Earlier this week, the New York Times published a special investigation into Trump’s tax affairs headlined “Trump Engaged in Suspect Tax Schemes as He Reaped Riches From His Father.” Among other things, the article describes an inter-generational wealth transfer from Fred Trump to his children worth more than $1 billion. The 55% estate and gift tax in effect at the time, they claim, would have produced a tax bill of at least $550 million.
Charles Harder, Trump’s lawyer, says that the tax “affairs were handled by… Trump family members who were not experts themselves and therefore relied entirely upon… licensed professionals to ensure full compliance with the law.” (Emphasis added). This may seem like a reasonable denial, but to a tax litigator, these words are strikingly specific.
Judge Learned Hand wrote that anyone can “arrange his affairs so that his taxes are as low as possible so long that he pays what the law demands.” But it’s not always clear how much the law demands because tax law is very complicated and every nuance is gamed and litigated as soon as the laws are written.
First, let’s call out an obvious misdirection: the only way an billion dollar estate pays the maximum estate tax is if there was a spectacular failure of estate planning. And, it might even require reverse planning to undo certain automatic tax preferences that would result in a lower effective rate without any planning at all.
In any event, the Times says that the Trump family used ‘suspect tax schemes’ to pay an effective tax rate of just 5%. This isn’t out of the question – it’s is undoubtedly possible under a sophisticated estate plan – but the article suggests some kind of impropriety.
Let us assume that the Trump family should have paid the full tax rate of 55%, or $550 million, and only paid $55 million as reported. The family would therefore owe an additional $495 million in taxes. Under IRC Sec. 6651, the penalty for a tax underpayment is 25%, or about $125 million in this hypothetical.
There is an important qualifier, however: the penalty applies “unless it is shown that such failure is due to reasonable cause.” (Emphasis added).
Reasonable cause is not defined in the tax code and is instead an elusive concept derived from case law and secondary sources. For example, the Internal Revenue Manual (the IRS’s employee handbook) explains that “[r]easonable cause is based on all the facts and circumstances… [and] is generally granted when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations…” IRM 184.108.40.206.2.2.5.
Hiring a tax lawyer is ordinary business care and prudence if, like most people, the taxpayer is not familiar with the complex rules of estate tax. By following the lawyer’s advice, the taxpayer can therefore claim ‘reasonable reliance on a tax professional’ as an argument to avoid penalties.
Consequently, Harder’s statement is more than a denial. He is specifically saying that the 25% penalty doesn’t apply to the Trump family because they are not tax experts and were only relying on the advice of licensed professionals.
It just might work. Harder may be able to help his client avoid an expensive penalty but – and let’s be clear about this – he can only do it by throwing the tax lawyers under the bus.