New York Attorney General Letitia James’ complaint against former President Donald Trump, Donald Trump Jr., Eric Trump, Ivanka Trump, Allen Wesselberg, Jeffrey McConaughey, and ten entities including the Trump Organization do not primarily focus on taxes. It is mostly about Trump gaining advantages such as favorable loan terms and insurance provisions by allegedly lying about his net worth.
The alleged “acts of fraud and disinformation” mentioned in the complaint came in the form of an annual financial statement prepared by the top 30 accounting firms Mazars, which fired the Trump Organization as a client and stated that Donald Trump’s financial health data for the years ending June 30, 2011 through 2020 was unreliable. Mazars collected data rather than reviewing or auditing it, so responsibility for alleged misrepresentations rests with the persons named in the complaint.
What the AG alleges is that Trump and others have been deceiving Mazars about it is property valuations, thus overestimating Trump’s net worth. This kind of thing is not going to reduce taxes. Where the problem of taxation, which I am writing about, enters into the question of easements of conservation. During his presidential run, Donald Trump’s campaign submitted a 93-page list of 4,844 charitable contributions totaling $102 million. High on the list was $63,825,000 in various easements.
Deductions to contribute to mitigation
In general, don’t get a charitable deduction for giving less than a full interest in a distant property. There are exceptions to this rule. The most prominent feature of Section 170 (h) of the Conservation Qualifying Concern Law. In lieu of a full or residual interest in the property, you can donate a “restriction (granted in perpetuity) on the use that can be made of real property.” This is usually called a symphysis. There are other requirements, most notably that the gift must be of the correct type of organization and must be for one of the various purposes of preservation.
If you give the easement you get a discount for the easement value. There is not a lot of buying and selling easements. How do you estimate the right of easement? Regulation 1.170A-14 is concerned with:
If, as a general rule (but not necessarily in all cases), there is no significant market sales history available to use as a meaningful or valid comparison, then the fair market value of the permanent keeping restraints is equal to the difference between the fair market value of the mortgaged property before the restriction was granted and the fair market value of the property pledged after the restriction is granted.
The value of “before” creates the most controversy. There is a mini-industry of common conservation easements based on fanciful valuations. I have written a lot on this issue. When you overstate the “past” value of a property, you can end up underestimating your tax liability by inflating your charitable deductions. This is the subject of income tax in the complaint.
Below are the parts of the complaint that discuss conservation easement rights.
According to the complaint, Seven Springs is a parcel of land consisting of approximately 212 acres within the towns of Bedford, New Castle and North Castle in Westchester County, New York. The owner of Seven Springs LLC, a subsidiary of the Trump Organization, was named in the complaint.
The complaint notes that property appraisals in 2000 and 2006 indicated values of $25 million and $30 million, respectively. In the 2011 to 2014 financial condition data, the valuation ranges from $261 million to $291 million. From the complaint's point of view, the easement donation was an acknowledgment that development plans supporting this type of value were unenforceable.
An appraisal of six New Castle lots indicated a value of $700,000 each. In a 2013 statement, the value of similar pieces in Bedford was $23 million. When asked to explain the discrepancy, Eric Trump invoked the privilege of the Fifth Amendment. According to the complaint, Eric was aware of a development restriction from the town of Bedford.
In the end they decided to award a conservation easement based on a valuation of $56.5 million—well below the $261 million to $291 million in the data. According to the complaint, that was still an exaggeration because it ignored the property's known limitations and had an overly optimistic selling schedule.
For what it's worth, the Seven Springs story broke in the Washington Post on October 9, 2020. I interviewed the eponymous expert on the Post story, Timothy Lindstrom, an easement attorney. Wasn't negative about the rating other than commenting that it could have been more clear.
Given what else is happening in the world of conservation easement tax, there probably isn't a huge tax problem here. It appears that when it comes to this issue, the Trump Organization may be more cautious with the IRS than it is with Deutsche Bank.
Any tax issues around the Mar-a-Lago easements are old and cold. Concerns about the easements and limitations of Mar-a-Lago relate to their disregard in the valuations that have been used in the financial condition statements.
The Trump Organization and Mr. Trump learned that Mar-a-Lago was subject to a set of onerous restrictions and restrictions - approved and signed by Mr. Trump - that precluded any use of the property as anything other than a club, residential subdivision of the property, and required significant preservation expenses, among other restrictions. . Despite knowledge and full awareness of these facts, the Trump Organization estimates Mar-a-Lago each year from 2011 to 2021 based on the false premise that these restrictions did not exist. For these and a host of other reasons, all evaluations of this property were wrong and misleading.
