Here’s Theory #3 On How Donald Trump Got $916 Million in Tax-Free Income

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The theories are piling up! Today, Josh Barro summarizes a theory from Lee Sheppard in Tax Notes about how Donald Trump managed to show a $916 million operating loss on his 1995 tax return. By my count, this is the third plausible theory in circulation. I shall now summarize Barro’s summary of Sheppard.

Sheppard reckons that Trump’s casino operations were organized as an S corporation, in which profits and losses flow through to the owner. So when the S corporation sustained huge losses after the casinos collapsed, those losses passed through to Trump. Subsequently, the corporation’s debts were canceled, which should have shown up as offsetting income. However, because the debts were canceled through bankruptcy, they never showed up on the S corporation’s balance sheet and never passed through to Trump:

“But wait!” I hope you are saying. “Wouldn’t that put Trump afoul of the rule that his tax losses from the S Corporation can’t exceed what he invested in it in the first place plus the prior profits?”

Yes, it would — except that, before the 2002 loophole fix, the debt forgiveness enjoyed by the S Corporation would have passed through to Trump for the purposes of calculating the amount of profit the S Corporation had earned on his behalf, even though the same debt forgiveness did not pass through as actual taxable profit to him.

Sheppard refers to this as a “double dip” — the tax loophole would have allowed Trump to claim losses on his individual income tax return that were ultimately borne by creditors, not by him.

Did you notice the reference to a “2002 loophole” there? This is what makes Sheppard’s theory so precious. “Double dipping” is obviously stupid, and it was never the intention of Congress. However, when the IRS tried to kill it off, the Supreme Court ruled that the letter of the law is the letter of the law. If Congress screwed up, it’s up to Congress to fix it.

So they did. In 2002 double dipping was banned. And guess who voted to ban it?

Yep: Hillary Clinton. So when Donald Trump disingenuously demands to know why Clinton never tried to close the loopholes he used, the answer is: She did. And if there had been any way to make it retroactive, she probably would have voted for that too.

So many theories. But all of them have one thing in common: They demonstrate that although Trump isn’t much of a businessman, he is rich enough to hire good tax attorneys who will hand over huge stacks of forms for him to sign blindly. That’s a helluva qualification for president, isn’t it?

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