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Trump Engaged in Suspect Tax Schemes as He Reaped Riches From His Father
The president has long sold himself as a self-made
billionaire, but a Times investigation found that he received at least $413
million in today’s dollars from his father’s real estate empire, much of it
through tax dodges in the 1990s.
By DAVID BARSTOW, SUSANNE CRAIG and RUSS BUETTNER
Oct. 2, 2018
President Trump participated in dubious tax schemes during
the 1990s, including instances of outright fraud, that greatly increased the
fortune he received from his parents, an investigation by The New York Times
has found.
Mr. Trump won the presidency proclaiming himself a self-made
billionaire, and he has long insisted that his father, the legendary New York
City builder Fred C. Trump, provided almost no financial help.
But The Times’s investigation, based on a vast trove of
confidential tax returns and financial records, reveals that Mr. Trump received
the equivalent today of at least $413 million from his father’s real estate
empire, starting when he was a toddler and continuing to this day.
Much of this money came to Mr. Trump because he helped his
parents dodge taxes. He and his siblings set up a sham corporation to disguise
millions of dollars in gifts from their parents, records and interviews show.
Records indicate that Mr. Trump helped his father take improper tax deductions
worth millions more. He also helped formulate a strategy to undervalue his
parents’ real estate holdings by hundreds of millions of dollars on tax
returns, sharply reducing the tax bill when those properties were transferred
to him and his siblings.
These maneuvers met with little resistance from the Internal
Revenue Service, The Times found. The president’s parents, Fred and Mary Trump,
transferred well over $1 billion in wealth to their children, which could have
produced a tax bill of at least $550 million under the 55 percent tax rate then
imposed on gifts and inheritances.
The Trumps paid a total of $52.2 million, or about 5
percent, tax records show.
The president declined repeated requests over several weeks
to comment for this article. But a lawyer for Mr. Trump, Charles J. Harder,
provided a written statement on Monday, one day after The Times sent a detailed
description of its findings. “The New York Times’s allegations of fraud and tax
evasion are 100 percent false, and highly defamatory,” Mr. Harder said. “There
was no fraud or tax evasion by anyone. The facts upon which The Times bases its
false allegations are extremely inaccurate.”
Mr. Harder sought to distance Mr. Trump from the tax
strategies used by his family, saying the president had delegated those tasks
to relatives and tax professionals. “President Trump had virtually no
involvement whatsoever with these matters,” he said. “The affairs were handled
by other Trump family members who were not experts themselves and therefore
relied entirely upon the aforementioned licensed professionals to ensure full
compliance with the law.”
The president’s brother, Robert Trump, issued a statement on
behalf of the Trump family:
“Our dear father, Fred C. Trump, passed away in June 1999.
Our beloved mother, Mary Anne Trump, passed away in August 2000. All
appropriate gift and estate tax returns were filed, and the required taxes were
paid. Our father’s estate was closed in 2001 by both the Internal Revenue
Service and the New York State tax authorities, and our mother’s estate was
closed in 2004. Our family has no other comment on these matters that happened
some 20 years ago, and would appreciate your respecting the privacy of our deceased
parents, may God rest their souls.”
The Times’s findings raise new questions about Mr. Trump’s
refusal to release his income tax returns, breaking with decades of practice by
past presidents. According to tax experts, it is unlikely that Mr. Trump would
be vulnerable to criminal prosecution for helping his parents evade taxes,
because the acts happened too long ago and are past the statute of limitations.
There is no time limit, however, on civil fines for tax fraud.
The findings are based on interviews with Fred Trump’s
former employees and advisers and more than 100,000 pages of documents
describing the inner workings and immense profitability of his empire. They
include documents culled from public sources — mortgages and deeds, probate
records, financial disclosure reports, regulatory records and civil court
files.
The investigation also draws on tens of thousands of pages
of confidential records — bank statements, financial audits, accounting
ledgers, cash disbursement reports, invoices and canceled checks. Most notably,
the documents include more than 200 tax returns from Fred Trump, his companies
and various Trump partnerships and trusts. While the records do not include the
president’s personal tax returns and reveal little about his recent business
dealings at home and abroad, dozens of corporate, partnership and trust tax
returns offer the first public accounting of the income he received for decades
from various family enterprises.
What emerges from this body of evidence is a financial
biography of the 45th president fundamentally at odds with the story Mr. Trump
has sold in his books, his TV shows and his political life. In Mr. Trump’s
version of how he got rich, he was the master dealmaker who broke free of his
father’s “tiny” outer-borough operation and parlayed a single $1 million loan
from his father (“I had to pay him back with interest!”) into a $10 billion
empire that would slap the Trump name on hotels, high-rises, casinos, airlines
and golf courses the world over. In Mr. Trump’s version, it was always his guts
and gumption that overcame setbacks. Fred Trump was simply a cheerleader.
“I built what I built myself,” Mr. Trump has said, a
narrative that was long amplified by often-credulous coverage from news
organizations, including The Times.
Certainly a handful of journalists and biographers, notably
Wayne Barrett, Gwenda Blair, David Cay Johnston and Timothy L. O’Brien, have
challenged this story, especially the claim of being worth $10 billion. They
described how Mr. Trump piggybacked off his father’s banking connections to
gain a foothold in Manhattan real estate. They poked holes in his go-to talking
point about the $1 million loan, citing evidence that he actually got $14
million. They told how Fred Trump once helped his son make a bond payment on an
Atlantic City casino by buying $3.5 million in casino chips.
But The Times’s investigation of the Trump family’s finances
is unprecedented in scope and precision, offering the first comprehensive look
at the inherited fortune and tax dodges that guaranteed Donald J. Trump a
gilded life. The reporting makes clear that in every era of Mr. Trump’s life,
his finances were deeply intertwined with, and dependent on, his father’s
wealth.
By age 3, Mr. Trump was earning $200,000 a year in today’s
dollars from his father’s empire. He was a millionaire by age 8. By the time he
was 17, his father had given him part ownership of a 52-unit apartment
building. Soon after Mr. Trump graduated from college, he was receiving the
equivalent of $1 million a year from his father. The money increased with the
years, to more than $5 million annually in his 40s and 50s.
Fred Trump’s real estate empire was not just scores of
apartment buildings. It was also a mountain of cash, tens of millions of
dollars in profits building up inside his businesses, banking records show. In
one six-year span, from 1988 through 1993, Fred Trump reported $109.7 million
in total income, now equivalent to $210.7 million. It was not unusual for tens
of millions in Treasury bills and certificates of deposit to flow through his
personal bank accounts each month.
Fred Trump was relentless and creative in finding ways to
channel this wealth to his children. He made Donald not just his salaried
employee but also his property manager, landlord, banker and consultant. He
gave him loan after loan, many never repaid. He provided money for his car,
money for his employees, money to buy stocks, money for his first Manhattan
offices and money to renovate those offices. He gave him three trust funds. He
gave him shares in multiple partnerships. He gave him $10,000 Christmas checks.
He gave him laundry revenue from his buildings.
Much of his giving was structured to sidestep gift and
inheritance taxes using methods tax experts described to The Times as improper
or possibly illegal. Although Fred Trump became wealthy with help from federal
housing subsidies, he insisted that it was manifestly unfair for the government
to tax his fortune as it passed to his children. When he was in his 80s and
beginning to slide into dementia, evading gift and estate taxes became a family
affair, with Donald Trump playing a crucial role, interviews and newly obtained
documents show.
The line between legal tax avoidance and illegal tax evasion
is often murky, and it is constantly being stretched by inventive tax lawyers.
There is no shortage of clever tax avoidance tricks that have been blessed by
either the courts or the I.R.S. itself. The richest Americans almost never pay
anything close to full freight. But tax experts briefed on The Times’s findings
said the Trumps appeared to have done more than exploit legal loopholes. They
said the conduct described here represented a pattern of deception and
obfuscation, particularly about the value of Fred Trump’s real estate, that
repeatedly prevented the I.R.S. from taxing large transfers of wealth to his
children.
“The theme I see here through all of this is valuations:
They play around with valuations in extreme ways,” said Lee-Ford Tritt, a
University of Florida law professor and a leading expert in gift and estate tax
law. “There are dramatic fluctuations depending on their purpose.”
The manipulation of values to evade taxes was central to one
of the most important financial events in Donald Trump’s life. In an episode
never before revealed, Mr. Trump and his siblings gained ownership of most of
their father’s empire on Nov. 22, 1997, a year and a half before Fred Trump’s
death. Critical to the complex transaction was the value put on the real
estate. The lower its value, the lower the gift taxes. The Trumps dodged
hundreds of millions in gift taxes by submitting tax returns that grossly
undervalued the properties, claiming they were worth just $41.4 million.
The same set of buildings would be sold off over the next
decade for more than 16 times that amount.
