US presidential hopefulÂ Donald Trump signed off on a controversial business deal that was designedÂ to deprive the American government of tens of millions of dollars in tax, the Telegraph can disclose.
The billionaire approved a $50 million investment in a company â€“ only for the deal to be rewritten several weeks later as a â€˜loanâ€™.
Experts say that the effect of this move was to skirt vast tax liabilities, and court papers seen by the Telegraph allege that the deal amounted to fraud.
Independent tax accountants and lawyers said that the documents Mr TrumpÂ signed â€“ copies of which were obtained by this newspaper as part of a three-month investigationÂ – contained â€œred flagsâ€ indicating the deal was irregular.
But theÂ Republican presumptive presidential nomineeÂ signed nonetheless.
Bob McIntyre, director of the US-based Citizens for Tax Justice campaign group,Â said the disclosures raised serious questions about Mr Trumpâ€™s judgment as well as that of his advisers.
Mr Trumpâ€™s tax affairs have come under scrutiny in recent weeks when he broke with US political convention and refused to disclose his tax returns before this Novemberâ€™s presidential election.
The outspoken tycoon â€“ who revealed last week that he had earned more than $500 million in the last year â€“ has previously boasted of how he pays as little tax “as possible”.
Jack Blum, chairman of the Tax Justice Network and a financial crime attorney, said Mr Trump was a “poster child” for tax avoidance property schemes, which ultimately harm the middle-income American.
Trump Signed Off On Deal Which Deprived The US of Tens of Millions In Taxes
The allegations centre on Mr Trump’s business alliance with Bayrock Group, the property company that was building Trump SoHo, the mogul’s prizedÂ New York building Â – as well as two other projects to whichÂ he had licensed his name.
In 2007 Bayrock struck a deal with FL Group, an Icelandic company that had agreed to invest $50 million in four of Bayrock’s subsidiary partnerships. However, the deal was later relabeled as a loan.
[quote_regular name=”” icon_quote=”yes”]“It’s not a loan – it’s really equity. I donâ€™t think they would survive a challenge [by the IRS].” -Howard Abrams, law professor[/quote_regular]
In New York, the sale of a stake in a partnership would make the existing partners liable to pay more than 40 per cent in tax on their ‘gain’, based on the highest tax rate.
However, if the investment is classified as a loan no tax would be payable.
Former employees of Bayrock have alleged in a case against the company that the deal was intended to fraudulently evade some $20 million in tax through a disguised sale of partnership interests.Â They also claim the participants mislabeled the sale as a loan in order to avoid paying a further estimated $80 million taxes on the projected profits from the real estate.
The Telegraph has obtained copies of the letters Mr TrumpÂ signed for both the original version, and the newÂ form as a â€œloanâ€. He and his lawyers were sent copies of the relevantÂ paperwork, including the final loan agreement.
Alan Garten, Mr Trumpâ€™s lawyer, claimed that the billionaire â€œhad nothing to do with that transactionâ€ and by signing the letters was simply acknowledging the deal as a â€œlimited partnerâ€.Â â€œHe was not signing off on the deal,â€ he insisted.
But copies of the final agreement, seen by the Telegraph, reveal thatÂ deal required Mr Trump’s approval because he was a key player in Bayrock’s investments. He had a 15 per cent stake in Trump SoHo.
Independent experts who have reviewed copies of the final agreementÂ have said the documents appear to be an equityÂ investment disguised as a loan in order to avoid tax paymentsÂ on the profit FL was expecting to receive.
Howard Abrams, professor of law and director of tax at the UniversityÂ of San Diego, said: â€œConverting the original equity into debt improvedÂ their tax position dramatically. However they have changed the labels,Â but they didnâ€™t really change the economics at all.
“It’s not a loan – it’s really equity. I donâ€™t think they would survive a challenge [by the Internal Revenue Service (IRS)].â€
Experts said that the matter would usually be one for the IRS, whoÂ could audit, or re-audit, the deal and attempt to recover any tax thatÂ should have been paid. In such cases the IRS can subsequently pursueÂ fraud charges if there is sufficient evidence of intentionalÂ wrongdoing.
A former federal prosecutor in the Department of Justice’s tax division,Â said that if action were taken by the IRS it could see Mr Trump deposed in court.
