Connecting the issues outlined in the JCT (Joint Committee on Taxation) report with Trump’s tax returns
In a previous post, we uploaded the 2015-2020 tax returns of former US President, Donald J. Trump released by the House Ways and Means Committee back in December 2022, and published the searchable archive to a public project in Essentia AI. As a follow-up to that post, we've spent some time reviewing the original report from the Joint Committee on Taxation that outlined the issues that they identified within the tax returns of Donald Trump as an individual as well as his business returns. It's no small feat to be able to navigate the report and tie its findings to the thousands of pages of those tax documents, but we were able to do so using Essentia AI's tools that make it easy to search, tag and comment, and published them to this post.
We've broken the report based on tax year and linked each issue in the report to the actual pages in the tax returns that correlate to them. Simply click the link to view the relevant pages.
(Note: This is for educational and demonstration purposes only and is not meant to be political or partisan in anyway)
Tax Year
2015
- Charitable contributions.--Specifically, whether the conservation easement deduction of $21.1 million and other large donations reported on the 2015 Schedule A (Form 1040) were supported by required substantiation. Even though the deduction was limited in 2015 as a result of Mr. Trump not having any taxable income, it still became part of the charitable contribution deduction carryforward amount (such that it may be deducted in future years if not subject to limitations) and, therefore, would warrant review.
- Proper reporting of section 108(i) income deferral.--The 2015 Form 1040 reported (as part of other income on line 21) section 108(i) income of $282,486 from DJT Holdings Managing Member LLC and $27,966,102 from DJT Holdings LLC (for a total of $28.2 million). While a taxpayer generally must recognize cancellation of indebtedness (“COD”) income when a loan is forgiven or a debt is discharged for less than the issue price, a special rule applied to the reacquisitions of business debt at a discount during 2009 or 2010, under which a taxpayer could elect to defer the COD income for five years (2009 reacquisitions) or four years (2010 reacquisitions), and then recognize such deferred COD income ratably over five years. Details of the debt discharge should be examined, particularly since an inclusion in income of $28.2 million in one year means that a total of $141 million is being deferred.
- Verification of the net operating loss carryover schedule.--The net operating loss carryover to 2015 was shown as $105,157,825 as part of the other income reported on line 21 of the 2015 Form 1040. Verifying the net operating loss carryovers will ensure that the proper amount of net operating loss is utilized in future years.
- Unreimbursed partnership/S corporation expenses reported on the 2015 Form 1040.-- With respect to a partner in a partnership, unreimbursed business expenses generally are deductible only if required to be paid by the partner without reimbursement under the terms of the partnership agreement. In the case of an S corporation shareholder, the payment of unreimbursed business expenses is generally considered to be a contribution to capital of the S corporation unless the shareholder is an employee of the S corporation, in which case the shareholder may be able to treat such amounts as a miscellaneous itemized deduction (to the extent allowed). For 2015, the total unreimbursed business expenses reported (for all partnerships and S corporations flowing through to the Form 1040) were approximately $4.9 million. We would suggest looking into these amounts, which would include reviewing each applicable partnership agreement.
- Related party loans.--Interest income on the 2015 Form 1040 was reported from related party loans made to some of Mr. Trump’s children (i.e., Ivanka Trump, Donald Trump Jr., and Eric Trump), in the amount of approximately $51,000, raising the question of whether the loans were bona fide arm’s length transactions, or whether the transfers were disguised gifts that could trigger gift tax and a disallowance of interest deductions by the related borrowers.
- Validity of sole proprietorship activities.--A majority of the Schedule Cs reported either no gross income (i.e., only expenses), or gross income and expenses that almost entirely offset, raising the question of whether these were valid trade or business activities, or whether these Schedules contained costs derived from personal activities or hobbies. For example, 13 of the 27 Schedule Cs reported only expenses (no gross income). As another example, one Schedule C for Donald J. Trump (speaking) reported gross income of $50,000, which was almost entirely offset by $46,162 of travel expenses. Audits of closely-held entities often find personal expenditures being improperly deducted as business expenses.
