Further nitty gritty on Trump and Twitty
Yesterday's post about parallels between Donald Trump and Conway Twitty prompted a great response (in the comments) from a fellow tax law professor, Gregg Polsky of the University of Georgia. He makes a pretty persuasive argument that unlike Twitty, who was allowed to deduct voluntary payments made to investors in his failed burger joints in order to protect his music industry reputation, Trump's misconduct arose in his personal life, and thus his hush money payments aren't deductible.
You could argue with Polsky about this. Twitty got to deduct his investor payoffs on the tax schedule for his business as a country crooner, even though the burger venture was an entirely separate corporation in which he was an investor. Besides, Trump can argue, unlike Twitty, that everything he does all day and night is part of his image, his brand, his business. Having sex with porn stars and models and paying them and others to shut up is, he could say, all part of being the rich rogue celebrity (and stable genius) he is.
But let's not argue that point. Let's concede that Trump's no Twitty. What I'm still hung up on is how labeling the checks to Michael Cohen as "legal fees" under a "retainer" advanced a tax crime. If Polsky's right (and he probably is), Trump would not be allowed to deduct either legal fees or hush money payments connected with his personal misconduct. Even if Trump was going to cheat on his taxes and deduct them anyway, the bookkeeping entry wouldn't have helped. Whether he wrote "legal fees," "settlement payment," "consulting," whatever, the origin of the claim was too personal to claim a deduction. Are the prosecutors going to argue that the only proper entry would have been "Hush money to sex partner"?
I guess I'll wait to let the prosecution make its case and see what it's thinking. But if Trump is convicted on these charges based on a tax crime, and the conviction holds up on appeal, I'm buying at Mar a Lago.
I’ve noticed that many in our community think that an accusation should proceed directly to conviction, with only a passing comment about the legal process.
ReplyDeleteYes, I remember "Lock her up!" very well.
DeleteIt seems reasonable to assume that the Trump Organization deducted the payments to Cohen, just as it would have deducted payments to Cohen (and all of its other outside lawyers) for actual legal services. The fact that they grossed him up suggests that everyone assumed Trump Org would send him a 1099. The whole point was to hide the nature of the payment. The true nature of the payment (according to Cohen) was the repayment of a loan from Trump to Cohen. Cohen agreed to pay Stormy with his personal funds on the condition that Trump would reimburse him--that's a loan. Repayment of borrowed proceeds is not deductible. Nor is the original hush money payment by Cohen on Trump's behalf deductible. The false entry is to treat the money paid by Trump to Cohen as a (presumably) deductible payment for legal fees, when in fact it was a repayment of the loan. The fact that they grossed up the payment for Cohen's taxes is consistent with that--Cohen would have no income upon repayment of the loan. So, in sum, the payment was mislabeled and as a result the tax treatment (on both sides) was erroneous. Interestingly, as I mentioned before, due to the gross up, it's not entirely clear that, if you look at both Cohen's and Trump's tax consequences collectively, there was a net revenue loss for NY (and if Trump had net operating losses, in fact could have been a revenue gainer). This means that the arrangement was surely not tax motivated, but it nevertheless resulted in false tax returns.
ReplyDeleteIf you repay a loan that you took out to pay business expenses, the repayment of the loan is deductible, isn't it? I'm thinking of your credit card bill when you buy office supplies for your business on the card. You put it down on the return as "Office expense." As for Cohen, if he deducted what he paid to Stormy in a previous year, the reimbursement would in fact be gross income to him, wouldn't it? Although given the prior deduction, he wouldn't deserve to have the payment grossed up.
DeleteMy best bet is that (1) Cohen didn't deduct the hush money payment when paid; (2) Trump didn't deduct the hush money payment when Cohen paid it on his behalf (which would be the time to claim the deduction if the payment were in fact deductible); (3) the Trump Org issued a 1099 to Cohen when it reimbursed Cohen; (4) Cohen included the reimbursement in income in the year of reimbursement; and (5) the Trump Org claimed a deduction for the payment to Cohen in the year of reimbursement. That would have best hidden the reasons behind the transaction and hiding those was the reason for the convoluted structure in the first place.
DeleteJust a comment on the theory behind the notion that costs that arise in your personal life are not deductible even if they may benefit your income production--consider the Tiger Woods situation. He was sloppy with his affairs and got photographed and then had to pay off the National Enquirer to suppress the photos. Imagine if instead Tiger was very careful and had all his affairs on distant private islands. In that case, he couldn't deduct the travel costs on the theory that the privacy protected his brand. Likewise, he shouldn't be able to deduct "clean up" costs like hush money payments when he's sloppy.
ReplyDeleteDoes anybody know for sure whether Tiger did in fact take the deduction?
DeleteJack, the Tiger situation was actually more complicated because Tiger (unlike Trump) didn't pay cash for the hush money. Instead, Tiger agreed to pose for cover photo and to do an interview for a magazine related to the National Enquirer. My piece with Hellwig analyzed the tax consequences of that barter transaction and concluded that, because Tiger could not get a deduction for the hush money payment, he would have gross income. I'm sure Tiger claimed that there were no tax consequences at all, but we argue that would have been incorrect.
DeleteCan we get real for a moment? This ain't about a tax violation- it's about getting rid of one of the rival criminal organizations that control our country. Which crime org do you all like? Let's see the Kennedy's ran booze, Johnson was into anything that made a buck-especially during the Vietnam "police action". Obama, a puppet for the Chicago mob (Meyer Lansky's "the company"). Clintons, same thing (but with a Rockefeller dad). Bushes, funded the Nazis in WW2. Biden, loves that money from China and the Ukraine.
ReplyDelete