The most overt fraud was All County Building Supply & Maintenance,
a company formed by the Trump family in 1992. All County’s ostensible purpose
was to be the purchasing agent for Fred Trump’s buildings, buying everything
from boilers to cleaning supplies. It did no such thing, records and interviews
show. Instead All County siphoned millions of dollars from Fred Trump’s empire
by simply marking up purchases already made by his employees. Those millions,
effectively untaxed gifts, then flowed to All County’s owners — Donald Trump,
his siblings and a cousin. Fred Trump then used the padded All County receipts
to justify bigger rent increases for thousands of tenants.
All told, The Times documented 295 streams of revenue that
Fred Trump created over five decades to enrich his son. In most cases his four
other children benefited equally. But over time, as Donald Trump careened from
one financial disaster to the next, his father found ways to give him
substantially more money, records show. Even so, in 1990, according to
previously secret depositions, Mr. Trump tried to have his father’s will
rewritten in a way that Fred Trump, alarmed and angered, feared could result in
his empire’s being used to bail out his son’s failing businesses.
Of course, the story of how Donald Trump got rich cannot be
reduced to handouts from his father. Before he became president, his singular
achievement was building the brand of Donald J. Trump, Self-Made Billionaire, a
brand so potent it generated hundreds of millions of dollars in revenue through
TV shows, books and licensing deals.
Constructing that image required more than Fred Trump’s
money. Just as important were his son’s preternatural marketing skills and
always-be-closing competitive hustle. While Fred Trump helped finance the
accouterments of wealth, Donald Trump, master self-promoter, spun them into a
seductive narrative. Fred Trump’s money, for example, helped build Trump Tower,
the talisman of privilege that established his son as a major player in New
York. But Donald Trump recognized and exploited the iconic power of Trump Tower
as a primary stage for both “The Apprentice” and his presidential campaign.
The biggest payday he ever got from his father came long
after Fred Trump’s death. It happened quietly, without the usual Trumpian news
conference, on May 4, 2004, when Mr. Trump and his siblings sold off the empire
their father had spent 70 years assembling with the dream that it would never
leave his family.
Donald Trump’s cut: $177.3 million, or $236.2 million in
today’s dollars.
Early experience, cultivated connections and a wave of
federal housing subsidies helped Fred Trump lay the foundation of his son’s
wealth.
Before he turned 20, Fred Trump had already built and sold
his first home. At age 35, he was building hundreds of houses a year in
Brooklyn and Queens. By 45, he was building some of the biggest apartment
complexes in the country.
Aside from an astonishing work ethic — “Sleeping is a waste
of time,” he liked to say — the growth reflected his shrewd application of
mass-production techniques. The Brooklyn Daily Eagle called him “the Henry Ford
of the home-building industry.” He would erect scaffolding a city block long so
his masons, sometimes working a second shift under floodlights, could throw up
a dozen rowhouses in a week. They sold for about $115,000 in today’s dollars.
By 1940, American Builder magazine was taking notice,
devoting a spread to Fred Trump under the headline “Biggest One-Man Building
Show.” The article described a swaggering lone-wolf character who paid for
everything — wages, supplies, land — from a thick wad of cash he carried at all
times, and whose only help was a secretary answering the phone in an office
barely bigger than a parking space. “He is his own purchasing agent, cashier,
paymaster, building superintendent, construction engineer and sales director,”
the article said.
It wasn’t that simple. Fred Trump had also spent years
ingratiating himself with Brooklyn’s Democratic machine, giving money, doing
favors and making the sort of friends (like Abraham D. Beame, a future mayor)
who could make life easier for a developer. He had also assembled a phalanx of
plugged-in real estate lawyers, property appraisers and tax accountants who
protected his interests.
All these traits — deep experience, nimbleness, connections,
a relentless focus on the efficient construction of homes for the middle class
— positioned him perfectly to ride a growing wave of federal spending on
housing. The wave took shape with the New Deal, grew during the World War II
rush to build military housing and crested with the postwar imperative to
provide homes for returning G.I.s. Fred Trump would become a millionaire many
times over by making himself one of the nation’s largest recipients of cheap
government-backed building loans, according to Gwenda Blair’s book “The Trumps:
Three Generations of Builders and a President.”
Those same loans became the wellspring of Donald Trump’s
wealth. In the late 1940s, Fred Trump obtained roughly $26 million in federal
loans to build two of his largest developments, Beach Haven Apartments, near
Coney Island, Brooklyn, and Shore Haven Apartments, a few miles away. Then he
set about making his children his landlords.
As ground lease payments fattened his children’s trusts,
Fred Trump embarked on a far bigger transfer of wealth. Records obtained by The
Times reveal how he began to build or buy apartment buildings in Brooklyn and
Queens and then gradually, without public trace, transfer ownership to his
children through a web of partnerships and corporations. In all, Fred Trump put
up nearly $13 million in cash and mortgage debt to create a mini-empire within
his empire — eight buildings with 1,032 apartments — that he would transfer to
his children.
The handover began just before Donald Trump’s 16th birthday.
On June 1, 1962, Fred Trump transferred a plot of land in Queens to a newly
created corporation. While he would be its president, his children would be its
owners, records show. Then he constructed a 52-unit building called Clyde Hall.
It was easy money for the Trump children. Their father took
care of everything. He bought the land, built the apartments and obtained the
mortgages. His employees managed the building. The profits, meanwhile, went to
his children. By the early 1970s, Fred Trump would execute similar transfers of
the other seven buildings.
For Donald Trump, this meant a rapidly growing new source of
income. When he was in high school, his cut of the profits was about $17,000 a
year in today’s dollars. His share exceeded $300,000 a year soon after he
graduated from college.
How Fred Trump transferred 1,032 apartments to his children
without incurring hundreds of thousands of dollars in gift taxes is unclear. A
review of property records for the eight buildings turned up no evidence that
his children bought them outright. Financial records obtained by The Times
reveal only that all of the shares in the partnerships and corporations set up
to create the mini-empire shifted at some point from Fred Trump to his
children. Yet his tax returns show he paid no gift taxes on seven of the
buildings, and only a few thousand dollars on the eighth.
That building, Sunnyside Towers, a 158-unit property in
Queens, illustrates Fred Trump’s catch-me-if-you-can approach with the I.R.S.,
which had repeatedly cited him for underpaying taxes in the 1950s and 1960s.
Sunnyside was bought for $2.5 million in 1968 by Midland
Associates, a partnership Fred Trump formed with his children for the
transaction. In his 1969 tax return, he reported giving each child 15 percent
of Midland Associates. Based on the amount of cash put up to buy Sunnyside, the
value of this gift should have been $93,750. Instead, he declared a gift of
only $6,516.
Donald Trump went to work for his father after graduating
from the University of Pennsylvania in 1968. His father made him vice president
of dozens of companies. This was also the moment Fred Trump telegraphed what
had become painfully obvious to his family and employees: He did not consider
his eldest son, Fred Trump Jr., a viable heir apparent.
Fred Jr., seven and a half years older than Donald, had also
worked for his father after college. It did not go well, relatives and former
employees said in interviews. Fred Trump openly ridiculed him for being too
nice, too soft, too lazy, too fond of drink. He frowned on his interests in
flying and music, could not fathom why he cared so little for the family
business. Donald, witness to his father’s deepening disappointment, fashioned
himself Fred Jr.’s opposite — the brash tough guy with a killer instinct. His
reward was to inherit his father’s dynastic dreams.
The Times documented 295 streams of revenue that Fred Trump
created over five decades to enrich Donald Trump, left.
Though the other Trump children benefited from their
father’s financial maneuvers, Donald Trump would be given substantially more
money over time.
Fred Trump began taking steps that enriched Donald alone,
introducing him to the charms of building with cheap government loans. In 1972,
father and son formed a partnership to build a high-rise for the elderly in
East Orange, N.J. Thanks to government subsidies, the partnership got a nearly
interest-free $7.8 million loan that covered 90 percent of construction costs.
Fred Trump paid the rest.
But his son received most of the financial benefits, records
show. On top of profit distributions and consulting fees, Donald Trump was paid
to manage the building, though Fred Trump’s employees handled day-to-day
management. He also pocketed what tenants paid to rent air-conditioners. By
1975, Donald Trump’s take from the building was today’s equivalent of nearly $305,000
a year.
Fred Trump also gave his son an extra boost through his
investment, in the early 1970s, in the sprawling Starrett City development in
Brooklyn, the largest federally subsidized housing project in the nation. The
investment, which promised to generate huge tax write-offs, was tailor-made for
Fred Trump; he would use Starrett City’s losses to avoid taxes on profits from
his empire.
Fred Trump invested $5 million. A separate partnership
established for his children invested $1 million more, showering tax breaks on
the Trump children for decades to come. They helped Donald Trump avoid paying
any federal income taxes at all in 1978 and 1979. But Fred Trump also deputized
him to sell a sliver of his Starrett City shares, a sweetheart deal that generated
today’s equivalent of more than $1 million in “consulting fees.”
The money from consulting and management fees, ground
leases, the mini-empire and his salary all combined to make Donald Trump
indisputably wealthy years before he sold his first Manhattan apartment. By
1975, when he was 29, he had collected nearly $9 million in today’s dollars
from his father, The Times found.
Wealthy, yes. But a far cry from the image father and son
craved for Donald Trump.
