The Returns
Last Friday, December 30, 2022, during the final hours of the 117th Session of Congress, the House Ways and Means Committee – through which all tax legislation passes[i] – released redacted versions of six years of Mr. Trump’s annual federal income returns.
I told myself months ago that I would not waste my time reviewing the returns if they were ever made public. However, after several acquaintances peppered me with questions regarding the returns over the long holiday weekend, I relented and quickly skimmed the earliest of the returns, for 2015.
I confess that I was not taken aback, despite the magnitude of the losses claimed.[ii] In fact, only the number of Schedules C, “Profit and Loss from Business (Sole Proprietorship),” surprised me – especially the one that described one of Mr. Trump’s businesses as “acting,” which I concede may have constituted a fraudulent statement.
Perhaps I should have also looked at the later returns, but my immediate reaction was to wonder whether and, if so, why the members of the Committee – or should I say their staff – were, or at least appeared to be, genuinely shocked or surprised by the contents of the 2015 return.
My opinion was reinforced when I glanced through the summary report of the returns prepared by the Joint Committee on Taxation,[iii] which unfortunately gives the impression at times of a “whodunit.”
The report seeks to identify those parts of the returns that the Joint Committee believes warrant further investigation; for example, it raises the possibility that loans to family members may have been disguised gifts, and that personal expenditures may have been improperly deducted as business expenses – basically, the issues raised by the returns of practically every closely held business.[iv]
As an exercise in issue-spotting, the report appears to be thorough. However, why is the Joint Committee – the principal function of which is to assist members of Congress on tax legislation[v] – engaging in this activity and why are the initial steps of an “audit” being conducted in public?
What’s more, and especially in light of the accompanying hoopla, where is the proverbial smoking gun on the basis of which the Committee may have sought absolution for having failed to observe the safeguards afforded to tax return information and the due process of a formal audit? The report does not state that the tax laws were violated.
According to one Washington paper:[vi]
“A preliminary review of the thousands of pages of Donald Trump’s tax returns released by a key congressional committee on Friday confirms that the former president was using business losses in the tens of millions of dollars to reduce his annual tax liability, in some cases all the way down to zero.”
The article did not assert that the losses were unsubstantiated, overstated, or fabricated; nor did it claim that items of income or gain were understated or omitted.
Indeed, how might anyone arrive at any such conclusion based merely upon the redacted versions of the forms released?
More significantly, the above-referenced article continued:
“But that’s raising more urgent questions about the fairness of the U.S. tax code and tax regulations. . . Advocates for tax reform say that a shift in mindset is needed, that a flawed conception of taxation as punitive and economically destructive is what allows for the sort of serial tax avoidance on display in the Trump tax returns.”
“Serial tax avoidance.” The term is not defined in the Code or Regulations. In fact, I have only encountered it once, when working on a matter with U.K. tax advisers, who explained that HMRC’s “serial tax avoidance regime” (or “STAR”) is designed to deter people from using tax avoidance “arrangements” to gain a tax advantage that is not intended by the tax legislation in question.
I have a feeling that the article did not have such “unintended” consequences in mind; rather, the “findings” of the Joint Committee’s report depict someone who sought to maximize as many of the tax benefits that were legally available to him as possible.
In some cases, unfortunately, as most tax practitioners will admit, the taxpayer will realize a benefit under a provision of the Code that is not wholly in line with the underlying or motivating policy of the provision.[vii]
“Power is dangerous. It corrupts the best and attracts the worst.”
– Ragnar Lothbrok
Tax Avoidance, Evasion, or Confusion?
Of course, there’s a big difference between “tax evasion,” for which the taxpayer in question is the bad actor, and “tax avoidance,” for which Congress – as the lawmaker – is generally responsible.
Tax avoidance involves the use of perfectly legal means to reduce one’s tax liability and maximize one’s after-tax income. For example, the Code and the IRS regulations promulgated thereunder allow a qualifying taxpayer (a) to exclude from gross income, or to defer the inclusion in gross income of, certain items of income or gain, and (b) to claim certain deductions, credits, and other adjustments to income that reduce the taxpayer’s taxable income and their tax liability.
However, according to the IRS, “many people pay more federal income tax than necessary because they misunderstand tax laws and fail to keep good records.”[viii]
There’s no denying that many parts of the Code are complex, and some are more rational than others.[ix]
In some cases, such complexity is necessary because the subject of the provision in question is itself difficult to comprehend, as is the legislative goal sought to be attained.