- Passive versus nonpassive flow-through income and losses.--It should be determined whether the Schedule E losses reported on the 2015 Form 1040 were passive or active losses, which could change the amount of ordinary loss allowed for the year. The more than 400 passthrough entities flowing through to the Form 1040 reported total passive and nonpassive income of $69.52 million, and total passive and nonpassive losses allowed (including section 179 expenses) of $79.25 million, resulting in a net ordinary loss of $9.73 million. It should also be determined whether Mr. Trump had sufficient basis in the entities reporting losses and was sufficiently at risk with respect to such entities to be able to claim the losses.
- Cost of goods sold deduction by DJT Holdings LLC.--The 2015 Form 1065 for DJT Holdings LLC reported a cost of goods sold deduction of $29.1 million, without any description of the inventory method. It is not clear what DJT Holdings was selling from the face of return. However, based on the IRS audit files, this entity appears to be selling residential and hotel units. In general, real estate should not be treated as inventory and costs should not be recovered through a cost of goods sold reduction to gross income. Further, the 2015 Form 1125-A (Cost of Goods Sold) for DJT Holdings LLC reported cost of labor of $14.1 million (out of total cost of goods sold of $29.1 million). We would recommend looking into whether sales of real estate, and related costs, are being properly accounted for by the partnership, including an analysis of the labor costs and whether the partnership should have been using the percentage of completion method21 to account for the income and costs related to these sales.
- Hotel expense deduction by DJT Holdings LLC.--The 2015 Form 1065 for DJT Holdings LLC includes a deduction for hotel expenses of $13.9 million (total deductions were $24.7 million). We would have inquired about the nature and reasonableness of these costs, and whether any of such amount included capitalizable and/or personal expenses.
- Activities of DJT Holdings Managing Member LLC.--The 2015 Form 1120-S for DJT Holdings Managing Member LLC largely consists of flow-through items from lower tier partnerships and S corporations, which then flow through to Mr. Trump’s Form 1040. Specifically, for 2015, DJT Holdings Managing Member LLC reported an ordinary loss from other pass-through entities of $358,466 as part of its other income (loss) of ($357,526). While it had no gross receipts or sales, it reported deductions of $6,867 for taxes and licenses, auditing fees, legal expenses, and miscellaneous taxes. In addition, DJT Holdings Managing Member LLC reported a negative retained earnings as of December 31, 2015, of $1,488,038 on its Schedule L balance sheet. We would recommend requesting an explanation of these items in connection with the trade or business activities carried on by DJT Holdings Managing Member LLC as they strike us as somewhat unusual because the S corporation does not appear to be engaged in an active operating trade or business during 2015.
2016
- Charitable contributions.--Mr. Trump’s 2016 Form 1040 Schedule A reported charitable contributions of $1,191,210 ($1,111,000 of cash contributions, and $80,210 flowing through from Schedule K-1s). We would have inquired as to whether the large cash contributions were supported by required substantiation. Even though the deduction was limited in 2016 as a result of Mr. Trump not having any taxable income, it still became part of the charitable contribution deduction carryforward amount (such that it may be deducted in future years if not subject to limitations) and, therefore, would warrant review.
- Proper reporting of section 108(i) income deferral.--The 2016 Form 1040 reported (as part of other income on line 21) section 108(i) income of $282,486 from DJT Holdings Managing Member LLC and $27,966,102 from DJT Holdings LLC (for a total of $28.2 million). While a taxpayer generally must recognize COD income when a loan is forgiven or a debt is discharged for less than the issue price, a special rule applied to the reacquisitions of business debt at a discount during 2009 or 2010, under which a taxpayer could elect to defer the COD income for five years (2009 reacquisitions) or four years (2010 reacquisitions), and then recognize such deferred COD income ratably over five years. Details of the debt discharge should be examined, particularly since an inclusion in income of $28.2 million in one year means that a total of $141 million is being deferred.