The Silent Partner
“He is tall, lean and blond, with dazzling white teeth, and
he looks ever so much like Robert Redford. He rides around town in a
chauffeured silver Cadillac with his initials, DJT, on the plates. He dates
slinky fashion models, belongs to the most elegant clubs and, at only 30 years
of age, estimates that he is worth ‘more than $200 million.’”
So began a Nov. 1, 1976, article in The Times, one of the
first major profiles of Donald Trump and a cornerstone of decades of mythmaking
about his wealth. How could he claim to be worth more than $200 million when,
as he divulged years later to casino regulators, his 1976 taxable income was
$24,594? Donald Trump simply appropriated his father’s entire empire as his
own.
In the chauffeured Cadillac, Donald Trump took The Times’s
reporter on a tour of what he called his “jobs.” He told her about the
Manhattan hotel he planned to convert into a Grand Hyatt (his father guaranteed
the construction loan), and the Hudson River railroad yards he planned to
develop (the rights were purchased by his father’s company). He showed her “our
philanthropic endeavor,” the high-rise for the elderly in East Orange
(bankrolled by his father), and an apartment complex on Staten Island (owned by
his father), and their “flagship,” Trump Village, in Brooklyn (owned by his
father), and finally Beach Haven Apartments (owned by his father). Even the
Cadillac was leased by his father.
“So far,” he boasted, “I’ve never made a bad deal.”
It was a spectacular con, right down to the priceless moment
when Mr. Trump confessed that he was “publicity shy.” By claiming his father’s
wealth as his own, Donald Trump transformed his place in the world. A brash
30-year-old playboy worth more than $200 million proved irresistible to New
York City’s bankers, politicians and journalists.
Yet for all the spin about cutting his own path in
Manhattan, Donald Trump was increasingly dependent on his father. Weeks after
The Times’s profile ran, Fred Trump set up still more trusts for his children,
seeding each with today’s equivalent of $4.3 million. Even into the early
1980s, when he was already proclaiming himself one of America’s richest men,
Donald Trump remained on his father’s payroll, drawing an annual salary of
$260,000 in today’s dollars.
Meanwhile, Fred Trump and his companies also began extending
large loans and lines of credit to Donald Trump. Those loans dwarfed what the
other Trumps got, the flow so constant at times that it was as if Donald Trump
had his own Money Store. Consider 1979, when he borrowed $1.5 million in
January, $65,000 in February, $122,000 in March, $150,000 in April, $192,000 in
May, $226,000 in June, $2.4 million in July and $40,000 in August, according to
records filed with New Jersey casino regulators.
In theory, the money had to be repaid. In practice, records
show, many of the loans were more like gifts. Some were interest-free and had
no repayment schedule. Even when loans charged interest, Donald Trump
frequently skipped payments.
This previously unreported flood of loans highlights a clear
pattern to Fred Trump’s largess. When Donald Trump began expensive new
projects, his father increased his help. In the late 1970s, when Donald Trump
was converting the old Commodore Hotel into a Grand Hyatt, his father stepped
up with a spigot of loans. Fred Trump did the same with Trump Tower in the
early 1980s.
In the mid-1980s, as Donald Trump made his first forays into
Atlantic City, Fred Trump devised a plan that sharply increased the flow of
money to his son.
The plan involved the mini-empire — the eight buildings Fred
Trump had transferred to his children. He converted seven of them into
cooperatives, and helped his children convert the eighth. That meant inviting
tenants to buy their apartments, generating a three-way windfall for Donald
Trump and his siblings: from selling units, from renting unsold units and from
collecting mortgage payments.
In 1982, Donald Trump made today’s equivalent of about
$380,000 from the eight buildings. As the conversions continued and Fred
Trump’s employees sold off more units, his son’s share of profits jumped,
records show. By 1987, with the conversions completed, his son was making
today’s equivalent of $4.5 million a year off the eight buildings.
Fred Trump made one other structural change to his empire
that produced a big new source of revenue for Donald Trump and his siblings. He
made them his bankers.
The Times could find no evidence that the Trump children had
to come up with money of their own to buy their father’s mortgages. Most were
purchased from Fred Trump’s banks by trusts and partnerships that he set up and
seeded with money.
Co-op sales, mortgage payments, ground leases — Fred Trump
was a master at finding ways to enrich his children in general and Donald Trump
in particular. Some ways were like slow-moving creeks. Others were rushing
streams. A few were geysers. But as the decades passed they all joined into one
mighty river of money. By 1990, The Times found, Fred Trump, the ultimate
silent partner, had quietly transferred today’s equivalent of at least $46.2
million to his son.
Donald Trump took on a mien of invincibility. The stock
market crashed in 1987 and the economy cratered. But he doubled down thanks in
part to Fred Trump’s banks, which eagerly extended credit to the young Trump
princeling. He bought the Plaza Hotel in 1988 for $407.5 million. He bought
Eastern Airlines in 1989 for $365 million and called it Trump Shuttle. His
newest casino, the Trump Taj Mahal, would need at least $1 million a day just
to cover its debt.
The skeptics who questioned the wisdom of this debt-fueled
spending spree were drowned out by one magazine cover after another marveling
at someone so young taking such breathtaking risks. But whatever Donald Trump
was gambling, not for one second was he at risk of losing out on a lifetime of
frictionless, effortless wealth. Fred Trump had that bet covered.
Bailouts, collateral, cash on hand — Fred Trump was
prepared, and was not about to let bad bets sink his son.
As the 1980s ended, Donald Trump’s big bets began to go
bust. Trump Shuttle was failing to make loan payments within 15 months. The
Plaza, drowning in debt, was bankrupt in four years. His Atlantic City casinos,
also drowning in debt, tumbled one by one into bankruptcy.
What didn’t fail was the Trump safety net. Just as Donald
Trump’s finances were crumbling, family partnerships and companies dramatically
increased distributions to him and his siblings. Between 1989 and 1992, tax
records show, four entities created by Fred Trump to support his children paid
Donald Trump today’s equivalent of $8.3 million.
Fred Trump’s generosity also provided a crucial backstop
when his son pleaded with bankers in 1990 for an emergency line of credit. With
so many of his projects losing money, Donald Trump had few viable assets of his
own making to pledge as collateral. What has never been publicly known is that
he used his stakes in the mini-empire and the high-rise for the elderly in East
Orange as collateral to help secure a $65 million loan.
Tax records also reveal that at the peak of Mr. Trump’s
financial distress, his father extracted extraordinary sums from his empire. In
1990, Fred Trump’s income exploded to $49,638,928 — several times what he paid
himself in other years in that era.
Fred Trump, former employees say, detested taking
unnecessary distributions from his companies because he would have to pay
income taxes on them. So why would a penny-pinching, tax-hating 85-year-old in
the twilight of his career abruptly pull so much money out of his cherished
properties, incurring a tax bill of $12.2 million?
The Times found no evidence that Fred Trump made any
significant debt payments or charitable donations. The frugality he brought to
business carried over to the rest of his life. According to ledgers of his
personal spending, he spent a grand total of $8,562 in 1991 and 1992 on travel
and entertainment. His extravagances, such as they were, consisted of buying
his wife the odd gift from Antonovich Furs or hosting family celebrations at
the Peter Luger Steak House in Brooklyn. His home on Midland Parkway in Jamaica
Estates, Queens, built with unfussy brick like so many of his apartment
buildings, had little to distinguish it from neighboring houses beyond the white
columns and crest framing the front door.
There are, however, indications that he wanted plenty of
cash on hand to bail out his son if need be.
Such was the case with the rescue mission at his son’s
Trump’s Castle casino. Donald Trump had wildly overspent on renovations,
leaving the property dangerously low on operating cash. Sure enough, neither
Trump’s Castle nor its owner had the necessary funds to make an $18.4 million
bond payment due in December 1990.
On Dec. 17, 1990, Fred Trump dispatched Howard Snyder, a
trusted bookkeeper, to Atlantic City with a $3.35 million check. Mr. Snyder
bought $3.35 million worth of casino chips and left without placing a bet.
Apparently, even this infusion wasn’t sufficient, because that same day Fred
Trump wrote a second check to Trump’s Castle, for $150,000, bank records show.
With this ruse — it was an illegal $3.5 million loan under
New Jersey gaming laws, resulting in a $65,000 civil penalty — Donald Trump
narrowly avoided defaulting on his bonds.
Both the son and the father were masters of manipulating the
value of their assets, making them appear worth a lot or a little depending on
their needs.
As the chip episode demonstrated, father and son were of one
mind about rules and regulations, viewing them as annoyances to be finessed or,
when necessary, ignored. As described by family members and associates in
interviews and sworn testimony, theirs was an intimate, endless confederacy
sealed by blood, shared secrets and a Hobbesian view of what it took to
dominate and win. They talked almost daily and saw each other most weekends.
Donald Trump sat at his father’s right hand at family meals and participated in
his father’s monthly strategy sessions with his closest advisers. Fred Trump
was a silent, watchful presence at many of Donald Trump’s news conferences.
