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Introduction

Donald Trump refuses to release his tax returns, concerned that tax attorneys like me will scour it for hidden gems, such as what percentage of his income comes from foreign sources and how much does he really earn? Speculation abounds that Trump’s worth is only a fraction of what he claims, and that his projects are financed in large part by foreign countries (Chinese banks) and corrupt Russian and Ukrainian officials and oligarchs. ¹

Reviewing Trump’s tax return is vital, because it is signed under penalty of federal perjury, so he cannot later deny that the information is accurate without incurring a risk of criminal perjury charges.

So What Is In His Tax Returns?

Because Trump’s tax return has not made public, we do not know his true earnings, charitable contributions or his foreign holdings and income. But if he makes them available, where should you look for the golden nuggets and, perhaps a smoking gun or two? We have roadmap for dissecting Trump’s tax return from Mitt Romney, another extremely rich individual with substantial international holdings.

Last election, I wrote extensively about Romney’s Tax World and how he used tax loopholes and dubious tax planning to save millions. Compared to Romney, Trump’s holdings appear more complex and voluminous; it is estimated that he has interests in about 500 business entities throughout the globe, mostly involving real estate deals and licensing of his name.

Where to Start?

Basically, Trump’s tax return is comprised of Form 1040, a two-page summary of a person’s income, credits, deductions and taxes paid or owed. There are forms and schedules attached to Form 1040 that furnish more specific information about the sources of income and deductions, and those documents are usually supplemented with notes, calculations and explanations. If Trump supplies his returns, here is the set of forms that should merit close scrutiny.

Form 8938 (Statement of Specified Foreign Financial Assets). Look at the first page of this form. Parts I and II will list all Trump’s foreign assets and their value. ² Part III shows the foreign income earned and where it appears on the tax return.

A comparison of Trump’s foreign income to his total income should prove interesting. For instance, Romney’s foreign income ($6 million) was a whopping 44% of his 2011 total income.

Schedule E. This schedule contains directly-owned real estate income, listed in Part I and income from partnerships and S corporations listed in Part II. Unfortunately, Schedule E, Part II contains only the net income or loss from the partnership or S corporation, which can produce a huge distortion from the actual income earned.

Example: Assume Trump owns 25% of XX Partnership and is entitled to 25% of the income and deductions. XX Partnership has $10 million in income, but a $5 million depreciation deduction, an accounting (paper deduction), not an actual expenditure. Thus, the partnership’s taxable income is only $5.0 million and Trump’s share of reportable income would be $1.25 million; however, he may have actually received $2.5 million (double the amount reported) due to the depreciation deduction.

Because of the depreciation deduction, real estate professionals like Trump routinely pay little or no tax on their income. In fact, many real estate ventures produce losses and Trump may apply those losses against his non-real estate income, including royalty and licensing fees, as well as income from other business ventures.

The upshot, we need to analyze the tax returns of each Trump entity to comprehend his true income and deductions – Schedule E does not provide enough information.

Charitable Deductions. Charitable contributions are listed on Form 1040, Schedule A, separated into cash contributions and non-cash donations. Non-cash charitable deductions are listed on Form 8283, including contributions of publicly-traded stock. ³

Cash donations are not listed in the tax return, but taxpayers are required to maintain a record of the contribution, such as a cancelled check or written record from the charity. Consequently, while the amount of charitable giving is stated on the tax return, the cash contributions are not. Form 8283 could make interesting reading if Trump made non-cash charitable contributions.

Foreign Bank and Financial Accounts. Interests in foreign bank and financial accounts are contained in Part III of Schedule B to Form 1040. Taxpayers must confirm whether they have a foreign bank or financial account, including signatory authority over an account not in their name, and list the countries where the accounts are located. ⁴

Although not part of the tax returns, taxpayers must file Foreign Bank and Financial Account Reports (FBARS) with respect to these assets. Disclosure of FBARS would greatly enhance the public’s understanding of Trump’s foreign investments and holdings.

Forms 5471 and 8865. If Trump has a direct or indirect ownership of 10% or more in a foreign corporation, partnership or limited liability company, he is forced to disclose a wealth of information about the entities on his personal tax returns, something that does not occur with domestic entities listed on Schedule E. Taxpayers who have a 10% or greater shareholder interest in a foreign corporation must file Form 5471.

For ownership in a partnership or LLC, in some circumstances, taxpayers file Form 8865. Look for these forms as they contain an entity’s income and expenses, assets and liabilities, and any transactions between the entity and Trump.

Conclusion:

We are waiting, perhaps in vain, for the release of Trump’s tax returns. As discussed in this article, we know where to look, if and when his returns become public.

