Trump swapped partnership equity for canceled debt in tax-law stretch, experts say
Photo of Donald Trump by JStone / Shutterstock.com.
Donald Trump’s tax lawyers at Willkie Farr & Gallagher signaled their doubt about a tax maneuver he used in regards to canceled casino debt when they wrote a tax opinion letter in 1991, according to a published report.
The lawyers warned there was no specific statute, regulation or judicial opinion that permitted Trump’s tax maneuver, and said “substantial uncertainties exist” with respect to its consequences, the New York Times reports.
Tax experts interviewed by the Times also expressed doubts, saying Trump earned tax benefits for losing other people’s money, pushing the envelope of what was permitted at the time.
Trump’s Atlantic City casinos were financed mostly by high-interest junk bonds, and the bondholders were forced to forgive hundreds of millions of dollars in debt after the casinos filed for bankruptcy.
Canceled debt is usually considered taxable income, which would have offset the $916 million loss Trump reported on his 1995 tax returns, the Times says. But Trump did not report the canceled casino debt by using “a new twist” on a tax strategy used by corporations that was known as a “stock-for-debt swap,” the Times says.
The way it worked: When a bank forgave a loan to a company, the company avoided reporting the canceled debt as income by swapping stock for the money it couldn’t repay. But Trump owned his casinos through partnerships, rather than companies. So he decided to swap partnership debt for a partnership interest, eliminating the need to report the canceled debt by bondholders.
“Thanks to this one maneuver, which was later outlawed by Congress,” The Times reported, Trump “potentially escaped paying tens of millions of dollars in federal personal income taxes.” Hillary Clinton was among those who voted to ban such swaps by partnerships.