“I probably knew my father as well or better than anybody,”
Donald Trump said in a 2000 deposition.
They were both fluent in the language of half-truths and
lies, interviews and records show. They both delighted in transgressing without
getting caught. They were both wizards at manipulating the value of their
assets, making them appear worth a lot or a little depending on their needs.
Those talents came in handy when Fred Trump Jr. died, on
Sept. 26, 1981, at age 42 from complications of alcoholism, leaving a son and a
daughter. The executors of his estate were his father and his brother Donald.
Fred Trump Jr.’s largest asset was his stake in seven of the
eight buildings his father had transferred to his children. The Trumps would
claim that those properties were worth $90.4 million when they finished
converting them to cooperatives within a few years of his death. At that value,
his stake could have generated an estate tax bill of nearly $10 million.
But the tax return signed by Donald Trump and his father
claimed that Fred Trump Jr.’s estate owed just $737,861. This result was
achieved by lowballing all seven buildings. Instead of valuing them at $90.4
million, Fred and Donald Trump submitted appraisals putting them at $13.2
million.
Emblematic of their audacity was Park Briar, a 150-unit
building in Queens. As it happened, 18 days before Fred Trump Jr.’s death, the
Trump siblings had submitted Park Briar’s co-op conversion plan, stating under
oath that the building was worth $17.1 million. Yet as Fred Trump Jr.’s
executors, Donald Trump and his father claimed on the tax return that Park
Briar was worth $2.9 million when Fred Trump Jr. died.
The Trump siblings put the value of the Park Briar complex
in Queens at over $17 million before their brother Fred Trump Jr. died in 1981.
But as the executors of his estate, Donald Trump and his father claimed on a
tax return that it was worth only $2.9 million. Dave Sanders for The New York
Times
This fantastical claim — that Park Briar should be taxed as
if its value had fallen 83 percent in 18 days — slid past the I.R.S. with
barely a protest. An auditor insisted the value should be increased by
$100,000, to $3 million.
During the 1980s, Donald Trump became notorious for leaking
word that he was taking positions in stocks, hinting of a possible takeover,
and then either selling on the run-up or trying to extract lucrative
concessions from the target company to make him go away. It was a form of stock
manipulation with an unsavory label: “greenmailing.” The Times unearthed
evidence that Mr. Trump enlisted his father as his greenmailing wingman.
On Jan. 26, 1989, Fred Trump bought 8,600 shares of Time
Inc. for $934,854, his tax returns show. Seven days later, Dan Dorfman, a
financial columnist known to be chatty with Donald Trump, broke the news that
the younger Trump had “taken a sizable stake” in Time. Sure enough, Time’s
shares jumped, allowing Fred Trump to make a $41,614 profit in two weeks.
Later that year, Fred Trump bought $5 million worth of
American Airlines stock. Based on the share price — $81.74 — it appears he made
the purchase shortly before Mr. Dorfman reported that Donald Trump was taking a
stake in the company. Within weeks, the stock was over $100 a share. Had Fred
Trump sold then, he would have made a quick $1.3 million. But he didn’t, and
the stock sank amid skepticism about his son’s history of hyped takeover
attempts that fizzled. Fred Trump sold his shares for a $1.7 million loss in
January 1990. A week later, Mr. Dorfman reported that Donald Trump had sold,
too.
With other family members, Fred Trump could be cantankerous
and cruel, according to sworn testimony by his relatives. “This is the
stupidest thing I ever heard of,” he’d snap when someone disappointed him. He
was different with his son Donald. He might chide him — “Finish this job before
you start that job,” he’d counsel — but more often, he looked for ways to
forgive and accommodate.
By 1987, for example, Donald Trump’s loan debt to his father
had grown to at least $11 million. Yet canceling the debt would have required
Donald Trump to pay millions in taxes on the amount forgiven. Father and son
found another solution, one never before disclosed, that appears to constitute
both an unreported multimillion-dollar gift and a potentially illegal tax
write-off.
In December 1987, records show, Fred Trump bought a 7.5
percent stake in Trump Palace, a 55-story condominium building his son was
erecting on the Upper East Side of Manhattan. Most, if not all, of his
investment, which totaled $15.5 million, was made by exchanging his son’s
unpaid debts for Trump Palace shares, records show.
Four years later, in December 1991, Fred Trump sold his
entire stake in Trump Palace for just $10,000, his tax returns and financial
statements reveal. Those documents do not identify who bought his stake. But
other records indicate that he sold it back to his son.
Under state law, developers must file “offering plans” that
identify to any potential condo buyer the project’s sponsors — in other words,
its owners. The Trump Palace offering plan, submitted in November 1989,
identified two owners: Donald Trump and his father. But under the same law, if
Fred Trump had sold his stake to a third party, Donald Trump would have been
required to identify the new owner in an amended offering plan filed with the
state attorney general’s office. He did not do that, records show.
He did, however, sign a sworn affidavit a month after his
father sold his stake. In the affidavit, submitted in a lawsuit over a Trump
Palace contractor’s unpaid bill, Donald Trump identified himself as “the” owner
of Trump Palace.
Under I.R.S. rules, selling shares worth $15.5 million to
your son for $10,000 is tantamount to giving him a $15.49 million taxable gift.
Fred Trump reported no such gift.
According to tax experts, the only circumstance that would
not have required Fred Trump to report a gift was if Trump Palace had been
effectively bankrupt when he unloaded his shares.
Yet Trump Palace was far from bankrupt.
Property records show that condo sales there were brisk in
1991. Trump Palace sold 57 condos for $52.5 million — 94 percent of the total
asking price for those units.
Donald Trump himself proclaimed Trump Palace “the most
financially secure condominium on the market today” in advertisements he placed
in 1991 to rebut criticism from buyers who complained that his business
travails could drag down Trump Palace, too. In December, 17 days before his
father sold his shares, he placed an ad vouching for the wisdom of investing in
Trump Palace: “Smart money says there has never been a better time.”
By failing to tell the I.R.S. about his $15.49 million gift
to his son, Fred Trump evaded the 55 percent tax on gifts, saving about $8
million. At the same time, he declared to the I.R.S. that Trump Palace was
almost a complete loss — that he had walked away from a $15.5 million investment
with just $10,000 to show for it.
Federal tax law prohibits deducting any loss from the sale
of property between members of the same family, because of the potential for
abuse. Yet Fred Trump appears to have done exactly that, dodging roughly $5
million more in income taxes.
In 1991, as Fred Trump was declaring his investment in his
son’s Trump Palace project almost a complete loss, Donald Trump was telling the
public there had never been a better time to buy in.
The partnership between Fred and Donald Trump was not simply
about the pursuit of riches. At its heart lay a more ambitious project,
executed to perfection over decades — to create that origin story, the myth of
Donald J. Trump, Self-Made Billionaire.
Donald Trump built the foundation for the myth in the 1970s
by appropriating his father’s empire as his own. By the late 1980s, instead of
appropriating the empire, he was diminishing it. “It wasn’t a great business,
it was a good business,” he said, as if Fred Trump ran a chain of laundromats.
Yes, he told interviewers, his father was a wonderful mentor, but given the
limits of his business, the most he could manage was a $1 million loan, and
even that had to be repaid with interest.
Through it all, Fred Trump played along. Never once did he
publicly question his son’s claim about the $1 million loan. “Everything he
touches seems to turn to gold,” he told The Times for that first profile in
1976. “He’s gone way beyond me, absolutely,” he said when The Times profiled
his son again in 1983. But for all Fred Trump had done to build the myth of
Donald Trump, Self-Made Billionaire, there was, it turned out, one line he
would not allow his son to cross.
A Family Reckoning
Donald Trump tried to change his ailing father’s will,
prompting a backlash — but also a recognition that plans had to be set in
motion before Fred Trump died.
Fred Trump had given careful thought to what would become of
his empire after he died, and had hired one of the nation’s top estate lawyers
to draft his will. But in December 1990, Donald Trump sent his father a
document, drafted by one of his own lawyers, that sought to make significant
changes to that will.
Fred Trump, then 85, had never before set eyes on the
document, 12 pages of dense legalese. Nor had he authorized its preparation.
Nor had he met the lawyer who drafted it.
Yet his son sent instructions that he needed to sign it
immediately.
What happened next was described years later in sworn
depositions by members of the Trump family during a dispute, later settled,
over the inheritance Fred Trump left to Fred Jr.’s children. These depositions,
obtained by The Times, reveal something startling: Fred Trump believed that the
document potentially put his life’s work at risk.
The document, known as a codicil, did many things. It
protected Donald Trump’s portion of the inheritance from his creditors and from
his impending divorce settlement with his first wife, Ivana Trump. It
strengthened provisions in the existing will making him the sole executor of
his father’s estate. But more than any of the particulars, it was the entirety
of the codicil and its presentation as a fait accompli that alarmed Fred Trump,
the depositions show. He confided to family members that he viewed the codicil
as an attempt to go behind his back and give his son total control over his
affairs. He said he feared that it could let Donald Trump denude his empire,
even using it as collateral to rescue his failing businesses. (It was, in fact,
the very month of the $3.5 million casino rescue.)
