What Donald Trump’s Tax Returns Won’t Tell Us, But Hillary Clinton’s Do

Voters would like to poke through Donald Trump’s tax returns, but they can’t. After some earlier waffling and mixed signals, Trump’s camp now seems firm that his big tax audit prevents him from releasing his returns. Outside of a Presidential campaign, his audit defense is a pretty good one, whatever the IRS or the public might say. A letter from Trump’s tax lawyers confirmed there was an ongoing tax audit for 2009 and later. Anyone who has ever been through a tax audit might have some sympathy. 

Still, many voters aren’t likely to give him a free pass. As a candidate for President, the conventional answer is that Trump should release them, even though there is no legal requirement. Trump says he has “very big” tax returns. He has also said that his financials “show I’m worth more than $10 billion by any stretch of the imagination.” But maybe they don’t, and tax returns probably wouldn’t show his net worth in any event. We don’t even know Trump’s income, but we do know Bill and Hillary Clinton’s.

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The Clintons’ gross income since Bill left office was:

  • 2001, $16 million
  • 2002, $9 million
  • 2003, $8 million
  • 2004, $20 million
  • 2005, $18 million
  • 2006, $16 million
  • 2007, $21 million
  • 2008, $5 million
  • 2009, $10 million
  • 2010, $13 million
  • 2011, $15 million
  • 2012, $20 million
  • 2013, $27 million
  • 2014, $28 million
  • 2015, $11 million

We also know that, despite this big income, Bill and Hillary Clinton still have a house payment just like most Americans. The Clintons deducted $41,000 of mortgage interest each of the last few years. They make too much money to get benefits from the deductions, but still. As Lee Sheppard recently wrote in Tax Notes, “How is it possible for the Clintons to still have a mortgage when the pair has earned $237 million since Bill left office, mostly in speaking fees?” That’s a good question.

Tax returns are about income for one year. They do not show an individual’s net worth. They show income, and in some years even Donald Trump might have a loss. Yes, he could still rake in millions, but have a tax loss. In fact, having a tax loss can be attractive. You let non-cash losses (for example, from partnerships) offset your cash income items. You don’t want to end up with losses you can’t deduct.

Case in point, the Clintons deduct $3,000 a year of capital losses going back to 2008. That was the year Bill disposed of his Yucaipa partnerships with controversial billionaire Ron Burkle, taking a $726,000 capital loss. They chip away at the loss $3,000 per year. IN all, the Clintons pay a lot of taxes. In fact, between taxes to the IRS and New York State, they have averaged an effective tax rate of about 41% over 15 years. Those are probably higher effective tax rates than Trump pays.

After all, Trump echoes Warren Buffett and many other tax-savvy investors in saying that he pays as little tax as he can. And he rails about how the government wastes money. Most of Mr. Trump’s income is probably not ordinary income taxed at 39.6%. Most may be capital gain taxed at 20% (plus maybe the 3.8% Obamacare tax). If that is so, the lower rates could grate on some of his supporters.

The Clintons’ tax returns don’t show big write-offs. In fact, as Lee Sheppard commented, “The Clintons may be the first couple in history to try to justify money of questionable provenance by paying taxes on it.” In contrast, it seems reasonable to think that Trump’s tax returns might show big write-offs. Large income (say from rents, royalties, commissions), may be sheltered with big depreciation deductions. Depreciation is that assumed erosion in value that occurs every year. As a building is appreciating in real dollar value, Mr. Trump can write-off a piece of its value every year as if it were going down in value.

Since 2007, the Clintons have given $16 million to charity, mostly to the Clinton Foundation. We don’t know about Trump. It is possible that Trump’s tax returns will reveal that he is not generous generally, or not generous specifically with respect to causes–like Veterans–that Mr. Trump suggests he supports. If he only releases the first two pages of his tax returns, we still wouldn’t know. Charitable contribution deductions go on Schedule A.