In other cases, a particular provision necessarily becomes complex as taxpayers exploit uncertainties or openings in the provision and Congress reacts to “clarify” or tighten the provision in order to curtail such exploitation and its unintended consequences.
Then there are those provisions of the Code that are the product of lobbying,[x] pure and simple, and – dare I say it – political contributions.[xi]
In contrast, tax evasion is illegal, and involves a taxpayer’s deliberately (a) underreporting income, (b) failing to report income, (c) overstating a deduction, (d) claiming a deduction or credit to which the taxpayer is not entitled, or (e) failing to file a tax return.
“Power is only given to those who are prepared to lower themselves to pick it up.”
– Ragnar Lothbrok
Politicians In Glass Chambers
So, what about the lawmakers who are responsible for the nation’s well-being?
I recall that members of Congress are required to file annual personal financial disclosure forms.[xii] These are available to the public through the Senate Office of Public Records and the Office of the Clerk of the House. Alternatively, Open Secrets – a nonpartisan not-for-profit – tracks and analyzes all this information. It’s worth a look.[xiii]
I also recall that members of Congress and family members are effectively “free” to trade securities on public markets using confidential information obtained by members in the course of “doing their job.”[xiv] A member is also required to disclose securities transactions above a certain threshold amount.[xv]
You may recall that a bill was introduced last autumn to combat the clear conflict of interest inherent in such trading. The “Combatting Financial Conflicts of Interest in Government Act”[xvi] would have banned federal lawmakers (and other officials) – as well as their spouses and dependent children – from owning or trading stocks and certain “digital assets.” The bill’s fate is uncertain following the mid-term elections.[xvii]
These elected officials are the same folks who last year brought “pork” back into the legislative process. In fact, the $1.7 trillion spending bill passed by Congress at the end of 2022 included over 7,200 earmarks totaling $15 billion.[xviii]
These are also the same folks who add certain tax avoidance provisions to the Code and who allow other tax avoidance provisions to remain in the Code.
Most of these provisions are economically beneficial to individuals and/or businesses – it’s only a question of knowing that they exist, which is no small matter. Others, not so much.
Then there are certain taxpayers (including, it seems, Mr. Trump) who engage in what the above-referenced article referred to as “serial tax avoidance” by aggressively, albeit legally, utilizing these avoidance provisions to greatly reduce their tax liability.[xix]
What to Do?
A couple of posts back, in concluding a discussion on the “social contract,” I suggested that it may be time for society to “amend and restate” its contract with wealthy taxpayers (like the former President) to clarify what is expected of them.[xx]
“Among the most fundamental of [society’s] rules is the obligation of every member to contribute toward the cost of providing the above-referenced services and protection – i.e., the obligation to pay taxes.
Unfortunately, there are always some individuals – thankfully, relatively few – who are willing to accept the benefits afforded by a community but who nevertheless choose to exercise their ‘natural’ rights by denying their obligation to contribute toward the maintenance of the community.
In today’s society, these folks choose to hide their wealth. They feel “put upon” by the system of taxation and consequently decide unilaterally how much tax they will pay. In doing so, they breach the social contract – too often without any meaningful repercussions for themselves. There are consequences for others, however, as government responds to ‘tax gaps’ by increasing rates and limiting incentives for all taxpayers rather than taking action against the bad actors – the former is easier to do and perhaps more palatable than the latter.
Significantly, these same folks – including those who abide by the letter of the law – also tend to neglect their moral duty to society by refusing to share their wealth beyond what their tax dollars will provide.”
The same be said of Congress – especially in its present dysfunctional state. According to social contract theory, these elected officials have been charged with the responsibility for protecting members of the public from outside threats (as well as from internal ones), providing them with various civil services to maintain and improve their communities, and ensuring them certain “civil rights,” thereby enabling them to sustain a livelihood and pursue economic opportunities.
To this list of legislative duties, one must add ensuring that everyone respects their obligations under the “contract,” including folks like Mr. Trump who have to be reminded that “for unto whomsoever much is given, of him shall much be required.”[xxi] We also need to remind the members of Congress of their fiduciary duties and responsibilities. These folks have to understand that “to whom men have committed much, of him they will ask the more.”[xxii] When they fail to abide by these strictures but are re-elected notwithstanding, well, in that case, to paraphrase Jefferson, we have the government we deserve.