As close as they were — or perhaps because they were so
close — Fred Trump did not immediately confront his son. Instead he turned to
his daughter Maryanne Trump Barry, then a federal judge whom he often consulted
on legal matters. “This doesn’t pass the smell test,” he told her, she recalled
during her deposition. When Judge Barry read the codicil, she reached the same
conclusion. “Donald was in precarious financial straits by his own admission,”
she said, “and Dad was very concerned as a man who worked hard for his money
and never wanted any of it to leave the family.” (In a brief telephone
interview, Judge Barry declined to comment.)
Fred Trump took prompt action to thwart his son. He
dispatched his daughter to find new estate lawyers. One of them took notes on
the instructions she passed on from her father: “Protect assets from DJT,
Donald’s creditors.” The lawyers quickly drafted a new codicil stripping Donald
Trump of sole control over his father’s estate. Fred Trump signed it
immediately.
Clumsy as it was, Donald Trump’s failed attempt to change
his father’s will brought a family reckoning about two related issues: Fred
Trump’s declining health and his reluctance to relinquish ownership of his
empire. Surgeons had removed a neck tumor a few years earlier, and he would
soon endure hip replacement surgery and be found to have mild senile dementia.
Yet for all the financial support he had lavished on his children, for all his
abhorrence of taxes, Fred Trump had stubbornly resisted his advisers’
recommendations to transfer ownership of his empire to the children to minimize
estate taxes.
With every passing year, the actuarial odds increased that
Fred Trump would die owning apartment buildings worth many hundreds of millions
of dollars, all of it exposed to the 55 percent estate tax. Just as exposed was
the mountain of cash he was sitting on. His buildings, well maintained and
carrying little debt, consistently produced millions of dollars a year in
profits. Even after he paid himself $109.7 million from 1988 through 1993, his
companies were holding $50 million in cash and investments, financial records
show. Tens of millions of dollars more passed each month through a maze of
personal accounts at Chase Manhattan Bank, Chemical Bank, Manufacturers Hanover
Trust, UBS, Bowery Savings and United Mizrahi, an Israeli bank.
Simply put, without immediate action, Fred Trump’s heirs
faced the prospect of losing hundreds of millions of dollars to estate taxes.
Whatever their differences, the Trumps formulated a plan to
avoid this fate. How they did it is a story never before told.
It is also a story in which Donald Trump played a central
role. He took the lead in strategy sessions where the plan was devised with the
consent and participation of his father and his father’s closest advisers,
people who attended the meetings told The Times. Robert Trump, the youngest
sibling and the beta to Donald’s alpha, was given the task of overseeing
day-to-day details. After years of working for his brother, Robert Trump went
to work for his father in late 1991.
The Trumps’ plan, executed over the next decade, blended
traditional techniques — such as rewriting Fred Trump’s will to maximize tax
avoidance — with unorthodox strategies that tax experts told The Times were
legally dubious and, in some cases, appeared to be fraudulent. As a result, the
Trump children would gain ownership of virtually all of their father’s
buildings without having to pay a penny of their own. They would turn the
mountain of cash into a molehill of cash. And hundreds of millions of dollars
that otherwise would have gone to the United States Treasury would instead go
to Fred Trump’s children.
‘A Disguised Gift’
A family company let Fred Trump funnel money to his children
by effectively overcharging himself for repairs and improvements on his
properties.
One of the first steps came on Aug. 13, 1992, when the
Trumps incorporated a company named All County Building Supply &
Maintenance.
All County had no corporate offices. Its address was the
Manhasset, N.Y., home of John Walter, a favorite nephew of Fred Trump’s. Mr.
Walter, who died in January, spent decades working for Fred Trump, primarily
helping computerize his payroll and billing systems. He also was the unofficial
keeper of Fred Trump’s personal and business papers, his basement crowded with
boxes of old Trump financial records. John Walter and the four Trump children
each owned 20 percent of All County, records show.
All County’s main purpose, The Times found, was to enable
Fred Trump to make large cash gifts to his children and disguise them as
legitimate business transactions, thus evading the 55 percent tax.
The way it worked was remarkably simple.
Each year Fred Trump spent millions of dollars maintaining
and improving his properties. Some of the vendors who supplied his building
superintendents and maintenance crews had been cashing Fred Trump’s checks for
decades. Starting in August 1992, though, a different name began to appear on
their checks — All County Building Supply & Maintenance.
Mr. Walter’s computer systems, meanwhile, churned out All
County invoices that billed Fred Trump’s empire for those same services and
supplies, with one difference: All County’s invoices were padded, marked up by
20 percent, or 50 percent, or even more, records show.
The Trump siblings split the markup, along with Mr. Walter.
The self-dealing at the heart of this arrangement was best
illustrated by Robert Trump, whose father paid him a $500,000 annual salary. He
approved many of the payments Fred Trump’s empire made to All County; he was
also All County’s chief executive, as well as a co-owner. As for the work of
All County — generating invoices — that fell to Mr. Walter, also on Fred Trump’s
payroll, along with a personal assistant Mr. Walter paid to work on his side
businesses.
Years later, in his deposition during the dispute over Fred
Trump’s estate, Robert Trump would say that All County actually saved Fred
Trump money by negotiating better deals. Given Fred Trump’s long experience
expertly squeezing better prices out of contractors, it was a surprising claim.
It was also not true.
The Times’s examination of thousands of pages of financial
documents from Fred Trump’s buildings shows that his costs shot up once All
County entered the picture.
A Trump company, formed ostensibly to help maintain Beach
Haven Apartments in Brooklyn and other properties, siphoned cash from the
empire free of gift taxes. Dave Sanders for The New York Times
Beach Haven Apartments illustrates how this happened: In
1991 and 1992, Fred Trump bought 78 refrigerator-stove combinations for Beach
Haven from Long Island Appliance Wholesalers. The average price was $642.69.
But in 1993, when he began paying All County for refrigerator-stove
combinations, the price jumped by 46 percent. Likewise, the price he paid for
trash-compacting services at Beach Haven increased 64 percent. Janitorial
supplies went up more than 100 percent. Plumbing repairs and supplies rose 122
percent. And on it went in building after building. The more Fred Trump paid,
the more All County made, which was precisely the plan.
While All County systematically overcharged Fred Trump for
thousands of items, the job of negotiating with vendors fell, as it always had,
to Fred Trump and his staff.
Leon Eastmond can attest to this. Mr. Eastmond is the owner
of A. L. Eastmond & Sons, a Bronx company that makes industrial boilers. In
1993, he and Fred Trump met at Gargiulo’s, an old-school Italian restaurant in
Coney Island that was one of Fred Trump’s favorites, to hash out the price of
60 boilers. Fred Trump, accompanied by his secretary and Robert Trump, drove a
hard bargain. After negotiating a 10 percent discount, he made one last demand:
“I had to pay the tab,” Mr. Eastmond recalled with a chuckle.
There was no mention of All County. Mr. Eastmond first heard
of the company when its checks started rolling in. “I remember opening my mail
one day and out came a check for $100,000,” he recalled. “I didn’t recognize
the company. I didn’t know who the hell they were.”
But as All County paid Mr. Eastmond the price negotiated by
Fred Trump, its invoices to Fred Trump were padded by 20 to 25 percent, records
obtained by The Times show. This added hundreds of thousands of dollars to the
cost of the 60 boilers, money that then flowed through All County to Fred
Trump’s children without incurring any gift tax.
All County’s owners devised another ruse to profit off Mr.
Eastmond’s boilers. To win Fred Trump’s business, Mr. Eastmond had also agreed
to provide mobile boilers for Fred Trump’s buildings free of charge while new
boilers were being installed. Yet All County charged Fred Trump rent on the
same mobile boilers Mr. Eastmond was providing free, along with hookup fees,
disconnection fees, transportation fees and operating and maintenance fees,
records show. These charges siphoned hundreds of thousands of dollars more from
Fred Trump’s empire.
Mr. Walter, asked during a deposition why Fred Trump chose
not to make himself one of All County’s owners, replied, “He said because he
would have to pay a death tax on it.”
After being briefed on All County by The Times, Mr. Tritt,
the University of Florida law professor, said the Trumps’ use of the company
was “highly suspicious” and could constitute criminal tax fraud. “It certainly looks
like a disguised gift,” he said.
While All County was all upside for Donald Trump and his
siblings, it had an insidious downside for Fred Trump’s tenants.
As an owner of rent-stabilized buildings in New York, Fred
Trump needed state approval to raise rents beyond the annual increases set by a
government board. One way to justify a rent increase was to make a major
capital improvement. It did not take much to get approval; an invoice or
canceled check would do if the expense seemed reasonable.
The Trumps used the padded All County invoices to justify
higher rent increases in Fred Trump’s rent-regulated buildings. Fred Trump,
according to Mr. Walter, saw All County as a way to have his cake and eat it,
too. If he used his “expert negotiating ability” to buy a $350 refrigerator for
$200, he could raise the rent based only on that $200, not on the $350 sticker
price “a normal person” would pay, Mr. Walter explained. All County was the way
around this problem. “You have to understand the thinking that went behind
this,” he said.
