New documents have surfaced showing that Donald Trump avoided financial ruin in the early 1990s through a controversial technique known as a "stock-for-debt swap," according to a report by The New York Times on Monday.
In a stock-for-debt swap, an individual or company who can only pay part of a large debt but doesn't wish to report the forgiveness of the remainder, which would then be counted as taxable income, simply uses stock (regardless of its value) as a substitute for the unpaid amount.
According to the tax experts who reviewed the documents obtained by the Times, Trump used this method to pressure debt forgiveness from the investors who lost hundreds of millions of dollars backing his failed Atlantic City casino empire in the early 1990s.
Instead of reporting this forgiven debt for what it was — hundreds of millions of dollars of taxable income — Trump took advantage of the fact that his three Atlantic City casinos were owned through partnerships instead of corporations. As a result, he offered the investors partnership equity instead of stock, then applied that logic to the stock-for-debt swap in order to avoid paying income taxes.
This may very well explain how Trump was able to report $916 million of tax losses on his 1995 tax returns (which were published by the Times in October). In theory, it shouldn't have been possible for Trump to cancel out that amount of taxable income when his casino losses would have also resulted in a comparable amount of canceled debt. By using this trick to avoid reporting that debt, though, Trump could have applied the $916 million deduction to income taxes he would have owed through his profitable business ventures from later years.
“Whatever loophole existed was not ‘exploited’ here, but stretched beyond any recognition,” Steven M. Rosenthal, a senior fellow at the nonpartisan Tax Policy Center, told the Times. This sentiment was echoed in an interview with John L. Buckley, who served as chief of staff for Congress's Joint Committee on Taxation in 1993 and 1994, who observed, “He’s getting something for absolutely nothing."
Hope Hicks, who served as spokeswoman for the Trump campaign, has characterized the New York Times article as "pure speculation" and claims the newspaper is guilty of either "a fundamental misunderstanding or an intentional misreading of the law."