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2019-05-09 10:44 by Karl Denninger
in Corruption , 198 references Ignore this thread
The Breathless NYT And Trump
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The idiotic NY Times printed a "scoop" that was in fact not a scoop, and likely suborned or even committed a felony in doing so by accessing or using private tax information on Trump.

But the so-called "scoop" -- that Trump lost over a billion dollars in what are called "NOL" (Net Operating Losses) over the space of roughly a decade, and used those "losses" to avoid paying taxes for a long time afterward, was first and foremost not a scoop in that it has been repeatedly reported over the last decades and in fact made the cover of TIME at one point, never mind being referenced when Trump was appearing on The Apprentice.

Further, there was no law-breaking involved here.  Gaming the tax code for Real Estate developers is not only common it's nearly universal.  Specifically, the NOL and "at risk" rules have been revised to try to stop this sort of abusive practice, but exactly how effective those revisions have been put in place is subject to plenty of debate.

Non-recourse financing -- that is, where either no recourse is formally in the financing documents (e.g. the bank can repo the property but not sue you for deficiency) or where there is no effective recourse because the potential deficiency (or actual deficiency after a default) exceeds your net worth, and therefore a lawsuit is worthless to recover the loss -- can lead to very large losses being available to you that are direct offsets from income for tax purposes.

The NOL rules in many cases forbid you from taking all of that directly against income in the current year but any amount in excess of that is carried forward until consumed, exactly as is the case for someone who has a $100,000 investment loss in the stock market.  You can only take $3,000 a year against ordinary income so if you don't have $100,000 in taxable investment gain the next year you consume $3,000 of that, but the remainder is available on a carry-forward basis until you use it up.

Real Estate is a specific area of activity where this sort of NOL gaming is particularly useful and profitable.  The intent is that if you have an actual loss of your own money then you should be able to use that in future years to offset gains, since you don't have a negative tax liability (that is, the IRS doesn't pay you) when you have a loss.  The "at risk" rules are supposed to prevent you from having someone else's loss become a tax write off for you, but when it comes to commercial real estate developers they were long a joke in that they were trivially and legally gamed, effectively allowing you to take a loss and then use it to reduce to zero your taxes on a forward basis for a long time even though actual cash was not lost.

This is what Trump did and it's why he didn't pay taxes for a very long time.  But Trump didn't write the tax code; Congress did.  Trump didn't sign the tax code either; the President at the time did.  Trump was not a politician during any part of the time in question.

There is nothing wrong with a business using every legal means to avoid (not evade) paying taxes, including structuring business and financing activities so as to decrease the amount of tax due.  Every business of material size does this -- even most small businesses.  MCSNet did it; we had an enrolled agent on retainer who worked with me on this stuff since I didn't know the inside-out parts of the tax code at the time but he sure did as that was his job for a couple of decades, and he was admitted to practice before the IRS and defend those decisions should there be an audit  (there wasn't.)  Larger businesses have armies of CPAs and enrolled agents who have this as their sole task in life.

If you want to be pissed off at someone for gaming the code in the present tense start with Amazon and Jeff Beelzebezos; the company has paid zero federal taxes for a while now.  Did Trump do that?  No -- Congress did, just as they did with Trump's NOL schemes -- all of them legal -- in previous years.

If you want to grab a rope and scream for people to twist on the end of same start with the 535 jackwads in Congress who have explicitly designed the tax code on purpose with structures in it exactly like this that are both insanely complex and make gaming it both worthwhile and easy for certain classes of business while everyone else, including you personally, get rammed up the ass and pay all of the marginal rate due on your income.

For what it's worth those rules have been tightened up to prevent some of the most-egregious former dodges, including some of the ways Trump was formerly able to amass those huge NOLs -- but not all of them.  Rather than get rid of the BS entirely Congress has added more complexity.

It would be trivially easy, for example, to define "at risk" to include only that which is paid in cash into a transaction; that is, irrespective of alleged or putative recourse no financed amount, no matter how financed (bonds, stock sales, loans from a bank whether individual or syndicated, etc) would be considered "at risk" ever.  That would instantly stop this crap in that only the amount of retained earnings or paid-in capital put into a project or business activity could result in an offset and, if it exceeded revenue, a NOL.  That would basically stop all of this in the real estate development industry -- an abuse that should have never been allowed in the first place.

Then again Congress is best described as a bribe factory, especially when it comes to Real Estate and various practices around it -- second only to the medical "industry."  The difference between Real Estate tax avoidance and the medical scams is that the former is legal while the latter crap is definitely not according to both 15 USC Chapter 1 and the two cases that went to the Supreme Court, including Royal Drug, which I referenced yesterday.

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Max_planck
Posts: 52
Incept: 2017-01-09

Southern Arizona
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So shouldn't the loss incurred by the other party show up as income for the Real Estate developer (forgiven debt, like in housing crash short sales)?
Tickerguy
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A True American Patriot!
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Oh c'mon, you don't think the tax code would actually be written so that people couldn't **** with it, right?