A source at FL Group – which went bankrupt in the Icelandic banking crisis in 2008 â€“ separately stated that â€œwhether it was structured as a loan or an equity investment we were always buying an interest in certain projects.â€
Mr Trumpâ€™s lawyer said the tax implications of the deal were not relevant to Mr Trump becauseÂ he was not Â a â€œpartyâ€ to the transaction.Â â€œOur interests areÂ protecting our rights,â€ he said.
Bayrock described the allegations in the legal complaint by JodyÂ Kriss, its former finance director, as â€œbaselessâ€.
The company said the deal was â€œvetted and approved by outsideÂ accountantsÂ and tax counsel”. ItÂ claimed that the deal’s â€œtax treatmentâ€ was subjectÂ to an â€œextensive field audit â€¦ conducted over many monthsâ€ by the IRS,Â which â€œconcluded that it was entirely appropriateâ€.
However it refused to provide proof of the audit or answer a series ofÂ questions about what information had been made available to officials.
Frederick Oberlander, the tax lawyer who has represented Mr Kriss inÂ his complaint against the company, said: â€œBeing audited only meansÂ they didnâ€™t catch anything. It doesnâ€™t mean there isnâ€™t anything toÂ catch.â€
Story of the $50 million deal signed off by Trump
It’s been quite the busy week … even for the presidential hopeful Donald Trump.
It began with the finale of season six of The Apprentice, his famed show, and continued in a style that was trademark Trump.
He settled a bitter legal fight with a Florida local council, agreeing to shorten the pole of a massively oversized American flag at his Palm Beach resort (but then raised the ground to keep it at the same height).Â He used a media interview to reignite a feud with a television presenter who had labelled him a â€œsnake-oil salesmanâ€ over his handling of the Miss USA pageant.
But in between the high drama manoeuvres, he managed to carve out time to attend, behind closed doors, to a particular business matter that had been on his mind.
Bayrock Group, the multi-million dollar property development firm to which he had lent his name for projects, had struck a $50 million deal to partner with an Icelandic investment company.
The projects included the Trump SoHo, Mr Trump’s prized hotel and apartment complex in New York.Â Mr Trump had a 15 per cent stake, and a further 3 per cent went to Ivanka and Donald Jr, his children.
Mr Trump was their star partner, and it was written into the agreement between Bayrock and FL, the Icelandic company, that his consent would be needed for the deal to go ahead.
Bayrock, which was housed in Trump Tower, sent copies of paperwork to Mr Trumpâ€™s lawyers as the deal progressed. And when representatives of FL visited New York, Bayrock’s executives brought them to Mr Trump’s penthouse office to meet the real estate mogul, a source said.
When the consent letters finally came, Mr Trump seemed only too happy to sign on the dotted line.
On Thursday April 26 2007 â€“ four days after the Apprentice finale â€“ he spoke to his chief legal officer Jason Greenblatt, an experienced property and corporate lawyer, about signing the papers – which he did that night.
At the same time, however, intense final negotiations were ongoing between Bayrock and FL. Their representatives had met in London, where Bayrockâ€™s â€œman in the roomâ€ was Felix Sater, a Russian-born businessman who spent a period in prison in the Nineties for stabbing a man with a broken margarita glass. He was then convicted of helping lead one of the biggest stock fraud heists of Wall Street of the era, involving New York mafia families.
Sater was panicking and wanted to close the deal.
He rang Julius Schwarz, Bayrock’s executive vice president and general counsel, demanding to know what was taking so long.
But Schwarz was caught up in frantic emails circulating in New York about the tax that would have to be paid as a result of the deal.
Under the current deal the partners were liable to be hit with a $20 million tax bill, according to figures in court papers filed by former employees, including the then finance director Jody Kriss. Separately, FL would be liable for tax on its expected income of around $143 million (Â£99 million) from the four property schemes.
Emails seen by this newspaper appear to capture the concern among key players at Bayrock about their tax liabilities.
â€œHOW DARE YOU,â€ Â Mr Schwarz wrote in a email reply to Saterâ€™s demand that the deal be finalised. â€œDO YOU REALIZE THAT WE ARE TALKING ABOUT LOOSING [sic] 50 CENTS ON THE DOLLAR? I HAVE BEEN WORKING MY ASS OFF TO GET US THERE.