Because the returns were already filed, they cannot be changed for political reasons, but don’t be surprised if the returns are partially redacted (blacked out) to prevent important or embarrassing information from surfacing. Stay tuned.

At the Center of the Storm – Mossack Fonseca

The Panama Papers leak involves the international law firm Mossack Fonseca (MF)
headquartered in Panama, a notorious tax haven country . MF has offices in the U.S. (Nevada and Wyoming) and throughout the planet, conducting business with hundreds of international banks, often spinning an intricate and undetectable web of anonymous companies used to launder dirty money.

MF forms companies to facilitate hiding income and assets of, among others, heads of governments, politicians, tax evaders and drug cartels. It supplies “middlemen”– sham directors and officers — to evade detection of the actual owners. According to the Panama Papers, MF also specializes in backdating documents, often an indication of fraud.

Several of the world’s most notorious “criminal” Swiss banks, including UBS , and their subsidiaries are implicated in the Panama Papers. Recently, as Swiss banks suffer the wrath of the U.S. for their tax evasion schemes, MF has taken over direct client contact to protect them from heightened due diligence requirements (all with a wink of an eye, no doubt).

Creating the Panama Papers Database

About a year ago, more than 11.5 million documents, amounting to 2.6 terabytes (2,600 gigabits) of confidential information, spanning almost 40 years, were obtained from MF’s computers by an anonymous whistle-blower and leaked to an international consortium of reporters, called the International Consortium of Investigative Journalists (ICIJ), who have painstakingly sorted and indexed the material to make it searchable. The Panama Papers mention over 200,000 companies operating in more than 200 countries and territories. Much of the Panama Papers reporting centers on the technical feat of receiving and manipulating the 2.6 T of data to make it searchable, and how the leak remained secret for such a lengthy period. ICIJ journalists now have access to 11.5 million documents by using a simple search engine, similar to Google.

Who is Implicated?

At this time, names of prominent world leaders and famous people who are connected to companies in the MF files have surfaced, but there has not been notable stories tracing actual transactions through the MF web. The files contain the names of 200 prominent politicians from around the globe, including a number of ministers. Famous names include Jackie Chan, Vladimir Putin, the Prime Ministers Iceland, Argentina, Pakistan and the UK, the presidents of Ukraine and Azerbaijan, the king of Saudi Aribia, the Xi Jinping (President of China) and many Chinese Politburo standing committee members.

The papers disclose 29 billionaires and the bribery situation with the infamous FIFA (soccer); even Lionel Messi, soccer’s superstar, owns a Panama company. Of course, China and Russia immediately denounced the Panama Papers and a U.S.-hatched plot and China moved quickly to suppress any information regarding the scandal from its internet. Putin’s billions were controlled by his long-term personal friend, a Russian cello player and godfather to one of his children. When asked why a cellist controlled companies worth billions, Putin arrogantly proclaimed that he needed to buy musical instruments!

Preliminary Observations

Although thus far, the information is more tabloid in nature (look who is caught up in this potential world-wide scandal ) there were several revelations.

First, I never suspected the existence of a world-wide conspiracy of large law firms and banks acting in such an interconnected manner. I assumed that tax–haven companies were formed in a series of independent and isolated transactions, precisely because of the danger of a Panama Papers leak that could collapse the off-shore financial industry.

Second, I realized that this is how the world pays bribes to crooked politicians. If one is looking to build a project in a country and needs to bribe the leader, the project builder does not walk into the leader’s office with a suitcase of cash and says “here you go.” The bribe is paid to an offshore entity controlled by the leader, usually through family members or close associates.

Third, we learned that much of the world’s privately-held art and mega yachts are owned by mysterious shell corporations. The same is true with valuable real estate, especially expensive residential properties.

Fourth, regardless of where the transactions occur, at some point they pass through New York because everyone wants funds in U.S. currency and the world’s clearinghouses are the New York-based banks. Thus, the worldwide financial system flows through New York City and the U.S. Department of Justice has jurisdiction over the banks implicated in the Panama Papers. This could prove damaging, if not fatal, to international legal, accounting and financial institutions engaging in, or facilitating, illegal activities, such as bribes, money-laundering, fraud and tax evasion.

Somewhat surprisingly, no major U.S. individuals, companies or banks have yet surfaced in the documents, but I suspect that once transactions, especially bribes, are traced through the Panama Papers, U.S. companies will surface. After all, in many countries paying bribes is the cost of doing business, and major U.S. companies are operating across the globe. Time will tell.

As far as U.S. individuals and companies, including hedge funds , the Cayman Islands is the tax haven of choice; Panama has a tawdry reputation because of its links with dictators and drug lords. If there is a similar leak involving the Cayman Islands, watch out!