As Robert Trump acknowledged in his deposition, “The higher
the markup would be, the higher the rent that might be charged.”
State records show that after All County’s creation, the
Trumps got approval to raise rents on thousands of apartments by claiming more
than $30 million in major capital improvements. Tenants repeatedly protested
the increases, almost always to no avail, the records show.
One of the improvements most often cited by the Trumps: new
boilers.
“All of this smells like a crime,” said Adam S. Kaufmann, a
former chief of investigations for the Manhattan district attorney’s office who
is now a partner at the law firm Lewis Baach Kaufmann Middlemiss. While the
statute of limitations has long since lapsed, Mr. Kaufmann said the Trumps’ use
of All County would have warranted investigation for defrauding tenants, tax
fraud and filing false documents.
Mr. Harder, the president’s lawyer, disputed The Times’s
reporting: “Should The Times state or imply that President Trump participated
in fraud, tax evasion or any other crime, it will be exposing itself to
substantial liability and damages for defamation.”
All County was not the only company the Trumps set up to
drain cash from Fred Trump’s empire. A lucrative income source for Fred Trump
was the management fees he charged his buildings. His primary management
company, Trump Management, earned $6.8 million in 1993 alone. The Trumps found
a way to redirect those fees to the children, too.
On Jan. 21, 1994, they created a company called Apartment
Management Associates Inc., with a mailing address at Mr. Walter’s Manhasset
home. Two months later, records show, Apartment Management started collecting
fees that had previously gone to Trump Management.
The only difference was that Donald Trump and his siblings
owned Apartment Management.
Between All County and Apartment Management, Fred Trump’s
mountain of cash was rapidly dwindling. By 1998, records show, All County and
Apartment Management were generating today’s equivalent of $2.2 million a year
for each of the Trump children. Whatever income tax they owed on this money, it
was considerably less than the 55 percent tax Fred Trump would have owed had he
simply given each of them $2.2 million a year.
But these savings were trivial compared with those that
would come when Fred Trump transferred his empire — the actual bricks and
mortar — to his children.
The Alchemy of Value
The transfer of most of Fred Trump’s empire to his children
began with a ‘friendly’ appraisal and an incredible shrinking act.
In his 90th year, Fred Trump still showed up at work a few
days a week, ever dapper in suit and tie. But he had trouble remembering names
— his dementia was getting worse — and he could get confused. In May 1995, with
an unsteady hand, he signed documents granting Robert Trump power of attorney
to act “in my name, place and stead.”
Six months later, on Nov. 22, the Trumps began transferring
ownership of most of Fred Trump’s empire. (A few properties were excluded.) The
instrument they used to do this was a special type of trust with a clunky
acronym only a tax lawyer could love: GRAT, short for grantor-retained annuity
trust.
GRATs are one of the tax code’s great gifts to the
ultrawealthy. They let dynastic families like the Trumps pass wealth from one
generation to the next — be it stocks, real estate, even art collections —
without paying a dime of estate taxes.
The details are numbingly complex, but the mechanics are
straightforward. For the Trumps, it meant putting half the properties to be
transferred into a GRAT in Fred Trump’s name and the other half into a GRAT in
his wife’s name. Then Fred and Mary Trump gave their children roughly
two-thirds of the assets in their GRATs. The children bought the remaining
third by making annuity payments to their parents over the next two years. By
Nov. 22, 1997, it was done; the Trump children owned nearly all of Fred Trump’s
empire free and clear of estate taxes.
As for gift taxes, the Trumps found a way around those, too.
The entire transaction turned on one number: the market
value of Fred Trump’s empire. This determined the amount of gift taxes Fred and
Mary Trump owed for the portion of the empire they gave to their children. It
also determined the amount of annuity payments their children owed for the
rest.
The I.R.S. recognizes that GRATs create powerful incentives
to greatly undervalue assets, especially when those assets are not publicly
traded stocks with transparent prices. Indeed, every $10 million reduction in
the valuation of Fred Trump’s empire would save the Trumps either $10 million
in annuity payments or $5.5 million in gift taxes. This is why the I.R.S.
requires families taking advantage of GRATs to submit independent appraisals
and threatens penalties for those who lowball valuations.
In practice, though, gift tax returns get little scrutiny
from the I.R.S. It is an open secret among tax practitioners that evasion of
gift taxes is rampant and rarely prosecuted. Punishment, such as it is, usually
consists of an auditor’s requiring a tax payment closer to what should have
been paid in the first place. “GRATs are typically structured so that no tax is
due, which means the I.R.S. has reduced incentive to audit them,” said Mitchell
Gans, a professor of tax law at Hofstra University. “So if a gift is in fact
undervalued, it may very well go unnoticed.”
This appears to be precisely what the Trumps were counting
on. The Times found evidence that the Trumps dodged hundreds of millions of
dollars in gift taxes by submitting tax returns that grossly undervalued the
real estate assets they placed in Fred and Mary Trump’s GRATs.
According to Fred Trump’s 1995 gift tax return, obtained by
The Times, the Trumps claimed that properties including 25 apartment complexes
with 6,988 apartments — and twice the floor space of the Empire State Building
— were worth just $41.4 million. The implausibility of this claim would be made
plain in 2004, when banks put a valuation of nearly $900 million on that same
real estate.
The methods the Trumps used to pull off this incredible
shrinking act were hatched in the strategy sessions Donald Trump participated
in during the early 1990s, documents and interviews show. Their basic strategy
had two components: Get what is widely known as a “friendly” appraisal of the
empire’s worth, then drive that number even lower by changing the ownership
structure to make the empire look less valuable to the I.R.S.
A crucial step was finding a property appraiser attuned to
their needs. As anyone who has ever bought or sold a home knows, appraisers can
arrive at sharply different valuations depending on their methods and
assumptions. And like stock analysts, property appraisers have been known to
massage those methods and assumptions in ways that coincide with their clients’
interests.
The Trumps used Robert Von Ancken, a favorite of New York
City’s big real estate families. Over a 45-year career, Mr. Von Ancken has
appraised many of the city’s landmarks, including Rockefeller Center, the World
Trade Center, the Chrysler Building and the Empire State Building. Donald Trump
recruited him after Fred Trump Jr. died and the family needed friendly
appraisals to help shield the estate from taxes.
Mr. Von Ancken appraised the 25 apartment complexes and other
properties in the Trumps’ GRATs and concluded that their total value was $93.9
million, tax records show.
To assess the accuracy of those valuations, The Times
examined the prices paid for comparable apartment buildings that sold within a
year of Mr. Von Ancken’s appraisals. A pattern quickly emerged. Again and
again, buildings in the same neighborhood as Trump buildings sold for two to
four times as much per square foot as Mr. Von Ancken’s appraisals, even when
the buildings were decades older, had fewer amenities and smaller apartments,
and were deemed less valuable by city property tax appraisers.
Mr. Von Ancken valued Argyle Hall, a six-story brick Trump
building in Brooklyn, at $9.04 per square foot. Six blocks away, another
six-story brick building, two decades older, had sold a few months earlier for
nearly $30 per square foot. He valued Belcrest Hall, a Trump building in
Queens, at $8.57 per square foot. A few blocks away, another six-story brick
building, four decades older with apartments a third smaller, sold for $25.18
per square foot.
Fred Trump’s 1995 gift tax return valued the Fiesta
Apartments, left, in Brooklyn, at $18.30 per square foot. A similar building a
few minutes away sold the next year for nearly four times as much: $67.08 per square
foot. New York City Municipal Archives
The pattern persisted with Fred Trump’s higher-end
buildings. Mr. Von Ancken appraised Lawrence Towers, a Trump building in
Brooklyn with spacious balcony apartments, at $24.54 per square foot. A few
months earlier, an apartment building abutting car repair shops a mile away,
with units 20 percent smaller, had sold for $48.23 per square foot.
The Times found even starker discrepancies when comparing
the GRAT appraisals against appraisals commissioned by the Trumps when they had
an incentive to show the highest possible valuations.
Such was the case with Patio Gardens, a complex of nearly
500 apartments in Brooklyn.
Of all Fred Trump’s properties, Patio Gardens was one of the
least profitable, which may be why he decided to use it as a tax deduction. In
1992, he donated Patio Gardens to the National Kidney Foundation of New
York/New Jersey, one of the largest charitable donations he ever made. The
greater the value of Patio Gardens, the bigger his deduction. The appraisal
cited in Fred Trump’s 1992 tax return valued Patio Gardens at $34 million, or
$61.90 a square foot.
By contrast, Mr. Von Ancken’s GRAT appraisals found that the
crown jewels of Fred Trump’s empire, Beach Haven and Shore Haven, with five
times as many apartments as Patio Gardens, were together worth just $23
million, or $11.01 per square foot.