The big source of Clinton income is those controversial speeches. There are staggering numbers of them by both Clintons, and for staggering amounts. And some of them are still being scrutinized with respect to putative pay-to-play allegations, possible State Department connections, and more. No one else but the Clintons could have survived it. Of course, it is possible that Trump’s tax returns contain some dirt that might raise eyebrows as much as the Clinton speech machine. But, it is looking as if we’ll never know.

For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.

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Trump Vs. Clinton’s $1 Trillion Tax Hikes

Donald Trump has warned family farmers that a Clinton presidency would mean tax hikes and regulations, but he still faces an uphill battle. There is plenty to complain about in his opponent’s tax plans, but Trump has falsely claimed that she wants to raise taxes on African-American businesses by 50 percent. Some voters may not even want to hear him talk about taxes. He faces criticism from many in his own party that he should be transparent about his own taxes.

Still, his core supporters may not care, and there is plenty for him to attack in Hillary Clinton’s proposed tax increases. The website HighTaxHillary.com from Americans for Tax Reform paints a picture that probably does not frighten Ms. Clinton’s supporters. Plainly, she has made some sweeping tax proposals. If she is elected, she can be expected to push for them to become a reality. Ms. Clinton has said that she wants to raise taxes at the top, and not on middle income Americans making less than $250,000 a year.

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Yet, she has said she would be fine with a payroll tax hike on all Americans. She also has endorsed a steep soda tax, and even endorsed a 25% national gun tax. Ms. Clinton’s campaign manager John Podesta has also said that she would be open to a carbon tax. Once again, that could impact many people, directly or indirectly.

They suggest that these proposals would cost at least $1 trillion over ten years. A key campaign issue is just who gets stuck with paying these increased taxes. A more nuanced issue, regardless of who may nominally pay the taxes, is who actually bears the burden of all those taxes. That is not always easy to pinpoint.

Even if these ideas do not come to pass, Ms. Clinton has proposed plenty of other tax hikes. Mostly, they would hit the upper end of the income chart. But not everyone who is going to be paying these is likely to think they are fat cats than can afford it. She has proposed a $350 billion income tax hike in the form of a 28 percent cap on itemized deductions. You can think of this as a kind of new version of the alternative minimum tax (AMT). You might think you can deduct something because the law allows it, but not if you make too much money. How much this one will really cost you remains to be seen.

Ms. Clinton’s published plan calls for “between $400 and $500 billion” by “restoring basic fairness to our tax code.” These proposals include a “fair share surcharge,” the taxing of carried interest capital gains as ordinary income, and a hike in the Death Tax. She proposes higher capital gains taxes too. Forget short term and long term. She wants six different rates that climb high. Ms. Clinton’s proposed new tax on stock trading remains controversial. Although its target is Wall Street, its effect could impact millions of Americans who buy and sell, even in their 401(k)s and IRAs. It is not yet clear what this one will cost.

Ms. Clinton has also called for a tax hike of at least $275 billion through a number of business tax reforms described in a campaign  document. In large part, businesses have to wait for details on this. She has also proposed a new “exit tax” on income earned overseas. Her goal is to stop inversions of U.S. companies. Yet many observers say that reducing U.S. corporate tax rates would do considerably more to remove the incentives that make U.S. companies want to invert. In any case, this tax is supposed to raise $80 billion.

For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.

 

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How ‘Access To Hillary’ Could Impact Clinton Foundation Donations

New emails—new to us at least—suggest that the Clinton Foundation was on occasion a go-to place for bookings with the Secretary of State. It is too soon to say if the red carpet to the Foundation was also a cushy path to the State Department. The facts are still coming out, and there are differing views on just how much of this occurred. But the appearance does seem striking, and the snippets we’ve seen are hardly flattering.

In the context of an election to the highest office in the country, this raises vastly bigger and more important issues than tax issues. Still, taxes matter too, and the tax details of this are disturbing on their own. No one (including the IRS) may be worrying about the tax returns of these large (and in some cases foreign) heavyweights. Yet from a tax viewpoint, it might matter if they parleyed their ‘donations’ into something better than a set of Downton Abbey DVDs.

