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Trump tax return discrepancy suggests use of loophole, experts say

Leaked 1995 tax returns from Donald Trump reported anegligible amount of salary, but public filings show the Republicanpresidential candidate received more than $500,000 in salary and nearly $5 millionin other income that year. Tax experts call the discrepancy a "redflag" that could suggest use of a loophole that classifies personal wagesas corporate distributions, thereby lowering the tax rate.

As Trump's tax returns have become a focal point of thepresidential campaign, there has been increased that lawmakers could seizethe opportunity to eliminate certain tax breaks.

Trump's campaign did not respond to requests for comment.

The New York Timeson Oct. 1 publisheda three-page snippet of Trump's New York state tax return for 1995. On thefirst line of the tax return, Trump reported "wages, salaries, tips,etc." as a mere $6,108. However, an annual report for Trump Entertainment Resorts Inc., which closed its IPOin 1995, showed that Trump received $583,333 in "salary" that year aschairman of the board.

Tax experts contacted by S&P Global Market Intelligencesaid the discrepancy, along with other items in the public filing, suggestTrump used a loophole madefamous by former elected officials Newt Gingrich and John Edwards.

Income from wages is subject to Medicare tax, but incomefrom corporate distributions, which can include money, stock or property, isnot. Gingrich and Edwards created corporations to receive personal income. Thecorporations would then distribute the funds back to Gingrich and Edwards withmuch of it classified as corporate profits not subject to Medicare tax.

"The fact that there is a report of salary in excess ofthe wages [Trump] reflected [on his tax return] suggests red flags to me — thatthis could be the Gingrich-Edwards loophole," said Steven Rosenthal, asenior fellow in the Urban-Brookings Tax Policy Center.

Rosenthal said another possible explanation would beclassification of the $583,333 in salary as "directors' fees," whichwould be reported as self-employment income, not as "wages, salaries,tips, etc." Courtney Edwards, an associate professor of accounting forUniversity of North Carolina, agreed with the assessment that those were thetwo most likely explanations for the discrepancy.

Rosenthal also said it is possible that Trump's salarymerely "accrued" in 1995 and was not paid until 1996, but he calledthis situation very rare. However, he said "other income" of morethan $1 million paid to Trump in 1994 could not have been deferred until 1996,suggesting some sort of use of the Gingrich-Edwards loophole. Without Trump'sfull tax return, it is impossible to know for certain.

Edward Kleinbard, a law professor focused on tax issues atthe University of Southern California, rejected the "directors'fees" explanation and attributed the discrepancy to theGingrich-Edwards loophole. Kleinbard pointed to another portion of TrumpEntertainment's annual report, which stated that directors "are paid anannual directors' fee of $50,000, plus $2,000 per meeting attended plusreasonable out-of-pocket expenses incurred in attending these meetings, providedthat directors … receive no additional compensation."

Trump's salary of $583,333 seems much greater than allowabledirectors' fees, especially considering that the public filing shows Trumpreceived several other forms of compensation. In the 1995 annual report, TrumpEntertainment disclosed $1.3 million in "other compensation" toTrump. Trump Entertainment's filing in 1996 revised that "othercompensation" figure to $4.8 million for 1995.

UNC's Edwards said she was unsure if the $583,333 in salaryrepresented use of the Gingrich-Edwards loophole, but she said the millions in"other compensation" certainly suggested use of the tax avoidancestrategy.

"It very much makes it sound like the [Gingrich-Edwardsloophole]. There's nothing necessarily nefarious about that — it's a well-knownstructure," Edwards said.

Use of the loophole would be illegal if the corporationfailed to pay its sole shareholder or beneficiary a "reasonable"salary, which would be subject to all taxes. In onecase, the IRS won a tax deficiency judgment against an accountant forpaying himself a $24,000 salary and more than $200,000 in corporatedistributions.

USC's Kleinbard said the situation demonstratesthe need to alter the tax code.

"It is a tactic that the Internal Revenue Service hasunderinvested in litigating, and it is a tactic that Congress is aware of andshould have permanently closed down years ago," Kleinbard said.

Kleinbard, Edwards and Rosenthal all agreed that thediscrepancy underscored the need for Trump to release his full tax return.

"This is really hard when Trump will not tell youwhat's on his return," Rosenthal said. "You have to guess what factpattern accommodated this, and that's really hard."