by Karl Denninger, Market Ticker:

The idiotic NY Times printed a “scoop” that was in fact not a scoop, and likely suborned or even committed a felony in doing so by accessing or using private tax information on Trump.

But the so-called “scoop” — that Trump lost over a billion dollars in what are called “NOL” (Net Operating Losses) over the space of roughly a decade, and used those “losses” to avoid paying taxes for a long time afterward, was first and foremost not a scoop in that it has been repeatedly reported over the last decades and in fact made the cover of TIME at one point, never mind being referenced when Trump was appearing on The Apprentice.

Further, there was no law-breaking involved here.  Gaming the tax code for Real Estate developers is not only common it’s nearly universal.  Specifically, the NOL and “at risk” rules have been revised to try to stop this sort of abusive practice, but exactly how effective those revisions have been put in place is subject to plenty of debate.

Non-recourse financing — that is, where either no recourse is formally in the financing documents (e.g. the bank can repo the property but not sue you for deficiency) or where there is no effective recourse because the potential deficiency (or actual deficiency after a default) exceeds your net worth, and therefore a lawsuit is worthless to recover the loss — can lead to very large losses being available to you that are direct offsets from income for tax purposes.

The NOL rules in many cases forbid you from taking all of that directly against income in the current year but any amount in excess of that is carried forward until consumed, exactly as is the case for someone who has a $100,000 investment loss in the stock market.  You can only take $3,000 a year against ordinary income so if you don’t have $100,000 in taxable investment gain the next year you consume $3,000 of that, but the remainder is available on a carry-forward basis until you use it up.

Real Estate is a specific area of activity where this sort of NOL gaming is particularly useful and profitable.  The intent is that if you have an actual loss of your own money then you should be able to use that in future years to offset gains, since you don’t have a negative tax liability (that is, the IRS doesn’t pay you) when you have a loss.  The “at risk” rules are supposed to prevent you from having someone else’s loss become a tax write off for you, but when it comes to commercial real estate developers they were long a joke in that they were trivially and legally gamed, effectively allowing you to take a loss and then use it to reduce to zero your taxes on a forward basis for a long time even though actual cash was not lost.

This is what Trump did and it’s why he didn’t pay taxes for a very long time.  But Trump didn’t write the tax code; Congress did.  Trump didn’t sign the tax code either; the President at the time did.  Trump was not a politician during any part of the time in question.

There is nothing wrong with a business using every legal means to avoid (not evade) paying taxes, including structuring business and financing activities so as to decrease the amount of tax due.  Every business of material size does this — even most small businesses.  MCSNet did it; we had an enrolled agent on retainer who worked with me on this stuff since I didn’t know the inside-out parts of the tax code at the time but he sure did as that was his job for a couple of decades, and he was admitted to practice before the IRS and defend those decisions should there be an audit  (there wasn’t.)  Larger businesses have armies of CPAs and enrolled agents who have this as their sole task in life.

If you want to be pissed off at someone for gaming the code in the present tense start with Amazon and Jeff Beelzebezos; the company has paid zero federal taxes for a while now.  Did Trump do that?  No — Congress did, just as they did with Trump’s NOL schemes — all of them legal — in previous years.

If you want to grab a rope and scream for people to twist on the end of same start with the 535 jackwads in Congress who have explicitly designed the tax code on purpose with structures in it exactly like this that are both insanely complex and make gaming it both worthwhile and easy for certain classes of business while everyone else, including you personally, get rammed up the ass and pay all of the marginal rate due on your income.

For what it’s worth those rules have been tightened up to prevent some of the most-egregious former dodges, including some of the ways Trump was formerly able to amass those huge NOLs — but not all of them.  Rather than get rid of the BS entirely Congress has added more complexity.

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