In an interview, Mr. Von Ancken said that because neither he
nor The Times had the working papers that described how he arrived at his
valuations, there was simply no way to evaluate the methodologies behind his
numbers. “There would be explanations within the appraisals to justify all the
values,” he said, adding, “Basically, when we prepare these things, we feel
that these are going to be presented to the Internal Revenue Service for their
review, and they better be right.”
Of all the GRAT appraisals Mr. Von Ancken did for the
Trumps, the most startling was for 886 rental apartments in two buildings at
Trump Village, a complex in Coney Island. Mr. Von Ancken claimed that they were
worth less than nothing — negative $5.9 million, to be exact. These were the
same 886 units that city tax assessors valued that same year at $38.1 million,
and that a bank would value at $106.6 million in 2004.
The Trumps’ appraiser used two Trump Village buildings’
temporary dip into the red to claim they were worth negative $5.9 million.
It appears Mr. Von Ancken arrived at his negative valuation
by departing from the methodology that he has repeatedly testified is most
appropriate for properties like Trump Village, where past years’ profits are a
poor gauge of future value.
In 1992, the Trumps had removed the two Trump Village
buildings from an affordable housing program so they could raise rents and
increase their profits. But doing so cost them a property tax exemption, which
temporarily put the buildings in the red. The methodology described by Mr. Von
Ancken would have disregarded this blip into the red and valued the buildings
based on the higher rents the Trumps would be charging. Mr. Von Ancken,
however, appears to have based his valuation on the blip, producing an appraisal
that, taken at face value, meant Fred Trump would have had to pay someone
millions of dollars to take the property off his hands.
Mr. Von Ancken told The Times that he did not recall which
appraisal method he used on the two Trump Village buildings. “I can only say
that we value the properties based on market information, and based on the
expected income and expenses of the building and what they would sell for,” he
said. As for the enormous gaps between his valuation and the 1995 city property
tax appraisal and the 2004 bank valuation, he argued that such comparisons were
pointless. “I can’t say what happened afterwards,” he said. “Maybe they
increased the income tremendously.”
The Minority Owner
To further whittle the empire’s valuation, the family
created the appearance that Fred Trump held only 49.8 percent.
Donald Trump with his mother, Mary, and his father. The
empire was split up among the parents and children to create the impression
that Fred Trump was a minority owner, decreasing its value on paper and
minimizing taxes.
Armed with Mr. Von Ancken’s $93.9 million appraisal, the
Trumps focused on slashing even this valuation by changing the ownership
structure of Fred Trump’s empire.
The I.R.S. has long accepted the idea that ownership with
control is more valuable than ownership without control. Someone with a
controlling interest in a building can decide if and when the building is sold,
how it is marketed and what price to accept. However, since someone who owns,
say, 10 percent of a $100 million building lacks control over any of those
decisions, the I.R.S. will let him claim that his stake should be taxed as if
it were worth only $7 million or $8 million.
But Fred Trump had exercised total control over his empire
for more than seven decades. With rare exceptions, he owned 100 percent of his
buildings. So the Trumps set out to create the fiction that Fred Trump was a
minority owner. All it took was splitting the ownership structure of his
empire. Fred and Mary Trump each ended up with 49.8 percent of the corporate
entities that owned his buildings. The other 0.4 percent was split among their
four children.
Splitting ownership into minority interests is a widely used
method of tax avoidance. There is one circumstance, however, where it has at
times been found to be illegal. It involves what is known in tax law as the
step transaction doctrine — where it can be shown that the corporate
restructuring was part of a rapid sequence of seemingly separate maneuvers actually
conceived and executed to dodge taxes. A key issue, according to tax experts,
is timing — in the Trumps’ case, whether they split up Fred Trump’s empire just
before they set up the GRATs.
In all, the Trumps broke up 12 corporate entities to create the
appearance of minority ownership. The Times could not determine when five of
the 12 companies were divided. But records reveal that the other seven were
split up just before the GRATs were established.
The pattern was clear. For decades, the companies had been
owned solely by Fred Trump, each operating a different apartment complex or
shopping center. In September 1995, the Trumps formed seven new limited
liability companies. Between Oct. 31 and Nov. 8, they transferred the deeds to
the seven properties into their respective L.L.C.’s. On Nov. 21, they recorded
six of the deed transfers in public property records. (The seventh was recorded
on Nov. 24.) And on Nov. 22, 49.8 percent of the shares in these seven L.L.C.’s
was transferred into Fred Trump’s GRAT and 49.8 percent into Mary Trump’s GRAT.
That enabled the Trumps to slash Mr. Von Ancken’s valuation
in a way that was legally dubious. They claimed that Fred and Mary Trump’s
status as minority owners, plus the fact that a building couldn’t be sold as
easily as a share of stock, entitled them to lop 45 percent off Mr. Von
Ancken’s $93.9 million valuation. This claim, combined with $18.3 million more
in standard deductions, completed the alchemy of turning real estate that would
soon be valued at nearly $900 million into $41.4 million.
According to tax experts, claiming a 45 percent discount was
questionable even back then, and far higher than the 20 to 30 percent discount
the I.R.S. would allow today.
As it happened, the Trumps’ GRATs did not completely elude
I.R.S. scrutiny. Documents obtained by The Times reveal that the I.R.S. audited
Fred Trump’s 1995 gift tax return and concluded that Fred Trump and his wife
had significantly undervalued the assets being transferred through their GRATs.
The I.R.S. determined that the Trumps’ assets were worth
$57.1 million, 38 percent more than the couple had claimed. From the
perspective of an I.R.S. auditor, pulling in nearly $5 million in additional
revenue could be considered a good day’s work. For the Trumps, getting the
I.R.S. to agree that Fred Trump’s properties were worth only $57.1 million was
a triumph.
“All estate matters were handled by licensed attorneys,
licensed C.P.A.s and licensed real estate appraisers who followed all laws and
rules strictly,” Mr. Harder, the president’s lawyer, said in his statement.
In the end, the transfer of the Trump empire cost Fred and
Mary Trump $20.5 million in gift taxes and their children $21 million in
annuity payments. That is hundreds of millions of dollars less than they would
have paid based on the empire’s market value, The Times found.
Better still for the Trump children, they did not have to
pay out a penny of their own. They simply used their father’s empire as
collateral to secure a line of credit from M&T Bank. They used the line of
credit to make the $21 million in annuity payments, then used the revenue from
their father’s empire to repay the money they had borrowed.
On the day the Trump children finally took ownership of Fred
Trump’s empire, Donald Trump’s net worth instantly increased by many tens of
millions of dollars. And from then on, the profits from his father’s empire
would flow directly to him and his siblings. The next year, 1998, Donald
Trump’s share amounted to today’s equivalent of $9.6 million, The Times found.
This sudden influx of wealth came only weeks after he had
published “The Art of the Comeback.”
“I learned a lot about myself during these hard times,” he
wrote. “I learned about handling pressure. I was able to home in, buckle down,
get back to the basics, and make things work. I worked much harder, I focused,
and I got myself out of a box.”
Over 244 pages he did not mention that he was being handed
nearly 25 percent of his father’s empire.
Remnants of Empire
After Fred Trump’s death, his children used familiar methods
to devalue what little of his life’s work was still in his name.
During Fred Trump’s final years, dementia stole most of his
memories. When family visited, there was one name he could reliably put to a
face. Donald.
On June 7, 1999, Fred Trump was admitted to Long Island
Jewish Medical Center, not far from the house in Jamaica Estates, for treatment
of pneumonia. He died there on June 25, at the age of 93.
Fifteen months later, Fred Trump’s executors — Donald,
Maryanne and Robert — filed his estate tax return. The return, obtained by The
Times, vividly illustrates the effectiveness of the tax strategies devised by
the Trumps in the early 1990s.
Fred Trump, one of the most prolific New York developers of
his time, owned just five apartment complexes, two small strip malls and a
scattering of co-ops in the city upon his death. The man who paid himself $50
million in 1990 died with just $1.9 million in the bank. He owned not a single
stock, bond or Treasury bill. According to his estate tax return, his most
valuable asset was a $10.3 million I.O.U. from Donald Trump, money his son
appears to have borrowed the year before Fred Trump died.
The bulk of Fred Trump’s empire was nowhere to be found on
his estate tax return. And yet Donald Trump and his siblings were not done.
Recycling the legally dubious techniques they had mastered with the GRATs, they
dodged tens of millions of dollars in estate taxes on the remnants of empire
that Fred Trump still owned when he died, The Times found.
As with the GRATs, they obtained appraisals from Mr. Von
Ancken that grossly understated the actual market value of those remnants. And
as with the GRATs, they aggressively discounted Mr. Von Ancken’s appraisals.
The result: They claimed that the five apartment complexes and two strip malls
were worth $15 million. In 2004, records show, bankers would put a value of
$176.2 million on the exact same properties.
The most improbable of these valuations was for Tysens Park
Apartments, a complex of eight buildings with 1,019 units on Staten Island. On
the portion of the estate tax return where they were required to list Tysens
Park’s value, the Trumps simply left a blank space and claimed they owed no
estate taxes on it at all.
