The Making of Donald Trump (12 page)

Trump tried to develop the land anyway, only to be told no by Palos Verdes officials. In 2008, Trump sued the town for $100 million, more than five times the town’s annual budget.
Showing his relish for litigation, Trump told the
Los Angeles Times
: “I’ve been looking forward for a long time to do this.” The case was settled four years later, the terms sealed by a judge.

Land unsuitable for development generally has little or no value. In this case, the supposed development rights that Trump gave away when he signed the easement on the land almost equaled the price he paid for it. Federal and state tax auditors, if they questioned this, would likely have approved no deduction for the development rights since the land would not support structures. But Trump’s surrender of development rights included a strong element of self-interest: The site was not maintained as an open field to preserve the sweeping views of the ocean and Catalina Island, twenty-six miles across the sea. The land is used as a driving-range annex to his golf course.

Trump took an even stronger view of how little his real estate is worth in a series of Chicago property tax appeals. In this case, he turned for help to Edward M. Burke, a local Democratic Party power who has been a Chicago city alderman since 1969. Burke’s law firm also handles appeals against city property tax assessments. Having friends in powerful places (rather than fighting with local officials, as Trump did in Palos Verdes) can pay off.

•    •    •

Trump International Hotel & Tower soars more than 1,300 feet above the north side of the Chicago River and stands as the second tallest building in the Windy City, the fourth tallest in America. It cost Trump $847 million to buy the land, tear down the old
Chicago Sun-Times
newspaper building, and erect the concrete high-rise. Trump testified in an unrelated lawsuit that he owns it all, except for the individual condominium apartments he has sold.

On Trump’s behalf, Alderman Burke won tax discounts that cut the Trump Organization’s property tax bills by almost $12 million, a reduction of 39 percent.
Chicago Sun-Times
reporters Tim Novak and Chris Fusco calculated this discount after examining more than 1,500 property tax bills sent to the building and distilling those that were Trump’s responsibility from those that went to individual apartment owners. Further still, Trump had Alderman Burke sue the public schools, the city, the county, and other taxing authorities for refunds of “erroneous, excessive, illegal” taxes. The suit claimed that the taxes were so egregiously high that they should have been voided and the taxes already paid fully refunded.

Also intriguing is the value applied to the retail space at Trump International: $75 million after the tower opened in 2009.
Kelly Keeling Hahn, a lawyer at Alderman Burke’s firm, wrote, “The hotel is NOT located in the prime Michigan Avenue hotel area,” adding that “the entire retail space of the building is unleasable.” Indeed, the retail space is empty, a mix of rubble and dirt floors that was never completed because it violates the three basic rules of real estate investment: location, location, location. Not only is the retail space a hike from the Miracle Mile, it is also on the wrong side of the Chicago River; the city had decided even before Trump came along that its focus would be on the south side.

Assuming that Hahn’s letter is an accurate statement of the facts, how could Trump have become involved with such a total loser of an investment, especially given his endlessly repeated claims of exceptional prowess as a businessman and real estate investor? How could he have failed to notice that the tower bearing his name in huge letters was not on Michigan Avenue’s Magnificent Mile, where high-end retailers flourish?

The assessor slashed the retail space property tax valuation by almost $49 million, a 65 percent reduction. It is unclear whether Hahn’s letter was persuasive in securing the lower value. Trump has often boasted (in the past and on the campaign trail) that he buys the friendship of politicians so they “do what I want.” The Republican presidential hopeful made sure he would have Chicago friends in powerful places by making nearly $100,000 in campaign contributions to local politicians—all of them Democrats.

A new Cook County assessor has sought to increase Trump Tower property tax assessments on the hotel and other spaces in active use. Trump has continued to seek lower assessments, perhaps reflecting his inability to charge high rates for hotel rooms because of its out-of-the-way location and the squeamishness some corporations and retailers have developed about associating their brands with Trump since his latest candidacy.

But asserting that the properties he calls top-shelf in one forum are virtually worthless in others is not Trump’s only technique for avoiding taxes. He also works hard to avoid income taxes and has even reported huge directions from a business that had no revenue.

