settlement

Swapping Debt for Equity and Stock

On his 1995 tax returns, which were published in part by The New York Times, United States tax laws at the time permitted Trump to use a $916 million loss he reported to cancel out his taxable income.

During this period, his casino empire in Atlantic City, New Jersey was faced with mounting losses. There were also major debts, to the tune of hundreds of millions of dollars, that he needed to repay to creditors that had invested in the partnership that owned these three casinos. In order to eliminate the debts, Trump pressured the investors and banks who had loaned money to the partnership to forgive hundreds of millions of dollars of the debt.Image result for Swapping Debt for Equity and Stock

Knowing that the partnership would not be able to repay the debt, the lenders opted to forgive the debt by taking equity in the partnership. This canceled debt would have had to have been reported to the IRS as taxable income. However, since the partnership owed the debt and the debt was to be swapped for equity in the partnership, there was no requirement for Trump to report the debt to the IRS when the debt was forgiven by the partnership’s creditors.

The strategy was known as a “stock-for-debt swap,” when used by corporations, and an “equity-for-debt swap,” when used by partnerships. In addition, it did not matter if the actual market value of the stock or equity was less than the amount of the canceled debt. Therefore, even if the equity or stock was virtually worthless to the lenders that had acquired it by canceling debt, the move was still considered to be legally permissible at the time.

Having hired expert tax lawyers and certified public accountant Jack Mitnick to handle his taxes, his accounting team essentially found a way for him to avoid reporting the debt on his tax returns so that he could use the casino losses to offset any income tax liability he still had. The staggering amount of loss that was reported so large that Trump was able to avoid paying taxes for 18 years subsequently.

Tax Loopholes Used By Trump No Longer Exist

For business owners looking to take advantage of the tax loopholes used by Trump, these loopholes no longer exist as Congress banned stock-for-debt swaps by corporations in 1993 and equity-for-debt swaps by partnerships in 2004.

These bans were prompted by Trump’s use of the loopholes, as well as, an awareness by Congress and the IRS since the 1980s that there had existed a substantial potential for abuse. However, since Congress and the IRS had been focused on eliminating the loophole for corporations seeking to swap debt for stock, they had not foreseen the use of the loophole by Trump.

Why You Should Hire a Legal Team to Protect Your Business

While the use of tax loopholes may seem egregious to some, this story does highlight the importance of having a legal team that will work on your behalf of your business. In addition to reducing the tax liabilities of your business, there are also other protections that you should have that could save your business money in the long run. It is also important that you keep in mind that tax concerns are not the only risks posed to your business.

The San Diego business litigation lawyers at Walker Law can help you to defend your business against a claim, as well as, ensuring that you have taken the necessary measures to secure your trade secrets and other intellectual property that are vital to the operations of your business.

Get Advice From the Business Litigation Attorneys at Walker Law

If you want to protect your business, you should make sure that you have been properly advised on the most important aspects of your business, including trademarks, copyrights, patents, and contracts. At Walker Law our lawyers will thoroughly investigate all of the potential avenues that could be used to defend your business against a claim.