Clinton Foundation

In fact, it could mean that some of these big ‘charitable contributions’ really weren’t charitable and weren’t donations, not in a technical sense. The tax  law requires the charity to operate exclusively for charitable purposes. Normally the IRS really means exclusively. It isn’t clear if the law has been enforced quite so rigorously for the Clintons. Here, though, we are talking about the donors. And for donors, you can’t get something in return.

For example, if you donate $1,000 to charity and get a $100 dinner in return, your deduction is $900. In other cases, though, you might not get a deduction at all. If you ‘donate’ to charity but have an ulterior motive, you might not get that charitable tax write-off. If your donations entitle you to merchandise, goods or services, you can only deduct the amount exceeding the fair market value of the benefits you received. If you pay $500 for a charity dinner ticket but receive a dinner worth $100, you can deduct $400, not the full $500.

In Commissioner v. Duberstein, 363 U.S. 278 (1960), the Supreme Court held that to be a gift, property must be transferred from a “detached and disinterested generosity, out of affection, respect, admiration, charity and like impulses.” And tax deductions get denied too. In Dejong v. Commissioner, 309 F.2d 373 (9th Cir. 1962), parents claimed tax deductions for “voluntary” amounts paid to the private school where their children went. The parents’ “contributions” were made with the expectation of receiving an education for their children in return for the cash. Thus, the amounts paid did not emanate from a “detached and disinterested generosity” and were not deductible.

In McConnell v. Commissioner, 55 T.C.M. 1284 (1988), aff’d without opinion, 870 F.2d 651 (3d Cir. 1989), a real estate developer donated streets and sewers for a new subdivision to the city. When the developed claimed the “gift” to charity, the IRS said no. The transfer was motivated by a business deal. The developer avoided responsibility for future maintenance of the streets and sewers, and enhanced the value of what he kept.

Does any of this mean that big donors to the Clinton Foundation are actually sweating? It seems unlikely. After all, many of them are probably foreign and may not be filing U.S. tax returns. And for those who are, so what if a ‘donation’ isn’t tax deductible as a charitable contribution? If it was really a business deal, surely the ‘donation’ can be deducted elsewhere on the tax return as a business expense!

For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.

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Clinton Foundation’s Alleged Pay To Play Or Its Private Benefits: Which Hurts Hillary More?

The Clinton Foundation has surely done good works. Yet like Steinbeck’s ‘The Pearl,’ it plagues Hillary Clinton. So do her unending email controversies, and the shifting explanations that seem to make any alleged cover-up worse than any alleged crime. Recently, the Foundation and the emails have become considerably more interconnected in a kind of toxic smoothie. Yet, when it comes to the Foundation, there appear to be two main points to evaluate when all the evidence is in.

If nothing else, both are worthy of some raised eyebrows. But they are quite different in scope and import. One is the alleged influence peddling that suggests that the Clinton Foundation may have been a well-worn avenue for some donors to travel to get access to the Secretary of State. The facts are still coming out, and there are many differing views on just how much of this occurred or should be allowed. But the appearance does seem striking. For example, it is hard to explain the report that the Foundation gathered $100 million from Gulf sheikhs and billionaires, and for what promises.

Clinton Foundation

The second main issue with the Foundation is pure tax issue, that of private inurement or private benefit. This one may be considerably less serious for a political candidate, but might look somehow even more unseemly. Charities are supposed to be operated exclusively for charitable purposes. In fact, the law is very clear that charitable organizations with public charity tax exemptions must benefit the public interest. The law requires the charity to operate exclusively for charitable purposes, and normally the IRS really means exclusively.

You can’t say this too many times. From a strict tax viewpoint, there do seem to be some Clinton lapses here. They are arguably not of the tax-exemption crushing variety, but they don’t look good. Take the Clinton Foundation having arranged a $2 million pledge to a firm owned by Bill’s ‘friend.’ Some observers say that the Clinton Foundation helped Hillary and Bill’s friends. And a more personal front, it is hard not to notice that the Clintons became wealthy. Peter Schweizer’s book “Clinton Cash” argues that the many public and private deals the Clintons brokered put staggering sums in their pockets.

