By Kenneth H. Bridges, CPA, PFS November 2016
While no law requires Presidential candidates to publicly release their tax returns, it has been customary for the past 40 years that all major candidates do so for the sake of transparency. Hillary Clinton, not one generally thought of as transparent, has released more than 30 years of returns. Donald Trump, on the other hand, refused to release his tax returns, supposedly because they were under IRS examination. However, no such prohibition exists. So what was Trump trying to hide, and what might we have learned or not learned from his returns?
Many have speculated that Trump is not as wealthy and successful as he portrays. However, there is no net worth line on a personal income tax return, and no balance sheet. Further, most of Trump’s business activities are undoubtedly reported on various business entity returns, such that his personal return would likely reflect only the net Schedule K-1 items. The presence of significant interest and dividend income and realized capital gains is typically indicative of significant wealth, but the lack of such is far from conclusive.
Some have speculated that Trump may not have paid any income tax; and he did not deny this in the debates, saying instead that just makes him smart, and that if he had paid tax it would have just been squandered. The reality is that many wealthy investors and successful real estate developers pay very little income tax. The current structure of our Internal Revenue Code permits (and some might say encourages) this. The NY Times reported that Trump may have avoided paying any income tax for up to 18 years as a result of a $916 million net operating loss reported in 1995 (the rule at that time being that losses could be carried back 3 years and forward 15). The question many tax professionals have is how did he have sufficient “basis” and “at-risk” amounts to deduct the losses and avoid recapturing them upon a sale or foreclosure of the underlying property or under the cancellation of debt rules.
Some have speculated that Trump would not release his returns because he did not want the public to see that he is not philanthropic or did not want the public to see the types of organizations he has supported. As for the latter, in the case of non-cash donations you are generally required to disclose the donee organization, but this is not required for cash donations.
Some have speculated that Trump would not release his returns because they would reveal close ties to Russia. It is conceivable that the foreign tax credit form might provide this detail (although my guess is that it just says “various” for countries) or that Trump’s returns might include a Form 5471 disclosing ownership of a Russian subsidiary (although my guess is that any such filing was made by another entity controlled by Trump, and that you would not find this detail with his personal return).
Finally, some have speculated that Trump might have taken aggressive positions or even committed tax evasion. If Trump has committed tax evasion, that would not likely be evident on the face of the returns, and the general public lacks the IRS’ power to require the production of supporting records. However, if he did commit tax evasion, subjecting his returns to review by hundreds of skilled tax professionals and possibly persons in possession of information not known by the IRS could be a very real risk.
Personally, I had thought that late in the election when in need of a boost in media attention (which never happened) Trump might release a heavily redacted version of his personal return for a single year. Realistically, in order to fully understand Trump’s tax and financial situation, one would probably need full access to his personal and entity tax returns for many years, along with an audited financial statement.
We may never know Donald Trump’s reasons for not releasing his tax returns, but what is clear now is that his gamble that he could get elected President without doing so paid off.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.