- Verification of the net operating loss carryover schedule.--The net operating loss carryover to 2016 was shown as $73,376,129 as part of the other income reported on line 21 of the Form 1040. Verification of the net operating loss carryover amounts will ensure that the proper amount of net operating loss is utilized in future years.
- Unreimbursed partnership/S corporation expenses reported on the 2016 Form 1040.-- With respect to a partner in a partnership, unreimbursed business expenses generally are deductible only if required to be paid by the partner without reimbursement under the terms of the partnership agreement. In the case of an S corporation shareholder, the payment of unreimbursed business expenses is generally considered to be a contribution to capital of the S corporation unless the shareholder is an employee of the S corporation, in which case the shareholder may be able to treat such amounts as a miscellaneous itemized deduction (to the extent allowed). For 2016, the total unreimbursed business expenses reported (for all partnerships and S corporations flowing through to the Form 1040) were approximately $1.9 million. We would suggest looking into these amounts, which would include reviewing each applicable partnership agreement.
- Related party loans.--Interest income on the 2016 Form 1040 was again reported from related party loans made to some of Mr. Trump’s children (i.e., Ivanka Trump, Donald Trump Jr., and Eric Trump), in the amount of approximately $51,000, raising the question of whether the loans were bona fide arm’s length transactions, or whether the transfers were disguised gifts that could trigger gift tax and a disallowance of interest deductions by the related borrowers.
- Validity of sole proprietorship activities.-- A number of the Schedule Cs either had no gross income (i.e., only expenses), or gross income and expenses that entirely (or almost entirely) offset, raising the question of whether these were valid trade or business activities, or whether these Schedules contained costs derived from personal activities or hobbies. In 2016, out of the 21 Schedule Cs, two reported expenses equal to the amount of gross income, nine reported only expenses (no gross income), eight reported a net profit, one reported negative gross income and expenses, and one reported no gross income or expenses. For example, the 2016 Schedule C for DT Endeavor I LLC (aviation) reported gross income of $680,886 and total expenses of $680,886. Similarly, the 2016 Schedule C for DJT Aerospace LLC (aviation) reported gross income of $376,493 and total expenses of $376,493. Audits of closely-held entities often find personal expenditures being improperly deducted as business expenses.
- Passive versus nonpassive flow-through income and losses.--It should be determined whether the Schedule E losses from partnerships and S corporations reported on the 2016 Form 1040 were passive or active losses, which could change the amount of ordinary loss allowed for the year. The more than 400 pass-through entities flowing through to the Form 1040 reported total passive and nonpassive income of $85.87 million, and total passive and nonpassive losses allowed (including section 179 expenses) of $103.64 million, resulting in a net ordinary loss from partnerships and S corporations of approximately $17.77 million. It should also be determined whether Mr. Trump had sufficient basis in the entities reporting losses and was sufficiently at risk with respect to such entities to be able to claim the losses.
- General business credits, including a $26.3 million rehabilitation credit.--The 2016 Form 3800 (Form 1040) reported a rehabilitation credit of $26.3 million. Given the stringent requirements for the rehabilitation credit, we think this item should have been audited to see if the rehabilitation credit requirements were satisfied. Even though Mr. Trump was not able to fully utilize the credit in 2016 due to taxable income limitations, it became part of his general business credit carryback and carryforward, available for use in prior and subsequent years.
- Cost of goods sold deduction by DJT Holdings LLC.--Similar to 2015, the 2016 Form 1065 for DJT Holdings LLC reported a cost of goods sold deduction of $27.3 million. As noted above, real estate generally should not be treated as inventory and costs should not be recovered through a cost of goods sold reduction to gross income. Further, the 2016 Form 1125-A (Cost of Goods Sold) for DJT Holdings LLC reported cost of labor of $13.5 million (out of total cost of goods sold of $27.3 million). We would recommend looking into whether sales of real estate, and related costs, are being properly accounted for by the partnership, including an analysis of the labor costs and whether the partnership should have been using the percentage of completion method42 to account for the income and costs related to these sales.