As with the Trump Village appraisal, the Trumps appear to
have hidden key facts from the I.R.S. Tysens Park, like Trump Village, had
operated for years under an affordable housing program that by law capped Fred
Trump’s profits. This cap drastically reduced the property’s market value.
Leaving a blank space on Fred Trump’s estate tax return, the
Trumps indicated that they owed no estate taxes on the Tysens Park complex on
Staten Island. Dave Sanders for The New York Times
Except for one thing: The Trumps had removed Tysens Park
from the affordable housing program the year before Fred Trump died, The Times
found. When Donald Trump and his siblings filed Fred Trump’s estate tax return,
there were no limits on their profits. In fact, they had already begun raising
rents.
As their father’s executors, Donald, Maryanne and Robert
were legally responsible for the accuracy of his estate tax return. They were
obligated not only to give the I.R.S. a complete accounting of the value of his
estate’s assets, but also to disclose all the taxable gifts he made during his
lifetime, including, for example, the $15.5 million Trump Palace gift to Donald
Trump and the millions of dollars he gave his children via All County’s padded
invoices.
“If they knew anything was wrong they could be in violation
of tax law,” Mr. Tritt, the University of Florida law professor, said. “They
can’t just stick their heads in the sand.”
In addition to drastically understating the value of
apartment complexes and shopping centers, Fred Trump’s estate tax return made
no mention of either Trump Palace or All County.
It wasn’t until after Fred Trump’s wife, Mary, died at 88 on
Aug. 7, 2000, that the I.R.S. completed its audit of their combined estates.
The audit concluded that their estates were worth $51.8 million, 23 percent
more than Donald Trump and his siblings had claimed.
That meant an additional $5.2 million in estate taxes. Even
so, the Trumps’ tax bill was a fraction of what they would have owed had they
reported the market value of what Fred and Mary Trump owned at the time of
their deaths.
Mr. Harder, the president’s lawyer, defended the tax returns
filed by the Trumps. “The returns and tax positions that The Times now attacks
were examined in real time by the relevant taxing authorities,” he said. “The
taxing authorities requested a few minor adjustments, which were made, and then
fully approved all of the tax filings. These matters have now been closed for
more than a decade.”
A Good Time to Sell
Donald Trump, in financial trouble again, pitched the idea
of selling the still-profitable empire that his father had wanted to keep in
the family.
In 2003, the Trump siblings gathered at Trump Tower for one
of their periodic updates on their inherited empire.
As always, Robert Trump drove into Manhattan with several of
his lieutenants. Donald Trump appeared with Allen H. Weisselberg, who had
worked for Fred Trump for two decades before becoming his son’s chief financial
officer. The sisters, Maryanne Trump Barry and Elizabeth Trump Grau, were there
as well.
The meeting followed the usual routine: a financial report,
a rundown of operational issues and then the real business — distributing
profits to each Trump. The task of handing out the checks fell to Steve Gurien,
the empire’s finance chief.
A moment later, Donald Trump abruptly changed the course of
his family’s history: He said it was a good time to sell.
Fred Trump’s empire, in fact, was continuing to produce
healthy profits, and selling contradicted his stated wish to keep his legacy in
the family. But Donald Trump insisted that the real estate market had peaked
and that the time was right, according to a person familiar with the meeting.
He was also, once again, in financial trouble. His Atlantic
City casinos were veering toward another bankruptcy. His creditors would soon
threaten to oust him unless he committed to invest $55 million of his own
money.
Yet if Donald Trump’s sudden push to sell stunned the room,
it met with no apparent resistance from his siblings. He directed his brother
to solicit private bids, saying he wanted the sale handled quickly and quietly.
Donald Trump’s signature skill — drumming up publicity for the Trump brand —
would sit this one out.
Three potential bidders were given access to the finances of
Fred Trump’s empire — 37 apartment complexes and several shopping centers. Ruby
Schron, a major New York City landlord, quickly emerged as the favorite. In
December 2003, Mr. Schron called Donald Trump and they came to an agreement;
Mr. Schron paid $705.6 million for most of the empire, which included paying
off the Trumps’ mortgages. A few remaining properties were sold to other
buyers, bringing the total sales price to $737.9 million.
On May 4, 2004, the Trump children spent most of the day
signing away ownership of what their father had doggedly built over 70 years.
The sale received little news coverage, and an article in The Staten Island
Advance included the rarest of phrases: “Trump did not return a phone call
seeking comment.”
Even more extraordinary was this unreported fact: The banks
financing Mr. Schron’s purchase valued Fred Trump’s empire at nearly $1
billion. In other words, Donald Trump, master dealmaker, sold his father’s
empire for hundreds of millions less than it was worth.
Within a year of the sale, Mr. Trump spent $149 million in
cash on a rapid series of transactions that bolstered his billionaire bona
fides. In June 2004 he agreed to pay $73 million to buy out his partner in the
planned Trump International Hotel & Tower in Chicago. (“I’m just buying it with
my own cash,” he told reporters.) He paid $55 million in cash to make peace
with his casino creditors. Then he put up $21 million more in cash to help
finance his purchase of Maison de l’Amitié, a waterfront mansion in Palm Beach,
Fla., that he later sold to a Russian oligarch.
The first season of “The Apprentice” was broadcast in 2004,
just as Donald Trump was wrapping up the sale of his father’s empire. The
show’s opening montage — quick cuts of a glittering Trump casino, then Trump
Tower, then a Trump helicopter mid-flight, then a limousine depositing the man
himself at the steps of his jet, all set to the song “For the Love of Money” —
is a reminder that the story of Donald Trump is fundamentally a story of money.
Money is at the core of the brand Mr. Trump has so
successfully sold to the world. Yet essential to that mythmaking has been
keeping the truth of his money — how much of it he actually has, where and whom
it came from — hidden or obscured. Across the decades, aided and abetted by
less-than-aggressive journalism, Mr. Trump has made sure his financial history
would be sensationalized far more than seen.
In the narrative Donald Trump has long put forth, money is
central; absent has been the critical financial role played by his father,
whose photograph sits alongside his mother’s in the Oval Office.
Just this year, in a confessional essay for The Washington
Post, Jonathan Greenberg, a former reporter for Forbes, described how Mr.
Trump, identifying himself as John Barron, a spokesman for Donald Trump,
repeatedly and flagrantly lied to get himself on the magazine’s first-ever list
of wealthiest Americans in 1982. Because of Mr. Trump’s refusal to release his
tax returns, the public has been left to interpret contradictory glimpses of
his income offered up by anonymous leaks. A few pages from one tax return,
mailed to The Times in September 2016, showed that he declared a staggering
loss of $916 million in 1995. A couple of pages from another return, disclosed
on Rachel Maddow’s program, showed that he earned an impressive $150 million in
2005.
In a statement to The Times, the president’s spokeswoman,
Sarah Huckabee Sanders, reiterated what Mr. Trump has always claimed about the
evolution of his fortune: “The president’s father gave him an initial $1
million loan, which he paid back. President Trump used this money to build an
incredibly successful company as well as net worth of over $10 billion,
including owning some of the world’s greatest real estate.”
Today, the chasm between that claim of being worth more than
$10 billion and a Bloomberg estimate of $2.8 billion reflects the depth of
uncertainty that remains about one of the most chronicled public figures in
American history. Questions about newer money sources are rapidly accumulating
because of the Russia investigation and lawsuits alleging that Mr. Trump is
violating the Constitution by continuing to do business with foreign
governments.
But the more than 100,000 pages of records obtained during
this investigation make it possible to sweep away decades of misinformation and
arrive at a clear understanding about the original source of Mr. Trump’s wealth
— his father.
Here is what can be said with certainty: Had Mr. Trump done
nothing but invest the money his father gave him in an index fund that tracks
the Standard & Poor’s 500, he would be worth $1.96 billion today. As for
that $1 million loan, Fred Trump actually lent him at least $60.7 million, or
$140 million in today’s dollars, The Times found.
And there is one more Fred Trump windfall coming Donald
Trump’s way. Starrett City, the Brooklyn housing complex that the Trumps
invested in back in the 1970s, sold this year for $905 million. Donald Trump’s
share of the proceeds is expected to exceed $16 million, records show.
It was an investment made with Fred Trump’s money and
connections. But in Donald Trump’s version of his life, Starrett City is always
and forever “one of the best investments I ever made.”
Oct. 2, 2018
© 2018 The New York Times Company
FAIR USE NOTICE: This post contains copyrighted material the use of which has not been specifically authorized by the copyright owner. This material is being made available in an efforts to advance understanding of criminal justice, political, human rights, economic, democracy, scientific, and social justice issues. We believe this constitutes a fair use of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. For more information go to: https://www.law.cornell.edu/uscode/text/17/107
FAIR USE NOTICE: This post contains copyrighted material the use of which has not been specifically authorized by the copyright owner. This material is being made available in an efforts to advance understanding of criminal justice, political, human rights, economic, democracy, scientific, and social justice issues. We believe this constitutes a fair use of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. For more information go to: https://www.law.cornell.edu/uscode/text/17/107
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