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Winding it down.
Wa9jml
Posts: 388
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DeKalb, Illinois
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Our current governor in Illinois took all of the toilets out of the mansion next to where he lives, so that he could get the property taxes on the second mansion reduced to the tune of over $300,000. The Cemetery vote, and all of the illegal immigrants voting swept him into the governor's office by a landslide. This tax avoidance scam came out during the campaign, and JB the Hutt made a big deal about paying the taxes that he formerly avoided.

There was not a word in the press or media about how he had cheated the public schools, or any of the local taxing districts. And the cretin was swept into office anyway.

When I can finally move and sell this place, I am going to fix it up only minimally before I unload it. And I will give the next owner a real bargain so that their assessment for property taxes is far less than what it is assessed at now. I will joyously take the same tax breaks that Trump took!

Ckaminski
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Quote:
you don't think the tax code would actually be written so that people couldn't **** with it, right?


It's why we have 20 different options for retirement accounts, instead of two, tax deferred and tax free with different levels of income and contribution limits and requirements. SEP-IRA is different from a personal 401K versus a corp 401K versus Roth IRA. Ugh.

Just give me the ability to put money in tax-deferred and let me manage my own personal 401K.

But nope, the finance guys want those delicious 401K fees.
Ckaminski
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And why is the carryover loss limit still $3000, hasn't it been that for like 30+ years now?
Spaceace
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@WA9JML - His family's business (Hyatt) also bought Braniff Airlines for a song in 1983 to get the tax loss carry forwards. Where is the Times or Trib for that matter on that?
Tickerguy
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Indeed

That's one of the few ways, incidentally, that NOL is usable by a non-real-estate firm -- buy someone with a big stack of it who is in cash-flow trouble and can't use them. They may be technically solvent -- barely -- but unless they turn a profit in the future the NOLs are worthless.

So you buy said company for basically nothing (it's cash flow value is zero) and get the entirety of the NOLs; whether you shut that now-division down doesn't matter.

Note that Congress DID close some of that down (Section 382) but not all. The most-serious abuses, however, have been curtailed.

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Emupaul
Posts: 38
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Typo? "For what it's worth tose rules " :)
Tickerguy
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Fixed - thanks.

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Mannfm11
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DFW, Tx
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Losses aren't funny. I thought for most of the time between the ;ate 1980's and 2000 that Trump was broke. I figured they carried him because he had value with the property. Commercial real estate losses in the US were massive during that period. Literally all of Texas was wiped out, not because of oil, but because of massive overbuilding. Indian reservation gambling was not on the horizon in 1980 and Vegas was the only sizable casino mecca in the US. I figured they left Trump in charge of bad properties, because he was more likely to make them pay than the insurance companies and bankers that financed them.

What people don't understand about taxes, income and losses is 95% of the time, if not more, it isn't whether something is a deduction or income, but when. There is a story that oil is subsidized. The only subsidy is depletion for small producers. Drilling costs are expensed, because you have a zero until you get the PV amount of oil out of the hole. This benefit is used more to sell bull**** deals than to make money out of oil. If you had to capitalize a hole in the ground, it probably wouldn't get done. It runs out.

Depreciation on real estate is another game. Buildings, contrary to popular opinion, do depreciate. The value of the land goes up or down. Put a Taj Mahal on a piece of crap location and you have a piece of crap. Ask people who built in Detroit 40 years ago. The same building in Dallas, Houston, Atlanta, DC, NYC and many other places is worth a fortune, but maybe a fire hazard in Detroit.

Depreciation in real estate has 2 benefits. One, it is a tax deferral. Secondly, when sold, the basis is reduced, but it is a capital gain rather than ordinary income. The tax laws are complex, in that forgiveness of debt can be considered income and I suspect that if one is written off, there is a requirement to recapture.

Karl hit on something. Healthcare and real estate. Why are they treated so well? Because they are nationwide. I bet there isn't a Congressional district in the US that doesn't have a hospital. Think of the bull**** that goes on in the hospital business, with its high paid and overstaffed bureaucracy? I bet you might find out how much money goes into political campaigns out of the pockets of these people, not to mention the public unions. The National Association of Realtors is nationwide. Construction is nationwide.

I read something where the United States was nothing more than a land speculation scheme. You make money out of land by increasing its use and moving population into an area. In any case, the top families got the best land. One of the main causes of the Revolution was the fact that the elite got their hands on land grants the crown wouldn't let them move into. Not to mention you couldn't cross the Ohio, nor could they get through the Cumberland pass. I think the rule was that everything beyond the drainage of the rivers into the east coast was off limits. The beat continues to go on.

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The only function of economic forecasting is to make astrology look respectable.---John Kenneth Galbraith
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