- Hotel expense deduction by DJT Holdings LLC.--The 2016 Form 1065 for DJT Holdings includes a deduction for hotel expenses of $13.9 million (total deductions were $22.2 million). We would recommend inquiring about the nature and reasonableness of these costs, and whether any of such amount included capitalizable and/or personal expenses.
- DTTM Operations LLC (Form 1065).--We did not see any mention of DTTM Operations LLC in the audit files for 2016. However, upon reviewing the returns, we noted that DTTM Operations LLC began business in 2016, and in its first year reported total income of $807,444, and total deductions of $142,457 (which included legal expense of $139,553), for ordinary business income of $664,987. We would recommend inquiring about the nature of the legal fees, including whether any of such legal fees should have been capitalized and amortized as start-up expenditures (pursuant to section 195) or organizational expenses (pursuant to section 709).
2017 & 2018
- Charitable contributions.--Mr. Trump’s 2017 and 2018 Form 1040 Schedule As reported charitable contributions of $1.9 million and $500,150, respectively. We would have inquired as to whether the large cash contributions were supported by required substantiation. Even though the deduction was limited in 2017 as a result of Mr. Trump not having any taxable income, it still became part of the charitable contribution deduction carryforward amount (such that it may be deducted in future years if not subject to limitations) and, therefore, would warrant review. Further, in 2018, Mr. Trump had taxable income, enabling him to benefit from a charitable contribution deduction.
- Miscellaneous itemized deductions for 2017. --Mr. Trump’s 2017 Form 1040 Schedule A reported a miscellaneous itemized deduction in the amount of $4.1 million, most of which was described as being for expenses for the production of income, deductible under section 212. This amount warrants further review.
- Proper reporting of section 108(i) income deferral.--The 2017 and 2018 Form 1040s reported section 108(i) income of $282,486 and $282,485, respectively, from DJT Holdings Managing Member LLC and $27,966,103 and $27,966,102, respectively, from DJT Holdings LLC (for a total of $28.2 million each year). While a taxpayer generally must recognize COD income when a loan is forgiven or a debt is discharged for less than the issue price, a special rule applied to the reacquisitions of business debt at a discount during 2009 or 2010, under which a taxpayer was permitted to elect to defer reporting the COD income for five years (2009 reacquisitions) or four years (2010 reacquisitions), and then to begin to recognize such deferred COD income ratably over five years. Details of the debt discharge should be examined, particularly since an inclusion in income of $28.2 million in one year means that a total of $141 million is being deferred.
- Verification of the net operating loss carryover schedule.--The net operating loss carryover to 2017 and 2018 was shown as $44,979,682 and $23,422,109, respectively, as part of the other income reported on line 21 of the Form 1040s. Verification of the net operating loss carryovers will ensure that the correct amount of net operating loss was utilized each year.
- Unreimbursed partnership/S corporation expenses reported on Form 1040.--With respect to a partner in a partnership, unreimbursed business expenses generally are deductible only if required to be paid by the partner without reimbursement under the terms of the partnership agreement. In the case of an S corporation shareholder, the payment of unreimbursed business expenses is generally considered to be a contribution to capital of the S corporation unless the shareholder is an employee of the S corporation, in which case the shareholder may be able to treat such amounts as a miscellaneous itemized deduction (to the extent allowed). For 2017 and 2018, the total unreimbursed business expenses reported (for all partnerships and S corporations flowing through to the Form 1040) were approximately $2.1 million and $1.9 million, respectively. We would suggest looking into these amounts, which would include reviewing each applicable partnership agreement.
