Avoided Paying....

How Donald Trump Avoided Paying Taxes

Using Other People’s Money...

By GABRIEL J.X. DANCE and AARON BYRD

The story of how Mr. Trump sidestepped a potentially ruinous tax bill emerged from documents recently discovered by The Times during a search of casino bankruptcy filings.

Mr. Trump structured his companies to allow him to have lucrative personal tax advantages, while limiting his personal liability should business go bad.

For each of his Atlantic City casinos, Mr. Trump formed a partnership between himself and a corporation that he wholly owned and created for this specific purpose.

At the time, many businesses, particularly real estate ventures, were structured similarly, with the goal of protecting owners from losing personal money should their businesses go bust. But Mr. Trump was playing on a vastly different scale than most; his leverage was the stuff of legend.

“There’s nothing like doing things with other people’s money, because it takes the risk,” Mr. Trump said at a campaign rally in September.

With the partnerships in place, Mr. Trump went looking for financing.

To purchase and finish construction on the Trump Taj Mahal, for instance, Mr. Trump’s company sold over a half-billion dollars in bonds – essentially i.o.u.s with interest – to individuals, companies and banks.

Within the first year, Mr. Trump began missing interest payments, a bad sign for investors. The Taj, though, was far from the only Trump business that was hemorrhaging money.

In the late 1980s and early 1990s, several of his casinos and other properties suffered significant losses, the majority of which ultimately ended up on Mr. Trump’s personal taxes.

Mr. Trump managed to turn these business losses to his personal gain — in the form of something called a net operating loss (N.O.L.).

But there was a threat to Mr. Trump’s N.O.L.: the debt forgiven by many of his creditors who were trying to salvage what was left of their investments.

Mr. Trump’s forgiven debt – which included the renegotiated bonds used to finance the Trump Taj Mahal – was viewed by the government as taxable income, and as such could be deducted from Mr. Trump’s personal N.O.L.

Mr. Trump needed a way to protect his advantage. He found a valuable one.

In a tax avoidance maneuver his own lawyers told him was legally dubious, Mr. Trump managed to avoid paying taxes on the forgiven debt by swapping partnership equity for debt. It didn’t matter if the actual market value of the equity was less than the forgiven debt. (Equity in an insolvent partnership could easily be next to worthless). This type of swap was made illegal for partnerships in 2004.

Mr. Trump also was part of a determined and successful lobbying campaign in 1991 to change several tax rules, including one that would allow him use his N.O.L. to offset all personal income, and not just real estate income. This cleared the way for him to avoid paying federal income taxes on ventures including “The Apprentice” (and “The Celebrity Apprentice”), for which Mr. Trump claims he was paid over $200 million.