He added: â€œREMEMBER I AM DOING THIS, TRYING TO FIX CHANGES BEING MADE TO THE DOCUMENTS AT LIGHT SPEED BY OUR LAWYERS WHO ARE SCREWING SOME THINGS UP, BEGGING EVERYONE FOR CONSENTS, DEALING WITH EGOS AND DOCUMENTSâ€¦â€
One of the consents, of course, was that of Mr Trump, who had signed that evening. But the sands were shifting â€“ quickly.
IntentÂ onÂ resolving the tax problem, a solution was engineered by Bayrock, FL and their lawyers that, court papers allege, amounted to fraud.
The complex restructure, Mr Kriss’ complaint claims, evaded $20 million of tax on the initial $50 million buy-in by FL and was designed to shun a further $80 million of tax payments on the projected profits – which never materialised.
Copies of correspondence seen by this newspaper show how an FL lawyer put forward â€œas a tentative suggestionâ€ that rather than FL buying a â€œpreferred equity interestâ€ in Bayrock, the company instead make a “participating loanâ€.
If the money from FL were presented as the company giving Â Bayrock a loan, FL’s income on the profits from the deal could be termed as â€œinterestâ€ which would not be taxable.
The loan, would be “respected as “debt” for tax purposes” a Bayrock lawyer wrote, citing a proposal by his FL counterpart, in an email included in Mr Krissâ€™s legal complaint.
In other words the deal could be relabeled as a loan, but keep the economic effects of an equity investment. And yet it wouldnâ€™t be taxed as an equity investment because the Internal Revenue Service would not tax a debt.
Had tax been payable, because FL was a foreign company, Bayrock would have been responsible for â€œwithholdingâ€ the relevant portion from FLâ€™s share of the profits in order to pay it to the IRS.Â Lawyers therefore advised that FL set up a US subsidiary – a shell company in Delaware – thereby further alleviating Bayrock’s responsibilities.
In order to add a feature to the “loan” which would “give it legs for tax purposesâ€, lawyers recommended creating a time frame by which Bayrock should “repay” the debt. They set it at 15 years.
Bayrock appeared to welcome the suggestions and immediately set about revising the paperwork accordingly.
On 30 April Mr Kriss, the firmâ€™s finance director, asked Mr Schwarz whether the money should be treated as an equity investment or a loan. He wrote: â€œIs FL coming in as equity or debt?â€
Mr Schwarz replied: “Call it equity but for tax purposes its debt. Otherwise we write a huge check to the IRS. As a 49 per cent equity partner they are still equity. There is no other way around it.â€
The â€œcontribution agreementâ€ quickly became a â€œloan agreementâ€.
This loan agreement was sent to the Trump Organisation along with a revised consent letter for Mr Trump to sign in May 2007. An email to Mr Trumpâ€™s then general counsel stated that the letter reflected â€œthe revised structure of Bayrock’s recap[italisation].â€
Court papers allege that the deal as it was finally structured was fraudulent in several ways. In addition to masking the equity as debt, the former Bayrock employees have alleged that the deal also involved a â€œdisguised sale of partnership interestsâ€.
Independent experts who reviewed the deal documents for the Telegraph identified â€œred flagsâ€Â indicating these two practices â€“ which, once discovered, would generally lead to the IRS claiming back unpaid tax.
Whether or not the deal was legal or deprived the Treasury of funds to which it was entitled, the experts consulted by the Telegraph agreed that something was wrong â€“ and that that much was apparent from the documents.
Jack Blum, chairman of the Tax Justice Network and a prominent financial crime and tax lawyer, said this deal was emblematic of an industry that had made mastery of tax avoidance – at a cost for the middle income American.
“My feeling is this whole arena of real estate taxation ought to be cleaned up. Because there is no rational reason for the tax that the rest of us pay; for the rest of us to subsidise Â these real estate deals,â€ he said.
“This is how people who are very wealthy donâ€™t pay tax. This is how this system can operate, relieving them of the tax burden without anybody out there in what I would call the civilian world understanding what happened.”
“If you dig through all these real estate deals of Trumpâ€™s, Iâ€™m sure youâ€™ll see that he took advantage of it again and again.
“He is a poster child for this industryâ€.
Originally Shown On The Independent.