- Related party loans.--Interest income on Form 1040 was again reported from related party loans made to some of Mr. Trump's children (i.e., Ivanka Trump, Donald Trump Jr., and Eric Trump), in the amount of approximately $51,000 in both 2017 and 2018, raising the question of whether the loans were bona fide arm’s length transactions, or whether the transfers were disguised gifts that could trigger gift tax and a disallowance of interest deductions by the related borrowers.
- Validity of sole proprietorship activities.-- A number of Schedule Cs either had no gross income (i.e., only expenses), or gross income and expenses that entirely (or almost entirely) offset, raising the question of whether these were valid trade or business activities, or whether these Schedules contained costs derived from personal activities or hobbies. For example, the 2017 Schedule C for DJT Aerospace LLC (aviation) reported gross income of $42,965 and total expenses of $42,965, the second consecutive year this business showed an equal amount of gross income and expense. In 2018, of the five Schedule Cs, three reported only expenses (no gross income), and two reported losses. For example, the 2018 Schedule C for Donald J. Trump (management services) reported no gross income, just taxes and licenses expense of $38,764. Similarly, the 2018 Schedule C for DJT Endeavor I (aviation) reported gross income of $38,392 and expenses of $312,773, for a net loss of $274,381. Audits of closely-held entities often find personal expenditures being improperly deducted as business expenses.
- Passive versus nonpassive flow-through income and losses.-- It should be determined whether the Schedule E losses from partnerships and S corporations reported on the Form 1040s were passive or active losses, which could change the amount of ordinary loss allowed for each year. The more than 400 pass-through entities flowing through to the Form 1040s reported total passive and nonpassive income of $80.64 million and $75.04 million for 2017 and 2018, respectively, and total passive and nonpassive losses allowed (including section 179 expenses) of $97.9 million and $87.2 million for 2017 and 2018, respectively, resulting in a net ordinary loss from partnerships and S corporations of $17.3 million and $12.2 million for 2017 and 2018, respectively. It should also be determined whether Mr. Trump had sufficient basis in the entities reporting losses and was sufficiently at risk with respect to such entities to be able to claim the losses.
- Foreign tax credits.--Since the 2018 Form 1040 reported taxable income, foreign tax credits could be utilized, and a foreign tax credit of $1.3 million was claimed for 2018. Verification of the foreign tax payments made will ensure that eligible amounts are being claimed as a credit. We would recommend requesting receipts for foreign tax payments to countries with the largest amounts making up the foreign tax credit, including the foreign tax credit carryforwards (e.g., foreign taxes paid over $500,000 per country over the 10-year period ending in 2018).
- General business credit carryover.--The general business credit carryover to the 2017 Form 1040 is shown as $22.6 million, partly attributable to the 2016 rehabilitation credit. As noted above, given the stringent requirements for the rehabilitation credit, we think this item should have been audited to see if the rehabilitation credit requirements were satisfied. Even though Mr. Trump was not able to fully utilize the credit in 2016, 2017, or 2018 due to taxable income limitations, it continues to be part of his general business credit carryforward, available for use in future years. As noted above, an informal claim was made for 2015 to carryback the 2016 rehabilitation credit. If any part of the claim is allowed, the amount carried forward to 2017 and beyond must be decreased.
- Rental real estate income (loss) for DJT Holdings LLC 2017 Form 1065.--DJT Holdings LLC 2017 Schedule E included a commercial rental real estate property that reported a significant loss of $949,123 (rents received of $792,698 and total expenses of $1,741,821), as well as a residential rental real estate property (single family home) with no rental income, but total expenses of $137,111.79 We would recommend inquiring about the reason for the significant loss on the commercial rental real estate property, as well as whether the residential rental real estate property was actually held for rent during 2017. If the property is not used in a rental real estate activity, it raises the question of whether the residence might be held for personal use, and the payment of the expenses would be a distribution (non-deductible) to the partner.