[i] Ways and Means is the chief tax-writing committee of the House. https://waysandmeans.house.gov/about/jurisdiction-and-rules.
[ii] Maybe it’s a question of experience or cynicism – sadly, the former often breeds the latter.
[iii] On December 20, 2022, the staff of the Joint Committee on Taxation issued a report summarizing the returns. https://thehill.com/policy/finance/3783058-read-house-panels-reports-on-trump-tax-returns/.
[iv] From all of you who regularly examine the returns of closely held businesses, may I please have a collective “yawn”? Thank you.
[v] The Joint Committee Staff is closely involved with every aspect of the tax legislative process, including:
- Assisting Congressional tax-writing committees and Members of Congress with development and analysis of legislative proposals;
- Preparing official revenue estimates of all tax legislation considered by the Congress;
- Drafting legislative histories for tax-related bills; and
- Investigating various aspects of the Federal tax system.
The statutorily prescribed duties of the Joint Committee are:
- To investigate the operation and effects of internal revenue taxes and the administration of such taxes;
- To investigate measures and methods for the simplification of such taxes;
- To make reports to the House Committee on Ways and Means and the Senate Committee on Finance (or to the House and the Senate) on the results of such investigations and studies and to make recommendations; and
- To review any proposed refund or credit of income or estate and gift taxes or certain other taxes in excess of $2,000,000.
In furtherance of these purposes, the Joint Committee is empowered to obtain and inspect tax returns and return information, as specified in IRC Sec. 6103(f); specifically, upon written request from the chairman of the Committee on Ways and Means of the House of Representatives, the chairman of the Committee on Finance of the Senate, or the chairman of the Joint Committee on Taxation, the IRS shall furnish such committee with any return or return information specified in such request, except that any return or return information which can be associated with, or otherwise identify, directly or indirectly, a particular taxpayer shall be furnished to such committee only when sitting in closed executive session unless such taxpayer otherwise consents in writing to such disclosure.
[vi] “Trump tax returns raise alarms about fairness of US tax code,” by Tobias Burns and Sylvan Lane, January 2, 2023, The Hill.
[vii] In those instances, you may argue with a taxpayer until you’re blue in the face. Their bottom-line position: if it’s not illegal, and if it follows from the language of the provision, why worry? I worry; it’s what I do.
[viii] https://apps.irs.gov/app/understandingTaxes/whys/thm01/les03/media/ws_ans_thm01_les03.pdf.
[ix] There’s also no denying that too many taxpayers lose tax benefits for which they otherwise qualify because they are unable to substantiate their entitlement thereto – they keep poor records.
[x] Hats off to “ProPublica”: https://projects.propublica.org/represent/lobbying/topics/TAX?page=1. The list is long and full of terrors.
[xi] They who must not be named. For a great discussion on corporate giving, see https://hbr.org/2022/01/corporate-political-spending-is-bad-business.
[xii] See, for example, https://ethics.house.gov/sites/ethics.house.gov/files/documents/CY%202020%20Instruction%20Guide%20for%20Financial%20Disclosure%20Statements%20and%20PTRs_1.pdf.
[xiii] https://www.opensecrets.org/personal-finances. If you have the time to sift through the data, it is well worth the effort.
[xiv] http://blogs.luc.edu/compliance/?p=4459.
For a great discussion of insider trading in Congress, see https://www.nytimes.com/interactive/2022/09/13/us/politics/congress-stock-trading-investigation.html.
[xv] The 2012 Stop Trading on Congressional Knowledge (STOCK) Act. They love their acronyms in D.C.
[xvi] Good luck coming up with an acronym for this one.
[xvii] https://www.congress.gov/bill/117th-congress/house-bill/8990.
[xviii] https://www.nytimes.com/2022/12/21/us/politics/congress-earmarks-spending-bill.html. Many of the projects are laughable.
[xix] And viewing the rest of us as schmucks for not having done so.
[xx] https://www.taxslaw.com/2022/12/pigs-get-fed-and-pay-their-taxes-but-hogs-that-remains-to-be-seen/.
[xxi] Luke 12:48, KJV.
[xxii] Luke 12:48 KJV.
