Tax Complications of a $1 Billion Dollar Net Operating Loss

Recently, The New York Times shared information that presidential candidate, Donald Trump, declared a loss of $916 million on his 1995 income tax returns. In response, there has been much speculation that Donald Trump may have violated the tax laws of the United States. This may be why he is under audit. This also may be why he refuses to release his income tax returns.

As I explained in The Boston Globe today:[1]

“It’s very possible that the audit that is happening in 2016 may be dealing with some of these issues that are going back 20 years…It’s a complicated, drawn out process. There’s a lot involved, and when you have bankruptcies, some before the loss and some after the loss, it adds another layer of complication.”

Bankruptcies, and the accompanying discharge of indebtedness, may impact the ability take net operating loss (NOL) deductions. In 1995, Mr. Trump reported NOL of nearly $1 billion. But he may not have been allowed, under law, to use the entire NOL to reduce his income and income taxes in subsequent years. Only debt forgiveness arising from a bankruptcy discharge occurring after 1995 can reduce NOL occurring in 1995. Rather, Mr. Trump would have been required to reduce his massive NOL by the debt forgiveness in his bankruptcies.  See IRC Section 108(b)(1) and (2). It is very possible that to the extent debt forgiveness in these bankruptcies reached Mr. Trump, it wiped out most or even the entire NOL.

It is also possible that Mr. Trump’s tax return preparers mistakenly failed to reduce his NOL by the debt forgiveness. If this is true, it is quite possible that Mr. Trump owes hundreds of millions to the United States Treasury! This may be why he won’t release his tax returns.

It is also quite possible that IRS discovered the possibly overstated NOL. Hence, the audit.

At this point, it is my opinion that Donald Trump has no alternative but to release his tax returns. Only he can demonstrate that the NOL, if applied, was applied correctly and that he does not owe perhaps hundreds of millions to the United States Treasury.

 

[1] Viser, Matt. “Trump Fires Back After Tax Revelations.” The Boston Globe, October 3, 2016, http://www.bostonglobe.com/news/politics/2016/10/02/trump-fires-back-after-tax-revelations//P7Rlxi16iMWaKWq8XyqFsI/story.html.

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