F
or more than two decades beginning in the early 1970s, Jack Mitnick prepared Donald Trump’s income tax returns. An NYU-educated lawyer and certified public accountant, Mitnick also handled appeals when Trump felt his income taxes were unfair. That included two tax appeals in 1984, a year in which Trump collected many millions of dollars but paid no federal income tax.

Mitnick has testified that he is “thoroughly familiar” with every aspect of Trump’s finances. In
The Art of the Deal
,
Trump recounts a typical conversation with Mitnick about the tax implications of a deal he was working on as it related to the 1986 Tax Reform Act that President Reagan had just signed into law, shutting down a host of tax shelters. Trump wrote that he expected the new tax law to be a disaster for the country, especially real estate investors. “To my surprise, Mitnick tells me he thinks the law is an overall plus for me,” Trump wrote.

Trump and Mitnick were close, and
Trump had done well
following his accountants advice. In 1978, the newlywed Trump lived lavishly, but paid no federal income taxes. He didn’t pay in 1979 either, thanks to Mitnick’s understanding of special tax rules for large real estate investors.

The fact that Trump paid no tax came to light when casino regulators issued a public report on his fitness to own a casino. Trump’s tax returns showed negative income. That’s because Congress lets big real estate investors offset their income from salaries, stock market gains, consulting fees, and other income with losses from depreciation in the value of their buildings. If these paper losses for the declining value of their buildings are greater than their cash income from other sources, real estate investors can legally tell the IRS that their income is less than zero and no federal income tax is due.

Trump’s 1978 tax return reported a negative income of $406,379. In 1979, his income went negative by more than $3.4 million. During a lunch interview one day in 1990, I suggested to Trump that he could become a little richer by reorganizing his various partnerships so that his income was negative by only about one dollar. That would be enough to wipe out income taxes; larger losses were pure waste. Trump seemed nonplussed that a journalist understood tax law, but he thanked me.

Two years later, in 1992, Mitnick represented Trump when hearings were finally held on appeals from two earlier tax audits. Both the City and the State of New York had audited Trump’s 1984 income tax returns. Both concluded that Trump owed more tax. Trump told Mitnick to fight.

The year made famous by George Orwell’s novel was Trump’s best ever to that point. Millions of dollars flowed into his accounts, a Niagara of greenbacks. Early that year, Trump and others moved into apartments at Trump Tower, which meant millions of dollars from the sale of apartments on
forty-four floors. Trump also collected rent for retail and office spaces on the nine lower floors of Trump Tower, which were pricey even for Fifth Avenue. In May, his first casino opened in Atlantic City, catching the full summer gambling season. Players lost millions of dollars at his tables and slot machines.

New York is known as a “strict federal” income state, meaning that except for some income that senior citizens collect free of state tax, the entries on an individual’s federal tax return should match their state return.
Trump’s federal tax return included a Schedule C, the form used by freelancers and other sole proprietors whose businesses are neither corporations nor partnerships. He also included a New York State sole proprietor return and a City return for unincorporated business. Trump identified his business title not as real estate developer or even casino owner, but as consultant.

Trump’s return showed zero income from this consulting business. Normally, one would not file a Schedule C without income, but Trump’s return showed huge deductions. His federal return deducted $626,400 of expenses. The city form listed a slightly smaller amount: deductions of $619,227 against zero income. That prompted New York City and State auditors to independently flag Trump’s tax return for scrutiny. The city asked for evidence that the sole proprietor deductions were legitimate.

Taxpayers do not have to substantiate deductions when they file their tax returns. That is why tax returns include an oath, known as a jurat. The federal jurat states: “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.” Auditors, on the other hand, require substantiation.

The auditors asked that Trump document his large deductions. Trump provided nothing. Not one receipt, invoice, or
cleared check. In that case, the auditors said, the deductions were denied. They billed Trump for the taxes he avoided by taking the huge deductions he could not substantiate. Interest was added. So were penalties, a civil law technique used to discourage tax cheating. The penalties came to 35 percent at the state level and 25 percent at the city level.

