Calvin H. Johnson (Texas), Were Trump’s Fake Losses Legal as Tax Deductions?:
Trump claimed almost a billion of tax losses on his 1995 tax return. Trump did not lose anything like that in economic substance because he never put that much money into his transactions. If he never put it, he did not lose it. Trump must have treated part of the $3.4 bank debt as a cost and tax basis, while inconsistently, not correcting his cost when it turned out not be paid. Sheppard and Lipton have proposed an S corporation or Gitlitz theory, which if applicable would allow the fake loss as a tax deduction, but real estate developers did not use S corporations in the early and middle 1990’s because S corporations trapped all losses inside the corporation where they were wasted. Trump might have reduced basis in real property, rather than taking an immediate income or NOL reduction. In any event, the losses do not “impinge on the world” and courts take away fake tax losses when they see them.
“Legal” means that a court would uphold the tax loss when fully aware of the facts and with capable briefing by adversaries. The standards for reporting losses allow the taxpayer to report that this loss might be available, but it probably is not. “Legal” does not include claims that were not caught by a smart agent, which were in fact fraudulent.
The legality of Trump’s claimed losses has some bearing on the current election. Even beyond the election, we need to understand his claim to ensure that such an awful result never happens again.