Trump can thank Obama for tax-refund play Democrats now oppose

Register now

At the center of President Donald Trump’s dispute with the IRS is a $72.9 million tax refund. He can thank his predecessor for that benefit.

Trump was able to generate a massive tax refund by using a provision President Barack Obama signed into law in 2009 during the financial crisis, according to an analysis of Trump’s tax information by the New York Times. That refund triggered a years-long audit, and some Democrats, including House Speaker Nancy Pelosi, are now calling for an end to a similar tax perk included in this year’s virus-related stimulus package.

Trump’s 2009 tax maneuver was based on a long-standing tax benefit that allows taxpayers to “carry” annual losses to more profitable years. The rules about how far forward or back the losses can be applied have changed multiple times in the past century, but Congress has routinely expanded the measure in times of financial crisis — including the Great Recession and the coronavirus pandemic — to let taxpayers quickly access cash.

The Tax Code normally allows taxpayers to tabulate their net operating losses from the years they weren’t profitable and use those to offset tax bills from some years when they did make money. In 2009 and for 2020, Congress expanded the provision to allow companies to carry losses up to five years in the past, which would allow previously profitable companies to mitigate their losses as the economy was faltering.

“Your taxes more accurately reflect long-term income, rather than having an artificial annual accounting period create unjust results,” said George Callas, the former chief tax counsel for former House Speaker Paul Ryan.

‘Quickie’ refund

The stimulus measure comes with a valuable benefit. Taxpayers can ask the Internal Revenue Service for what tax professionals call a “quickie” refund for the now-offset taxes. The agency has to process that claim within 90 days, giving taxpayers a rapid infusion of cash.

Trump said at a press conference Sunday that the Times report was “totally fake news.” In Tuesday’s debate with Democratic presidential candidate Joe Biden, he said, “I’ve paid millions of dollars in taxes.”

The president’s sons, Eric Trump and Donald Trump Jr., disputed the Times’s reporting on Tuesday, while acknowledging some of its underpinnings: that Trump, as a real estate developer, has exploited depreciation, tax credits and other provisions of the Tax Code to reduce his personal tax bill.

Trump has paid real estate taxes, and his company has paid payroll taxes, Eric Trump said in a Fox News interview. Donald Trump Jr. separately said that his father is “not going to pay more” than he needs to.

Lucky timing

The timing of the 2009 perk was exceptionally lucky for Trump, who earned $120 million from 2005 through 2007 from cash licensing deals and endorsements as “The Apprentice” reality show launched, according to the New York Times. Those years generated $70.1 million worth of federal income-tax bills. Trump then had a total of $1.4 billion in core business losses in 2008 and 2009 that he could use to claw back the tens of millions of dollars in taxes he owed, plus interest, on his previously profitable years.

Since he began running for president in 2015, Trump has cited an ongoing audit as the reason he can’t release his tax returns.The New York Times report, published just weeks before the Nov. 3 election, cites tax documents that show how Trump has aggressively used the Tax Code to his benefit.

This kind of provision is most helpful to companies in industries like real estate and energy that depend on broad economic conditions to be profitable.

The Obama White House and congressional Democrats supported including the net operating loss carryback measure in the recovery legislation in 2009, said Jason Furman, who served as the deputy director of White House National Economic Council at the time.

Economic logic

The provision allowed companies immediate access to capital as financial markets were in crisis, Furman said. And there was very little cost to the government because it only allowed companies to benefit sooner from offsets they were entitled to anyway. Even without the carryback, companies could carry forward the same losses, offsetting future tax bills by the same amount.

The only cost to the government was paying out money sooner at a time when interest rates were at rock bottom because of the recession, Furman said.

“There was a sound economic logic to it. It does create a higher risk of fraud, because you can basically get the money and run,” Furman said, though he noted that fraudulent losses are equally risky when companies are allowed to carry them forward.

The New York Times, after reviewing more than two decades of Trump’s tax information, said that the refund could be called into question because Trump might have improperly claimed millions in losses for a bankrupt casino.

Democrats questioning

Callas said that the IRS only issues quickie refunds in a narrow set of circumstances where the “the chances of an expedited procedure resulting in an unjustified refund are very, very low.” Plus, the IRS considers it a tentative refund that can still be audited and reclaimed, said Callas, who is now a managing director at law firm Steptoe & Johnson LLP.

Democrats are now questioning the practice of allowing individuals and businesses to carry losses backwards. The Times’s finding about Trump’s use of the benefit has renewed concern that the provision is a tax break for the rich that doesn’t help average workers. The Democratic-led House has proposed — and could vote this week — on another virus-related stimulus proposal that includes language to restrict the loss carrybacks.

“After taking advantage of a tax break in 2009 intended to help small businesses by claiming a massive, retroactive tax refund, this year he embraced a COVID relief bill to revive this tax break for an even narrower slice of the top 1 percent, like himself,” Representative Lloyd Doggett, a Texas Democrat, said in a statement.

Trump is an outlier who is willing to take much more aggressive positions than most wealthy taxpayers, said Steve Rosenthal, a senior fellow at the left-leaning Urban-Brookings Tax Policy Center. But loss carrybacks create lots of opportunities for gamesmanship and aren’t the most effective way to boost an economy in crisis.

“Yes, it gets money in the hands of taxpayers quickly, but the question is to whom is that money going,” Rosenthal said. “I’m all for a helicopter-dropping cash, but let’s send that helicopter over the Bronx and Harlem, but not over Westchester and Greenwich and corporate headquarters.”

The most recent CARES Act benefit allows losses generated from 2018 through 2020 to be carried back five years. After that, the code won’t permit any carrybacks, which were repealed in Trump’s 2017 tax overhaul, but the law does allow companies to carry forward losses indefinitely.

“It seems likely that, given all his ongoing business losses, the CARES Act might allow Trump to file for another multimillion-dollar refund check. The only thing that would stop him is if he has paid so little in taxes there are no millions to refund,” said Frank Clemente, the executive director for the left-leaning Americans for Tax Fairness.

— With assistance from Jennifer A. Dlouhy

Bloomberg News
Tax refunds Tax breaks Donald Trump Tax deductions Barack Obama CARES Act
MORE FROM ACCOUNTING TODAY