Trump National Golf Club in Los Angeles
In TNGC LA, there were geological concerns about a plan to develop 16 plots of land where there was a driving range and green setting. Given the difficulties, the Trump Organization ended up deciding to donate a conservation agreement that would allow continued use as a command area. The pieces were valued with others at $2.5 million each in the compilation of the statement of financial condition. When Trump tax attorney Sherry Dillon engaged appraisers to look at the property for easement discounting purposes, they returned values in the $1.7 million range.
Trump himself argued that the pieces to be subject to the easement were in a more prestigious zip code than the others and should receive a "zip code premium". It turns out that this is not the case. Appraisers ended up pushing the valuation further down to less than $20.5 million. Revised estimates of development costs threatened to push it further down. Trump lobbied for a higher rating. It ended up being $25 million.
The complaint mentions several issues with the $25 million valuation, but does not indicate how much it would be worth unless the golf course would benefit from continuing to provide an available driving range that, according to the complaint, inflated the value of the $500,000 donation. It should be noted that the assessment can be quite a long way before it is subject to significant or lump-sum misrepresentation fines for income tax purposes. Thresholds are 150% for the core and 200% for the total.
There was a press conference to announce the donation. Dillon advised against holding the press conference.
“Remind him that the higher the value and the more he can produce it, the more he is telling the world how much tax deduction he gets for it. In this case, it is the American taxpayers paying Donald Trump to maintain his driving range and use exactly what he is actually using it for — and he might argue Some argue that as long as he runs the golf course, he will continue to maintain the driving range - in effect, the US taxpayers are paying him to do what he's actually going to do anyway, and that's probably not the best use of taxpayer money. The more scrutiny we are called upon. This may cause renewed interest in this issue.”
Dillon was there asking an in-house lawyer to remind Trump that easements on golf properties are controversial. This did not stop the press conference.
In the context of what's going on with conservation easements, nothing really exciting here from a tax perspective. The allegations in the complaint do not appear to be up to the mark in the overall assessment. There is nothing here that can compare to running scams with common conservation easements where property held for a very short period will be coded with a factor of ten or more.
As with Seven Springs, we see that the Trump Organization is more cautious about what goes into Donald's tax credit than what is sent to Mazars for a statement of financial condition.
Complaining was fun to read for someone like me. It reminded me of my younger days before I focused exclusively on taxes. I was conducting an audit of the financial statements of a real estate partnership. I just became a partner and this was the biggest deal I've ever worked on. We were doing a procedure called Analytical Review to give more scrutiny of expenses and income that was way off than expected. Since we didn't have a previous year, we used the worksheets of a much larger company that made forecasts that were used to sell the interest in the partnership.
There was a wide range of differences that showed on the net expectations of cost reduction. When we discussed our confusion with someone at the management company, they replied "Oh. You're using these Company XYZ numbers. These are numbers for bankers and investors. Here's the real budget." That was not good for the general partners and many of their employees.
This is the type of behavior that a complaint broadly categorizes. Trump's response in an interview with Sean Hannity, in which Hannity tossed and then grabs softballs for "the 45th president," was interesting.
He tells us that the banks have their lawyers and do not rely on the Trump Organization for values. There's a "disclaimer in the front that basically says. Get your staff. You're at your own risk." It would be great to know what he's referring to. If this view is at the opening of the statement of financial condition, it is Mazars who disavow.
There's a lot more here, but at least on the surface, there doesn't seem to be much to the IRS. It's not in the same ballpark as what was going on with the common conservation easements.
On the other hand, Senator Ron Wyden of Oregon does not seem to view it that way,
Another point of view
Senator Wyden seems less simple than I am. The following statement was issued in response to the AG's report.
Attorney General James presented significant evidence of violations of federal tax law. This alleged behavior can result in the average American being imprisoned for years, and it is critical that the IRS fully investigate these cases.
Every day, prosecutors bring cases regarding a fraction of the alleged fraud here, and the federal government cannot send the message that only ordinary people face accountability while people like Donald Trump break the law with impunity.
I am particularly concerned about Donald Trump's alleged abuse of the Conservation Easement Program, which has been the focus of an extensive Finance Committee report. This underscores the need for a bipartisan bill to reform the Joint Conservation Conservation Program across the finish line.
The Finance Committee has written to Trump's accounting firm Mazars on this matter, and we intend to conduct a full investigation into the role played by other brokers involved in preparing the alleged false statements.