundreds of thousands of real estate dealers, real estate investment trusts (REITs), and real estate professionals that also use these recognized tax benefits.

Trump also utilizes the net operating loss (NOL) carryover rules, also codified in the IRC, which allow a 15-year carry forward of losses to future years. So do hundreds of thousands of real estate dealers, REITs and real estate professionals. These NOL carry forwards may subject the tax year from which the NOL is carried to intense IRS audit and scrutiny, with the result that the tax year(s) that otherwise would be closed and barred by the statute of limitations are reopened by virtue of the NOL. For this reason alone, Harper is incorrect in writing that tax years prior to 2008, which Morgan, Lewis & Bockius has confirmed are closed, are actually not closed at all since NOL carry forwards presumably from 1995 would still be available to have been carried to tax years 2008, 2009 and 2010. Furthermore, if NOLs resulted in the interim years of 1996 to 2010, then those NOLs also may be carried forward resulting in additional open years.

As a practicing tax lawyer with prior chief counsel IRS National Office experience and more than 35 years of tax adversary experience, I would advise any real estate dealer with the same circumstances against releasing his or her tax returns. And, believe me, there are hundreds of thousands of individuals in the same situation, except they are not running for the office of president of the United States.

Harper also criticizes Trump for not paying any taxes. He is wrong in placing any argument in his assertion that Trump “has made an admission” against his interest for at least three important reasons. First, as previously mentioned, since the enactment of the 1939 IRC, Congress consistently has accorded favorable tax benefits, deductions and credits to the real estate industry. Like hundreds of thousands of other real estate professionals, Trump uses the tax laws that are valid, legitimate laws in his trade or business. When did it become morally or ethically irresponsible to legitimately minimize or reduce the amount of taxes paid to the federal and state governments?

Let me remind Harper and the press: While taxes are the price we pay for a legalized society, no taxpayer is legally required to maximize his or her tax liability. There is an extremely important tax quote in Gregory v. Helvering, decided by Judge Learned Hand in 1934, which succinctly summarizes the tax law: “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose the pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the courts have said that there is nothing sinister in so arranging affairs to keep taxes as low as possible. Everyone does is, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.” (See 69 F.2d 809, 810 (2d Cir. 1934), aff’d, 293 U.S. 465 (1935).)

Second, this fundamental principle underscores the self-reporting federal system of taxation. Sure, the IRS often disagrees with a taxpayer’s treatment of an item on a tax return, but taxpayers have the legal right, the moral right and the ethical right to assert reasonable positions on their tax returns. If they assert unreasonable positions, the IRS is armed with notorious penalties to counterattack these positions.

Thirdly, Trump is not “fearing and avoiding transparency,” as Harper asserts in his column, by refusing to disclose his tax returns. Instead, Trump is exercising sound and logical business judgment, upholding his legal fiduciary duties, and protecting his businesses by refusing to disclose. Aside from the problems of making his private business transactions open to competitors’ knowledge and scrutiny, which are significant, Trump risks disclosing his future business transactions.

Moreover, Trump and his businesses have paid considerable taxes to federal and state governments, including federal employment taxes, FICA, FUTA, real estate taxes, sales and use taxes, occupational taxes, state employment taxes, license taxes and numerous other taxes.

Finally, one of the crucial factors that makes Trump so much more appealing to me as a voter than Hillary Clinton is that Trump is a successful businessman who can lead our country back to encouraging business investments, hiring U.S. persons, and restoring America’s place in the world. So, when the press and eligible voters continue to hear and read that Trump is doing something wrong by refusing to release his tax returns, they need to understand the practical and legal tax effects of such disclosures.