In the latest of many bombshells in this presidential election campaign, The New York Times reported Tuesday that in the early 1990s, Donald Trump used a tax loophole so "legally dubious" his lawyers advised him against it.
This is how the scheme apparently worked, according to documents obtained by the Times: As the billionaire businessman's casino empire tanked in 1990, Trump asked his backers to forgive hundreds of millions of dollars in debt. While doing so revived Trump's casinos, it created another problem: Since the IRS views canceled debt to be the same as taxable income, Trump would now have to report hundreds of millions of dollars as though it were taxable income.
However, the Times claims that Trump, who at that point was so cash-strapped he had just several million dollars in a few bank accounts, used a loophole to avoid reporting that chunk of change. The strategy, known as a "stock-for-debt swap," exchanged equity in a partnership for the debt that Trump could not repay. That way, it would look like Trump's debt had been paid in full — and the tax bill for it would vanish.
According to New York tax attorney Peter Faber, these debt-for-equity swaps were typically used to exchange debt for stock in a corporation. However, Trump borrowed through a partnership he controlled, with his interest in the partnership actually worth less than the amount of debt. Faber said:
The partnership raises a red flag for some tax experts, who say it provided Trump with a way to unfairly escape debt. As Alan Cole, an economist with the Center for Federal Tax Policy at the Tax Foundation, a nonpartisan think tank, put it: "It's like in the movie Indiana Jones: Raiders of the Lost Ark, when Indiana Jones exchanges a bag of sand for something that's actually valuable. [Trump and his creditors] have each come up with their way of interpreting events."
As Cole noted:
Others, like David Herzig, a professor of tax law at Valparaiso University, say at the time of Trump's transaction his behavior was aboveboard:
Still, Herzig said that Trump's tax strategies could be a indicator of future behavior in the Oval Office.