- Cost of goods sold deductions by DJT Holdings LLC and DJT Holdings Managing Member LLC.--The 2017 and 2018 Form 1065s for DJT Holdings LLC reported a cost of goods sold deduction of $24.5 million and $22.7 million, respectively. As noted above, real estate generally should not be treated as inventory and costs should not be recovered through a cost of goods sold reduction to gross income. Further, the 2017 and 2018 Form 1125-As (Cost of Goods Sold) for DJT Holdings LLC reported cost of labor of $12.8 million and $11.4 million, respectively (out of total cost of goods sold of $24.5 million and $22.7 million, respectively). We would recommend looking into whether sales of real estate, and related costs, are being properly accounted for by the partnership, including an analysis of the labor costs and whether the partnership should have been using the percentage of completion method to account for the income and costs related to these sales.
Similarly, the 2017 and 2018 Form 1120-Ss for DJT Holdings Managing Member LLC reported a cost of goods sold deduction of $7.1 million and $6.9 million, respectively. However. for 2015 and 2016, this entity did not report any sales or cost of goods sold (it only reported losses from pass-through entities and deductions, plus refundable fuel credits). Further, the 2017 and 2018 cost of goods sold deduction calculation (as reported on Form 1125-A) included lot development costs of $4.98 million and $5.12 million, respectively. We would recommend inquiring about the change in business activities between 2016 and 2017 (e.g., an explanation for the change from no sales to significant sales), as well as the nature of the lot development costs, why they were included in the cost of goods sold computation, and the methodology used to allocate such costs to sales.
- LFB Acquisition LLC (Form 1065).--We did not see any mention of LFB Acquisition LLC in the 2017 or 2018 audit files, but observed some noteworthy deductions after reviewing the partnership’s returns. Specifically, management fees and general and administrative expenses were significantly higher in 2017 than in 2016 and 2018. LFB Acquisition LLC reported management fees of $750,997, $1,919,780, and $707,786 in 2016, 2017, and 2018, respectively, and general and administrative expenses of $549,607, $2,846,420, and $570,454 in 2016, 2017, 2018, respectively. We would recommend inquiring about the large increase in these deductions for 2017 when compared to other years.
2019
- Charitable contributions.--Mr. Trump’s 2019 Form 1040 Schedule A reported charitable contributions of $504,700. We would inquire as to whether the large cash contributions were supported by required substantiation. Further, in 2019, Mr. Trump had taxable income, enabling him to benefit from a charitable contribution deduction.
- Unreimbursed partnership/S corporation expenses reported on the 2019 Form 1040.-- With respect to a partner in a partnership, unreimbursed business expenses generally are deductible only if required to be paid by the partner without reimbursement under the terms of the partnership agreement. In the case of an S corporation shareholder, the payment of unreimbursed business expenses is generally considered to be a contribution to capital of the S corporation, or non-deductible if the shareholder is an employee of the S corporation. For 2019, the total unreimbursed business expenses reported (for all partnerships and S corporations flowing through to the Form 1040) were approximately $11.2 million. We would suggest examining these amounts, which would include reviewing each applicable partnership agreement, particularly because this amount was significantly higher than what was reported in prior years (e.g., $1.9 million in 2018) and were incurred while Mr. Trump was President.
- Related party loans.--Interest income on the 2019 Form 1040 was again reported from related party loans made to some of Mr. Trump's children (i.e., Ivanka Trump, Donald Trump Jr., and Eric Trump), in the amount of approximately $51,000 in 2019, raising the question of whether the loans were bona fide arm’s length transactions, or whether the transfers were disguised gifts that could trigger gift tax and a disallowance of interest deductions by the related borrowers.
