Does Donald Trump Have a Duty to Pay More in Taxes?

Much has been written about Donald Trump’s apparent ability to not pay income taxes due to a $916 million loss stemming from a 1995 return. The question I’d like to address here is whether
Mr. Trump has a duty to pay more in taxes. Before I get much further, I’d like to add that I am not a fan of Mr. Trump, for various reasons.

But let’s examine an individual’s “duty” to pay income tax. How many of us have looked at our 1040 and said, “Boy, I think I got a good deal this year and because of that, I’ll send the Treasury another few thousand dollars?” The tax laws are complex, and yes they contain loopholes of all kinds, some of which Mr. Trump probably took advantage of.

I’d like to offer a couple of quotes from court opinions written by Judge Learned Hand (1872-1961), who served on the United States District Court for the Southern District of New York and later the United States Court of Appeals for the Second Circuit. Hand has been quoted more often by legal scholars and by the Supreme Court of the United States than any other lower court Judge.

In Gregory v. Helvering, a 1935 case that eventually made its way to the U.S. Supreme Court, the dispute centered on two aspects of the tax law: the business purpose doctrine and the doctrine of substance over form. There, Hand wrote in the majority opinion offered by the 2d Circuit Court of Appeals:  “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose a pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

When the case progressed to the U.S. Supreme Court, the court agreed with Hand, citing that quote in the majority opinion.

A 1947 case, Commissioner of the IRS v. Newman, Hand offered a dissenting opinion that said, among other things: “Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands; taxes are enforced extractions, not voluntary contributions. To demand more in the name of morals is mere cant.”

I suppose that a majority of Americans would agree with both statements. I believe that the objections voiced regarding Mr. Trump’s matter is not whether he took advantage of the laws to create a loss carry forward that apparently resulted in his not paying federal income taxes for many years (we still don’t know if this is the case). Rather, I believe that the objection arises because the laws were constructed in such a way as to allow him to do so.

One cannot blame Mr. Trump directly for the construction of the tax law. That falls on our federal executive and legislative branches. Nor can one blame real estate developers for lobbying Congress for beneficial treatment. Everyone must realize that they’re not the only special interest group doing so. One can make arguments about the role of campaign contributions and whether or not to limit them would somehow result in a “fairer” tax code. Hopefully you can now see how far these relevant issues are from the issue surrounding whether Mr. Trump did something improper in the filing of his personal and corporate income tax returns.

Why are we therefore considering his personal ability to avoid income tax as an election issue? It would follow that the secrecy surrounding his tax return nondisclosure plays a part. I also suspect that our 24-hour news media likes to create easy-to-digest sound snippets to attract our attention. “Trump plays unfair with the tax code” makes an all-to-easy headline that doesn’t make any sense upon closer examination.

There are plenty of other reasons to feel uneasy about Mr. Trump. My column is not the proper forum for those issues. But I thought that I’d at least give you a tax attorney’s view on an issue that I believe really shouldn’t be an issue in this election.

The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.

© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Promissory Notes are Part of Your Estate

Ken and Barb have a joint trust that provides for one another and upon the death of the survivor of them the trust is to be divided among their four children. One child, Amy, borrows $300,000 from her parents to purchase a home. She signs a promissory note and a mortgage is recorded. The note is payable back to Ken and Barb. Ken and Barb don’t tell their estate planning attorney about this transaction.

Many years later both Ken and Barb are deceased and their estate is being administered. The children find out about the note, as Amy was the only person who knew about it. None of the note had been repaid.

“I have to tell all of you that we need to open a probate estate,” the estate attorney tells the family.

“Why is that?” David, one of the other children, asks.

“Because the note is not owned by your parents’ trust,” the attorney instructs. “So it is a probate asset.”

“Mom and Dad told me that they were going to cancel the note when they died,” Amy said.

“Well, there’s nothing in their will or trust that directs the note be cancelled,” the attorney says, leafing through the legal documents. “So the note is an asset of their estate to be distributed in accordance with its terms. Even so, if your parents wanted you to not repay the estate, they should have directed the note be distributed back to you rather than cancel it.”

“Distribute back to me and cancelling it sounds like the same thing,” Amy said.

“Not really,” the attorney continued. “Under our income tax laws cancelling a note results in taxable income to the debtor. So you would have had a $300,000 addition to your net income if they cancelled it. The better thing would be to distribute the note back to you as a part of your share, which is what I’m going to suggest that we do during the trust administration.”

“Didn’t you say that the note was part of Mom’s probate estate?” David asks.

“Yes, it is. Your mother’s will is known as a ‘pour over will’ which means that upon the conclusion of the probate administration it will become part of the trust. One option is to divide the note into four shares and distribute 1/4 of it to each of you. Amy would not have to repay herself but she would have to repay each of you your share, which would amount to $75,000 plus interest each.”

