The extraordinary scale of Donald Trump’s business losses in 1995 suggest that he has avoided hundreds of millions in federal tax payments, but they also raise the question of whether Trump used a controversial strategy to do it.
The New York Times published three pages of Trump’s 1995 tax return, showing $916 million in operating losses from his businesses. Tax rules for partnerships like Trump’s allow them to legally use business losses to eliminate taxes on personal income for 15 years in the future.
The ability to turn commercial failure into personal success is a hallmark of both Trump’s career and the US tax code, but the limited information available—the Times received only three pages of Trump’s return from an anonymous source—has generated new questions even while confirming rumors, which Trump has encouraged, about his failure to contribute to public coffers.
Trump has refused to publicly release his tax returns, a simple transparency measure adopted by candidates in both parties to demonstrate the integrity of their personal finances. The tax documents published by the Times make clear once again that Trump’s public presentation and real life diverge remarkably.
At the time of this tax return, after all, Trump was promoting a career renaissance, not a near-billion-dollar loss. “He has reduced his personal debt—loans guaranteed with his own signature—from $975 million to $115 million,” Trump biographer Ed Klein told Newsday the year before.
In 1995, he negotiated a deal to offload his failing investment in the Plaza Hotel to a Saudi prince that included the cancellation of $125 million in debt. He sold his failing casinos to the public that summer, so he was no longer responsible for their debt, and used some of the money he raised to pay down nearly $36 million in additional personal debt. He also received a $1 million salary and a $3 million loan from the new public corporation. (The company would eventually declare bankruptcy in 2004, and again in 2009.)
All that, including debt forgiven, should be treated as income in the US tax system, with Trump on the hook for the appropriate tax payments. But it appears that whatever income he received was eclipsed by his losses, at least some of which appear to have been carried forward from previous years, suggesting the magnitude is far larger than the net figure of $916 million.
Yet there appears to be disparity between the estimated magnitude of Trump’s business losses and the size of the debts written-off by his creditors. Without the rest of Trump’s return, it’s hard to say exactly how bad Trump was at running his businesses, or how good he was at avoiding taxes.
One question is whether Trump’s losses were real, or a product of “debt parking.” Trump financed his businesses almost entirely with other people’s money, so typically any paper losses would belong to his creditors, not him. Trump didn’t actually lose all those millions himself, because he never had them. Yet he still managed to claim the losses as his own.
John Hempton, an investment fund manager and former Australian tax official, wonders if Trump may be engaging in “debt parking”—rather than having the debt officially forgiven, he had it transferred to a dummy vehicle, perhaps a fund he controls or in a family member’s name, that will never move to collect it.
“They don’t make a profit or loss on the debt,” Hempton writes of this strategy. “And because the debtor never has his debt forgiven he never gets the assessment on debt forgiveness and he gets to keep his [net operating losses] even though the losses did not come out of his pocket.” (Emphasis is Hempton’s.)
From the outside, there’s no way to know if this was the strategy used to avoid tax payments, or if his 1995 losses truly netted out to $916 million despite hundreds of millions in income. Either way, Trump is tremendous—tremendously bad at running a business, or tremendously good at avoiding taxes.