- Validity of sole proprietorship activities.--A number of Schedule Cs either had no gross income (i.e., only expenses), or income and expenses that entirely (or almost entirely) offset, raising the question of whether these were valid trade or business activities, or whether these Schedules contained costs derived from personal activities or hobbies. In 2019, out of the six Schedule Cs, two reported net profits of zero, three reported losses, and one reported a net profit. For example, the 2019 Schedule C for Donald J. Trump (management services) reported gross income of $94,017 and expenses of $94,017. Similarly, the 2019 Schedule C for Melania Trump (modeling) reported gross income of $3,848 and expenses of $3,848. As another example, the 2019 Schedule C for DJT Operations II LLC (aviation) reported no gross income and expenses of $7,382. Audits of closely-held entities often find personal expenditures being improperly deducted as business expenses.
- Passive versus nonpassive flow-through income and losses.-- It should be determined whether the Schedule E losses from partnerships and S corporations reported on the 2019 Form 1040 were passive or active losses, which could change the amount of ordinary loss allowed for the year. The more than 400 pass-through entities flowing through to the 2019 Form 1040 reported total passive and nonpassive income of $57.99 million, and total passive and nonpassive losses allowed (including section 179 expenses) of $74.61 million, resulting in a net ordinary loss from partnerships and S corporations of $16.62 million. It should also be determined whether Mr. Trump had sufficient basis in the entities reporting losses and was sufficiently at risk with respect to such entities to be able to claim the losses.
- General business credit carryover.--The general business credit carryover to the 2019 Form 1040 was $12.4 million, partly attributable to the rehabilitation credit that was reported in 2016. As noted above, given the stringent requirements for the rehabilitation credit, we think this item should have been audited to see if the rehabilitation credit requirements were satisfied. Even though Mr. Trump has not been able to fully utilize the credit in intervening years due to taxable income limitations, it continues to be part of his general business credit carryforwards, available for use in future years. As noted above, an informal claim was made for 2015 to carryback the 2016 rehabilitation credit. If any part of the claim is allowed, the amount carried forward to 2017 and beyond must be decreased.
- Cost of goods sold deductions by DJT Holdings LLC and DJT Holdings Managing Member LLC.--The 2019 Form 1065 for DJT Holdings LLC reported a cost of goods sold deduction of $23.4 million. As noted above, real estate generally should not be treated as inventory and costs should not be recovered through a cost of goods sold reduction to gross income. Further, the 2019 Form 1125-A (Cost of Goods Sold) for DJT Holdings LLC reported cost of labor of $11.3 million (out of total cost of goods sold of $23.4 million). We would recommend looking into whether sales of real estate, and related costs, are being properly accounted for by the partnership, including an analysis of the labor costs and whether the partnership should have been using the percentage of completion method93 to account for the income and costs related to these sales. Similarly, the 2019 Form 1120-S for DJT Holdings Managing Member LLC reported a cost of goods sold deduction of $2.1 million. Further, the 2019 cost of goods sold deduction calculation (as reported on Form 1125-A) included developed lot costs of $1.9 million. We would recommend inquiring about the nature of the developed lot costs, why they were included in the cost of goods sold computation, and the methodology used to allocate such costs to sales.
2020
- Unreimbursed partnership/S corporation expenses reported on the 2020 Form 1040.-- With respect to a partner in a partnership, unreimbursed business expenses generally are deductible only if required to be paid by the partner without reimbursement under the terms of the partnership agreement. In the case of an S corporation shareholder, the payment of unreimbursed business expenses is generally considered to be a contribution to capital of the S corporation, or non-deductible if the shareholder is an employee of the S corporation. For 2020, the total unreimbursed business expenses reported (for all partnerships and S corporations flowing through to the Form 1040) were approximately $5.4 million. We would suggest examining these amounts, which would include reviewing each applicable partnership agreement.
- Related party loans.--Interest income on the 2020 Form 1040 was again reported from related party loans made to some of Mr. Trump's children (i.e., Ivanka Trump, Donald Trump Jr., and Eric Trump), in the amount of approximately $46,000, raising the question of whether the loans were bona fide arm’s length transactions, or whether the transfers were disguised gifts that could trigger gift tax and a disallowance of interest deductions by the related borrowers.