“Is there an alternative to that?” Amy asks.

“Yes, you could take the entire note as a part of your share. Since your parents’ estate is $2 million including the note, that means each of you is entitled to $500,000. Amy will receive her $300,000 note plus $200,000 of other assets. Everyone else gets $500,000.”

“I thought that Mom and Dad wanted me to receive 1/4 of everything they had.” Amy said.

“Well, you are receiving 1/4 of what they had at the time of their death, including the note,” the attorney replied.

Often clients don’t consider the outstanding notes that they have between themselves and their adult children. The issue becomes more complicated when the loan is to a child’s business or from the parent’s business.

When you loan money to your children, it’s always a good idea to inform your estate planning attorney to ensure that your intent is properly followed through. Another issue that arises is when the note is never repaid, including interest. The IRS requires individuals to impute an interest rate if one isn’t stated. The interest rates are based on a monthly table that the IRS publishes known as the Applicable Federal Rate (AFR). The AFR changes based upon whether the note is short, medium or long term.

Even if the borrower doesn’t repay the note including interest, in related party transactions the lending parent is supposed to recognize the interest at the stated interest rate or lowest AFR available if no interest rate is provided.

Make sure that your estate plan considers all of the issues associated with lending money to children or other relatives. Otherwise your children might have to sort through these problems which can cause conflict among them.

The Sheppard Law Firm is located in Fort Myers and Naples by appointment.

© 2016 Craig R. Hersch. Originally published in the Sanibel Island Sun.

It’s Not The Money or Property They Fight Over

I was very close to my great grandmother, whom I called “Bubby.” A framed picture in my home includes her image along with an 1890 silver dollar. She told me that her father handed her a silver dollar bearing the year of her birth when she arrived in America. She hadn’t seen him in many years, as he had to save for her passage. Until my Bubby’s death in 1976, we celebrated our birthdays together, as ours were only one day apart on the calendar.

When she died, that silver dollar was invaluable to me. I was only 12 years old, but I dearly wanted it to remember her by. My sister, incidentally, has our Bubby’s soup spoon framed in a box. It hangs proudly in my sister’s dining room.

So you might find it interesting that in my twenty seven years of practicing estate planning law, I rarely encounter siblings who fight over a deceased parent’s money or property. Generally speaking, the very few disputes I’ve refereed between siblings involved tangible personal property items like rings, watches, jewelry and other items just like coins and soup spoons.

Don’t underestimate the sentimental value of an item that’s been handed down over the generations from father to son or from mother to daughter. If you have more than one son, you may not want to assume that the eldest will treasure granddad’s watch. Mothers of daughters and even granddaughters often own a certain string of pearls, a diamond broche or a bracelet that has sentimental value to one or more family members.

So if you own such items that you would like to see passed down to a certain child or grandchild, the first course of business is to find out whether he or she wants it. It doesn’t have to be the main topic of conversation during a visit or phone call, but at some opportune moment it makes sense to confirm the intended recipient is willing.

Don’t take “let’s not talk about this now” as an answer, either. Many adult children don’t want to sound as if they are awaiting your imminent demise. An appropriate response might be, “I intend to hold onto my [insert item name here] for quite some time. I just want to make sure that if I leave it to you that this is something you would treasure as I have. Or perhaps there’s something else that you find more valuable sentimentally.”

Be careful here. I’ve had some occasions where more than one child proclaims that he was “promised” an item by their father or mother. If you don’t intend to promise that certain item, but are merely talking about it, make that clear.

Once you’ve decided who is to receive these tangible personal property items, then it is time to make a list. Florida law actually gives us an easy mechanism to make a list of our tangible personal property outside of our will or trust, and to easily amend it without having to visit your attorney.

So long as our will or trust mentions the list properly under the Florida statute, (this would be the job of you working with your estate planning attorney) then you may create a list and it need only be signed and dated. The list does not have to be witnessed. If you should choose to update the list, sign and date it again. I suggest providing a copy of the current list to your estate planning attorney so that he may retain a current copy in your file.

One other note of caution – if you give an item away during your lifetime, remove the item from your list. Also, if you intend for the value of the gift to be deducted from the total value of what that beneficiary receives from your estate or trust, then you should mention this to your attorney to ensure he includes appropriate language within your will or trust documents.

What happens if you don’t have such a list? Then it is typically up to your personal representative and/or trustee to decide who is to receive which tangible personal property items, or which ones should be sold or auctioned. This is where the disputes may arise. The child with the unfortunate task of deciding the fate of sentimental items might find themselves in the unfortunate position of wanting something, but it might look like self dealing if they take it when another beneficiary also expresses a desire to acquire that same item.

Creating such a list can mean more than leaving thousands of dollars to your loved ones. Although my Bubby didn’t have much in the form of monetary wealth when she died, she left me a real treasure, one that can never be replaced.

The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.

© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.