After being “dead broke” on leaving the White House, their finances exploded. Now, with well over $100 million in earnings they have a vast net worth. Some of it comes from the many speeches no one is talking about. Many charities get tripped up on these kinds of private inurement issues. Often–if not most of the time–the problem is the founders themselves who end up getting enriched. And it may not be the bulk of they money. The IRS notes that:

any transaction between an organization and a private individual in which the individual appears to receive a disproportionate share of the benefits of the exchange relative to the charity served presents an inurement issue. Such transactions may include assignments of income, compensation arrangements, sales or exchanges of property, commissions, rental arrangements, gifts with retained interests, and contracts to provide goods or services to the organization.”

Even a small amount of private inurement canbe fatal to a tax exemption. In Spokane Motorcycle Club v. U.S., refreshments, goods and services amounting to $825 (representing some 8% of gross revenues) were furnished to members. That was too much for the IRS. The IRS adds that “a common factual thread running through the cases where inurement has been found is that the individual stands in a relationship with the organization which offers him the opportunity to make use of the organization’s income or assets for personal gain.” 

The burden of proof is on the organization to establish that it is not organized or operated for the benefit of private interests. Although the IRS investigation of the Clinton Foundation will almost surely not be completed until after the election.

For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.

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Real Housewives Get Real Tax Liens, As IRS Moves To Collect

The Real Housewives shows are no stranger to controversy, nor to tax issues. The latest alum with problems is NeNe Leakes, one of the Real Housewives of Atlanta. Her real name is Linnethia Monique Leakes, and she also appeared on Dancing with the Stars. It turns out that she owes a total of $824,366.01 in taxes for 2014, so was hit with a federal tax lien. While Leakes owes almost $830000, her New Jersey colleague Teresa Giudice was slapped with another $219K tax lien. That is just to the IRS, though Ms. Guidice also owes the State of NJ.

Tax liens–the IRS’s way of making sure that the IRS gets paid no matter what–are public and can be embarrassing. IRS tax liens can spoil your credit, prevent real estate closings, and damage your reputation. The IRS files a notice of lien so creditors know. IRS tax liens cover all property, even if acquired after the lien filing. However, tax liens are sometimes not promptly removed, even after you have paid off the IRS in full. One government report admits that some IRS lien notices are mishandled, with IRS notices going awry, appeal rights not explained, and similar gaffes.

Still, the report says in most cases the IRS mailed out the lien notices explaining the taxpayer’s appeal rights. The IRS can file a Notice of Federal Tax Lien only after the IRS assesses the liability; sends a Notice and Demand for Payment; and you fail to pay in full within 10 days. The courts use it to establish priority in bankruptcy proceedings and real estate sales. IRS liens last 10 years, and usually release automatically if IRS has not refiled them. However, you’re better off to get them removed immediately. Getting the IRS to release a lien usually involves: (1) paying the tax, interest and penalties; or (2) posting a bond guaranteeing payment.

Even then, the IRS may take 30 days. State or local government charges to file and release the lien are added to the amount you owe. The IRS explains how to request a release of federal tax lien. Liens and seizures aren’t the same. The lien just makes sure the IRS eventually gets paid. A seizure involves forced collection so the IRS can sell property and get paid. That’s usually a bad thing, but if you want to travel, paying the IRS might not be such a bad idea.

Under a recent expansion of IRS power, the tax agency can revoke passports for tax debts. The new section of the tax code is called ‘Revocation or Denial of Passport in Case of Certain Tax Delinquencies.’ The law says the State Department actually does the revoking, for anyone the IRS certifies as having a seriously delinquent tax debt in an amount in excess of $50,000. That could mean no new passport and no renewal. It could even mean the State Department will rescind existing passports.