- Validity of sole proprietorship activities.--A number of Schedule Cs either had no gross income (i.e., only expenses), or gross income and expenses that entirely (or almost entirely) offset, raising the question of whether these were valid trade or business activities, or whether these Schedules contained costs derived from personal activities or hobbies. In 2020, of the six Schedule Cs, three reported expenses equal to the amount of gross income, two reported only expenses (no gross income), and one reported no gross income or expenses. For example, the 2020 Schedule C for Donald J. Trump (management services) reported gross income of $87,442 and expenses of $87,442. Similarly, the 2020 Schedule C for DT Endeavor I LLC (aviation) reported gross income of $160,144 and expenses of $160,144. The 2020 Schedule C for DJT Operations I LLC (aviation) reported no gross income and expenses of $3,239. Audits of closely-held entities often find personal expenditures being improperly deducted as business expenses.
- Passive versus nonpassive flow-through income and losses.-- It should be determined whether the Schedule E losses from partnerships and S corporations reported on the 2020 Form 1040 were passive or active losses, which could change the amount of ordinary loss allowed for the year. The more than 400 pass-through entities flowing through to the 2020 Form 1040 reported total passive and nonpassive income of $65.99 million, and total passive and nonpassive losses allowed (including section 179 expenses) of $81.75 million, resulting in a net ordinary loss from partnerships and S corporations of $15.77 million. It should also be determined whether Mr. Trump had sufficient basis in the entities reporting losses and was sufficiently at risk with respect to such entities to be able to claim the losses.
- General business credits carryover.--The general business credit carryover to 2020 Form 1040 was $12.7 million, which was made up in part of the rehabilitation credit that was reported in 2016. As noted above, given the stringent requirements for the rehabilitation credit, we think this item should have been audited to see if the rehabilitation credit requirements were satisfied. Even though Mr. Trump has not been able to fully utilize the credit in intervening years due to taxable income limitations, it continues to be part of his general business credit carryforward, available for use in future years.100 As noted above, an informal claim was made for 2015 to carry back the 2016 rehabilitation credit. If any part of the claim is allowed, the amount carried forward to 2017 and beyond must be decreased.
- Rental real estate income (loss) for DJT Holdings LLC.--DJT Holdings LLC 2020 Schedule E (Form 1065) reported a residential rental real estate property (single family home) with no rental income, but total expenses of $342,182. We would recommend inquiring about the high level of expenses for the residential rental property, as well as whether such property was actually held for rent during 2020. If the property is not used in a rental real estate activity, it raises the question of whether the residence might be held for personal use, and the payment of the expenses would be a distribution (non-deductible) to the partner.
- Hotel expense deduction by DJT Holdings LLC.--The 2020 Form 1065 for DJT Holdings includes a deduction for hotel expenses of $7.2 million (total deductions were $10.1 million). We would recommend inquiring about the nature and reasonableness of these costs, and whether any of such amount included capitalizable and/or personal expenses.
- 2020 book-to-tax reconciliation for DJT Holdings Managing Member LLC (Form 1120-S).--The 2020 Schedule M-3 (Net Income (Loss) Reconciliation for S Corporations with Total Assets of $10 Million or More) reported management fees expense of $415,905 for book, but $965,483 for tax (i.e., a book-tax difference of ($549,578)). We would recommend inquiring about why there is such a large book-tax difference.
- 2020 Form 1065 for DTTM Operations LLC.--DTTM Operations LLC reported a net ordinary loss of $758,550 for 2020, which included a deduction for “gift cards redeemed” of $438,479. Further, the 2020 Schedule L (Balance Sheet per Books) reported a gift card payable liability of $614,417 as of December 31, 2020, but indicated on page 1 of the return that it used the cash method of accounting. We would recommend inquiring about the amounts reported for gift cards, and whether such amounts are being properly accounted for under the partnership’s method of accounting.