Trump appealed. Mitnick argued his case. During a city appeal hearing that stretched over two days in 1992, Mitnick provided no documentation to support the deductions. H. Gregory Tillman, the Harvard-educated judge hearing the appeal, noted this extraordinary testimony in his decision. He also noted, “The record does not explain how Petitioner [Trump] had significant expenses without any concomitant income from his consulting business.”

Mitnick was shown Trump’s tax returns. He verified that his signature was on the document in front of him, but then added a very strange statement about himself and his firm:

“
We did not” prepare that return, Mitnick testified.

If Mitnick (who has a clean record with the state bar) was telling the truth, then who prepared that return? The only person who would benefit from filing the document would be Donald J. Trump. With a photocopy machine, one person’s name can be transferred to a document they did not prepare. Decades ago, my first national investigative reporting award was for exposing just such a deception.

The court opinion does not address how Mitnick’s signature ended up on the photocopy of a return he said he did not prepare. The appeals records, except for Tillman’s decision, were destroyed—a routine procedure—years ago. I asked Mitnick in 2016 about his testimony. He said he did not remember it. It is likely to remain a mystery how what appeared to be Mitnick’s signature got onto the return.

Tillman found no factual basis for Trump’s unsubstantiated deductions. He also noted that Trump’s complaint, without explanation, was that he had been subjected to double taxation of his income. Using boldface typeface, which is rare in judicial opinions, Tillman wrote, “The problem at issue is not one of
double taxation
, but of
no taxation.”

Tillman ruled against Trump. However, he waived the 25 percent penalty for underreporting income because no original City tax return could be located, only the photocopy in the city’s files with Mitnick’s evidently forged signature.

Then came the state case. Here, too, Trump could not produce any documentation supporting the way he accounted for profits from apartments sold at the Trump Plaza at 167 East 61st Street in Manhattan. Frank W. Barrie, an administrative law judge, wrote in his twenty-three-page opinion that Trump “failed to substantiate [Trump’s] entitlement” to the tax savings he sought. The judge, underlining the word
not
, ruled that Trump had not established the most basic facts required to justify paying less tax.

Also at issue was whether Trump had filed tax appeal papers before the legal deadline. The judge said that Trump’s “mere allegation that [his] failure was due to reasonable cause and not due to willful neglect is inadequate to shoulder such burden.”

Judge Barrie then turned to the 35 percent penalty recommended by the state tax auditor, which they said was mandatory under state law given Trump’s conduct. “There is nothing in the record, other than the fact that petitioner relied on an attorney/CPA for gains tax advice [which may be implied from Mr. Mitnick’s testimony] relevant to the issue of penalty,” Judge Barrie wrote. “Consequently the penalty is upheld.”

Mitnick, again the sole witness for Trump, “testified that Mr. Trump had no income tax due against which the credit ‘could have been applied.’ ” Barrie ruled that Trump owed the tax as well as interest and a 35 percent penalty.

Asked about those cases in 2016, Mitnick told me he had no memory of them.

The year 1984 was not the last time Trump paid no income tax. The New Jersey Division of Gaming Enforcement, in reports about Trump’s financial stability in 1991 and 1993, showed that he had no income tax obligations in those years. The reports also indicated that he had losses so large that he could apply them to future tax seasons. The losses, known as net operating losses (or NOLs), meant that he likely would not owe any taxes for an unspecified number of future years.

In the early 1990s, Congress undid one of the 1986 Tax Reform Act provisions—the one that had troubled Trump. Congress reinstated a tax rule allowing real estate professionals who manage their property to take unlimited deductions against their other income. That means the paper loss from the supposed declining value of a building as it ages could offset other income, such as a salary, profits from golf courses, or fees accrued from selling neckties made in China. However, Congress retained a rule denying these benefits to anyone making more than $150,000 per year and allowing those who make less to offset no more than $25,000 of their other income with paper losses from depreciating buildings they own.