The State Department will act when the IRS tells them, and the list of affected taxpayers will be compiled by the IRS. The IRS will use a threshold of $50,000 of unpaid federal taxes. But this $50,000 figure includes penalties and interest. And interest and penalties can add up fast. The rules are not limited to criminal tax cases or where the government thinks you are fleeing a tax debt.

For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.

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Moving To Canada After The Presidential Election? Be Careful With Taxes

Some voters say they will move to Canada if Trump is elected, while others say they will leave if Clinton is elected. Most people in both camps are probably not serious. Even those who are serious may mean temporarily, not a permanent move. Hollywood stars in particular could probably keep working as they are with minor inconvenience. But there are tax consequences. Unless you give up your U.S. citizenship, even if you move abroad, you still must file your Form 1040 every year with the IRS.

Even if you earn all your money abroad, the IRS gets to tax it. You must report your worldwide income regardless of whether you ever set foot in the U.S. State taxes are another matter, and a move abroad–even one that is politically motivated–might save you plenty in state taxes. Not so with the IRS. America’s global income tax compliance and disclosure laws can be a burden, especially for U.S. persons living abroad. Foreign banks are sufficiently worried about keeping the IRS happy that many no longer want American account holders.

Hillary-Clinton-and-Donald-Trump-Face-Off-AP-Photos-640x480

Americans living and working in foreign countries must generally report and pay tax where they live. But they must also continue to file taxes in the U.S., where reporting is based on their worldwide income. Claiming a foreign tax credit generally does not eliminate double taxes. What’s more, the annual foreign bank account reports called FBARs carry big civil and criminal penalties. Enforcement fears are palpable, and even civil penalties can quickly consume the balance of an account.

Some of this is due to FATCA, the Foreign Account Tax Compliance Act, which compels non-U.S. banks to inform on American depositors. It also requires an annual Form 8938 filing if your foreign assets meet a threshold.  One more law adding to the mix:  the IRS even has the power to revoke passportsBut no matter how much you are fed up with taxes and politics, leaving America can be costly. To exit, you generally must prove 5 years of IRS tax compliance.

Plus, if you have a net worth greater than $2 million, or have average annual net income tax for the 5 previous years of $160,000 or more, you pay an exit tax. It is a capital gain tax, calculated as if you sold your property when you left. A long-term resident giving up a Green Card can be required to pay the exit tax too. Sometimes, planning and valuations can reduce or eliminate the tax, but it is nothing to ignore. In 2015, there were approximately 4,300 expatriations, and 2016 is on pace to exceed it. 

So if you move to Canada after the election, but keep your U.S. citizenship, is there any tax savings? There might be if you are careful. A key question will be whether you are still a state resident or domiciliary. Most people find it is easier tax-wise to move from State X to State Y than to move overseas. Let’s say State X is California–with a 13.3% tax–and State Y is Texas or Washington, both with no state income tax.

Any move analysis is comparative. Where do you own property, vote, have a driver’s licence, vehicles registered, etc? But more than with a state move, many people who move abroad seem to keep ties to their old state. And that can make a later state tax fight tougher. One key variable is the duration of your move. A temporary move out of your high tax state probably doesn’t count. If you plan to come back, you are probably still fully taxed there.

You can have only one domicile, and it depends on your intent. How do you measure intent? Objective facts, and many are relevant. Start with where you own a home. If you own several, compare size and value. Consider if you claim a homeowner’s property tax exemption as a resident. Where your spouse and children reside counts too, as does the location where your children attend school. And the details matter.

Presumably not many people will exit the U.S. after the Presidential election, regardless of who is elected. Those who do will probably keep their U.S. citizenship, but they might want to consider giving up their old state’s residency. Most states have a state income tax, and their impact varies. But if you play your cards right, you might at least be able to save on state taxes.

For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.

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Will Apple’s ‘I’ll Pay Tax If Its Fair’ Excuse Help You With IRS?

Apple CEO Tim Cook hasn’t exactly been praised for his remarks about taxes in a recent interview. He told the Washington Post that Apple has to keep its large profits abroad. American taxes are simply too high to bring them back, he said. America’s 35% corporate tax rate has to be reduced if big players like Apple are going to pay up. In fact, Mr. Cook said that he couldn’t advocate Apple bringing money to the U.S. unless America adopted a “fair rate.” 

