Trump's huge tax break: Was it legal?

Trump says he used $916M loss to avoid federal taxes
Trump says he used $916M loss to avoid federal taxes

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Trump says he used $916M loss to avoid federal taxes 01:38

Story highlights

  • Without seeing full tax returns from later years, it's not possible to know if the IRS found Trump's loss claims legitimate
  • In second debate, Trump failed to clear up the mystery surrounding his taxes

Edward J. McCaffery is Robert C. Packard trustee chair in law and a professor of law, economics and political science at the University of Southern California. He is the author of "Fair Not Flat: How to Make the Tax System Better and Simpler." The opinions expressed in this commentary are his.

(CNN)In the mad rush to analyze Donald Trump's stunning billion-dollar tax loss, virtually all commentators -- and the Trump campaign itself -- asserted that all was perfectly legal.

It ain't necessarily so.
    Edward J. McCaffery
    All we know, from the New York Times' disclosures, is that Trump's state tax returns from 1995 reflected a net operating loss on his federal tax return of $916 million. This is a big deal, bigly beneficial to Trump. We do not know, however, if Trump kept the benefits of his large tax loss. The number could have been reduced or even eliminated on a subsequent audit. We wouldn't know about that because we don't have Trump's tax returns, nor do we know the results of any audits.
    Trump supporters defend GOP nominee's taxes
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    Trump supporters defend GOP nominee's taxes 02:22
    Trump's own tax adviser at the time, Jack Mitnick, has said that he thought Trump's tax positions were "wrong from a philosophical standpoint," though he also found them legal. "It's what Congress enacted. We would be derelict in doing our duty if we didn't use it."
    That doesn't sound like any accountant I know describing standard real estate tax planning. Mitnick also stopped working for Trump in 1996.
    Trump hardly clarified his tax return situation at the second debate Sunday. He claimed he's paid "hundreds of millions" in taxes but did not deny paying no federal income taxes for decades. He referred only to "depreciation" by way of explaining his not paying taxes, but depreciation is a standard real estate tax break -- not something an accountant would have philosophical questions with.
    Trump again repeated that he would release his more current returns once his "routine audit" is over. But he could easily disclose his tax returns from the 1990s showing how his billion-dollar tax loss came from depreciation, if true. Without those returns, which are not being audited, we simply do not know how Trump got his huge tax break, or if the IRS allowed him to keep it.
    Trump on his taxes: Clinton should have changed law
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    Trump on his taxes: Clinton should have changed law 04:41
    Billionaires do try aggressive planning techniques and they don't always work. Trump's friend, lender, and economic adviser Andrew Beal tried to artificially create $1.1 billion in ordinary tax losses, just like Trump's. Beal's tax returns would have at one time showed billions of dollars in losses that were ultimately disallowed, though Beal was never charged with any crime.
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    The same could be true of Trump's billion-dollar loss. We don't know that there was anything improper there. But we also don't know that there wasn't. We need to see the returns, pre- and post-audit, to sort this all out.
    Speaking of the audits, by the way, they no longer sound so "routine," or possibly motivated by Trump's being a "strong Christian," as The Donald himself speculated. Fact checkers?