Piercing the veil of the Trump Organization

New York Attorney General Letitia James has accused Donald Trump and other co-defendants of fraudulent business schemes in a massive $370 million civil lawsuit (People v. Donald Trump, et al., 452564/2022, New York State Supreme Court, New York County, Manhattan). Judge Authur Engoron has already ruled that Trump has engaged in fraud and the only remaining question is the size of the penalty. James is seeking a $350 million penalty. Engoron’s decision is expected any day.

But related federal legal problems lie ahead for the former president based on James’ investigation.

On Jan. 26, Barbara Jones, the court-appointed monitor and retired federal district court judge, submitted a 12-page monitor’s report to Judge Engoron. The report assesses the various financial disclosures made by the Trump Organization. She stated that “my role has been limited to assessing the accuracy of the information provided to me by the Trump Organization. During my review, however, I have identified certain disclosure deficiencies that, from the recipient’s perspective, could be considered material inaccuracies in the presentation of financial information.”

In her report, she planted a legal land mine that could explode. On page 8, Jones stated “We also observed intercompany loans listed as liabilities in internally prepared balance sheets provided to a finance company.” It goes on to observe “these loans do not appear to have documents establishing their terms and conditions.”

Of particular interest to the federal authorities is footnote 6. “I discussed the springing loan (a loan with unfavorable terms to the borrower) previously disclosed as being between Donald J. Trump individually and Chicago Unit Acquisition (an entity related to the Trump Chicago Tower) with the Trump Organization several times. When I inquired about the loan, I was informed that there are no loan agreements that memorialize the loan, but that it was a loan that was believed to be between Donald J. Trump, individually, and Chicago Unit Acquisition for $48 million. However, in recent discussions with the Trump Organization, it indicated that it determined that the loan never existed.” The Trump Organization now reportedly disputes the fact that the “loan never existed.”

What’s going on? The difference between legitimate tax avoidance and tax evasion is critical. The arguable “loan debt” may have been concocted by Trump as a fictional way of avoiding income taxes.

The Chicago Unit Organization (CUO) is an LLC fully owned and controlled by Trump. It does not appear to earn any revenue and Trump assigns it no value. Fortress and its partners loaned money to Trump for the construction and development of the Trump International Hotel and Tower in Chicago.

The project was a financial disaster and reports indicate that Fortress agreed to accept 50 cents on the dollar of the loan. The terms of the settlement agreement with Fortress have not been publicly disclosed.

Trump’s argument appears to be that the Fortress debt of $48 million was transferred to his LLC. Thus, Trump now effectively owes himself the money. Assuming arguendo the debt was transferred to his LLC, if Trump didn’t intend to pay off the debt, his failure may be criminal.

But there is also potential tax liability. In general, if a debt or part of it is canceled or discharged for less than the amount owed, the amount of the canceled debt is treated as income to the borrower. Thus, the critical tax question is whether Trump purchased the amount of the canceled debt, which is now held by CUO, or whether the debt was partially written off by Fortress with no further recourse against Trump. If the latter is the case, Trump owes federal income taxes on the amount written off by Fortress. The Recorder of Deeds in Chicago has no record of filings on the acquisition by CUO.

The DOJ and IRS can pierce the veil of secrecy and mystery surrounding the transaction. The DOJ may bring a civil or criminal action against Trump if it finds he “knowingly and willfully” falsified or omitted required information on federally required financial disclosures.

The IRS also has an interest in recovering any amounts properly owed should it find the $48 million was reportable income. Some argue this may be one of the reasons Trump’s MAGA supporters in Congress are keen to slash the budget of the IRS. But cutting the budget of the IRS makes no sense and is nothing more than a gift to the wealthy tax evaders.

Meanwhile, the New York Times reported last week that former CFO to the Trump Organization, Allen Weisselberg, is negotiating with Manhattan prosecutors to plead guilty to perjury. The new development came to light following a Forbes article that discredited Weisselberg’s claims regarding the inflated value of Trump’s penthouse apartment. Weisselberg has been withdrawn from further testifying, and Judge Engoron said on Wednesday that other aspects of his testimony could also be called into question.