Mr. Cook’s interview didn’t reveal what he thought would be a fair tax rate. But his remarks have prompted discussion about whether the tax system is fair, and about just how voluntary it is supposed to be. Apple reportedly has a staggering $230 billion in cash. And some people argue it is keeping profits that really belong in the U.S. out of reach, with most of it overseas where America can’t tax it. Apple isn’t the only huge company to stockpile cash outside the U.S. where the IRS can’t get it. But Apple is good at it, very good.

Apple's Tim Cook

Apple CEO Tim Cook delivers the keynote address at Apple’s annual Worldwide Developers Conference at the Bill Graham Civic Auditorium in San Francisco, California, onJune 13, 2016. / AFP / GABRIELLE LURIE (Photo credit should read GABRIELLE LURIE/AFP/Getty Images)

Most of us can’t wait for a fairer rate. And plainly, individual taxpayers can’t stash money offshore and avoid paying taxes on it. A 2013 report from the Senate Permanent Subcommittee on Investigations said Apple avoided $9 billion in U.S. taxes in 2012 alone via offshore units with no tax home. CEO Tim Cook testified vigorously that Apple did nothing illegal. Still, Apple saved billions by claiming that companies registered in Ireland are not tax resident in any country. In fairness to Mr. Cook, Apple isn’t breaking the law, and he is not alone in thinking the U.S. corporate tax rate is too high. 

It may be legal, but it isn’t clear it is fair. And individuals can’t make these moves. In that sense, the ‘pay-if-it-is-fair’ mantra is a little like the Hillary defense. The FBI said she was careless, not criminal. Can you tell the IRS, “I didn’t know,” or “it was an innocent mistake?” Maybe, but some conduct can be considered criminal even if you didn’t have a bad intent. Besides, it is clear that individuals can’t avoid paying taxes just by keeping money offshore.

For individuals, the last seven years of IRS crackdowns show that American individuals must pay U.S. tax on their worldwide income. Period. In contrast, more than a few big U.S. companies with far-flung operations (yes, like Apple) go to extreme lengths to situate income offshore. Why not deposit it where it’s taxed at a fraction of the U.S. 35% corporate tax rate? In fact, U.S. law seems to invite putting intellectual property somewhere where the revenue will be taxed at a low rate. Can individuals do that? Nope.

Indeed, by comparison, some individual Americans who pay tax at up to 39.6% on their worldwide income might feel they’re getting a raw deal. Can they pay less until the rate becomes more fair? Not really. The stakes for individuals are high. The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty. Willfulness is shown by your knowledge of reporting requirements, and your conscious choice not to comply. Willfulness means you acted with knowledge that your conduct was unlawful—a voluntary, intentional, violation of a known legal duty.

It applies for civil and criminal tax violations. You may not have meant to cheat anyone, but that may not be enough. The failure to learn of IRS filing requirements, coupled with efforts to conceal what you did, may be willful. Some courts say willfulness is a purpose to disobey the law, but one that can be inferred by conduct. So, watch out for conduct meant to conceal.

Conduct meant to conceal might include setting up trusts or corporations, dealing in cash, keeping two sets of books, and even swapping goods or services to avoid income. It might include filing some forms and not others, or cash deposits and cash withdrawals. Mixing personal and business funds, failing to keep records, and under-reporting your receipts all look bad. Any of that conduct could suggest willfulness.

Plus, repeated failures can turn inadvertent neglect into reckless or deliberate disregard. Willful blindnessa kind of conscious effort to avoid learning about reporting requirementscan be enough for criminal charges. “I didn’t know,” can work in some cases. But the IRS can be unforgiving, and the IRS can say you were willful in circumstances that you might think are innocent. You will have the burden of proving that your mistakes were innocent. You may not have meant any harm or to cheat anyone, but that may not be enough.

For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.

 

 

 

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