New York Attorney General Letitia James’ complaint against former President Donald Trump, Donald Trump Jr., Eric Trump, Ivanka Trump, Allen Wesselberg, Jeffrey McConney and ten entities including the Trump Organization is not mainly focused on taxes. It is mostly about Trump gaining advantages such as favorable loan terms and insurance provisions by purportedly misrepresenting his net worth.
The “acts of fraud and misrepresentation” cited in the complaint came in the form of an annual Statement of Financial Condition compiled by top 30 accounting firm Mazars, which has fired the Trump Organization as a client and stated that the Statements of Financial Condition for Donald Trump for the years ended June 30, 2011 through 2020 are unreliable. Mazars compiled rather than reviewed or audited the statements so responsibility for the purported misrepresentations rests with the people named in the complaint.
What the AG claims is that Trump and the others were fibbing to Mazars about is the valuation of property thereby overstating Trump’s net worth. That sort of thing will not create a tax understatement. Where the tax problem, which is what I write about, comes into play is with conservation easements. During his run for the presidency, Donald Trump’s campaign provided a 93-page list of 4,844 charitable contributions totaling $102 million. At the very top of the list was $63,825,000 in various conservation easements.
Deductions For Contribution Of An Easement
Generally you don’t get a charitable deduction for giving less than an entire interest in property away. There are exceptions to that rule. Most notable is Code Section 170(h) Qualified conservation easement. Rather than the entire interest or a remainder interest in the property you can donate “a restriction (granted in perpetuity) on the use which may be made of the real property”. That is commonly called an easement. There are other requirements, most notably that the gift has to be to the right sort of organization and has to be for one of a variety of conservation purposes.
If you give an easement you get a deduction for the value of the easement. There is not a lot of buying and selling of easements. So how do you value the easement? Regulation 1.170A-14 takes care of that:
If no substantial record of market-place sales is available to use as a meaningful or valid comparison, as a general rule (but not necessarily in all cases) the fair market value of a perpetual conservation restriction is equal to the difference between the fair market value of the property it encumbers before the granting of the restriction and the fair market value of the encumbered property after the granting of the restriction.
The “before” value creates most of the controversy. There is a mini-industry of syndicated conservation easements that is based on fantasy valuations. I have written a lot about the issue. When you overstate the “before” value of a property, you can end up understating your tax liability by inflating your charitable deductions. That is the income tax issue in the complaint.
Here are the parts of the complaint that discuss conservation easements.
Seven Springs
According to the complaint, Seven Springs is a parcel of real property that consists of approximately 212 acres within the towns of Bedford, New Castle and North Castle in Westchester County, New York. The owner of Seven Springs LLC, a subsidiary of the Trump Organization, is named in the complaint.
The complaint notes that property appraisals in 2000 and 2006 indicated values of $25 million and $30 million respectively. In the Statements of Financial Condition for 2011 to 2014, the valuation ranges from $261 million to $291 million. In the complaint’s view, the easement donation was a recognition that the development plans that supported those sort of values were infeasible.
An appraisal of six lots in New Castle indicated a value of $700,000 each. In the 2013 statement, similar lots in Bedford were valued at $23 million. When asked to explain the discrepancy Eric Trump invoked his Fifth Amendment privilege. According to the complaint Eric was aware of a restriction on development from the Town of Bedford.
Ultimately they decided to grant a conservation easement that was based on a valuation of $56.5 million — far below the $261 million to $291 million in the statements. According to the complaint, that was still an overvaluation as it omits known restrictions on the property and contains an overly optimistic sell out schedule.
For what it is worth, the Seven Springs story broke in the Washington Post on Oct. 9, 2020. I interviewed the one expert named in the Post story, Timothy Lindstrom, a lawyer who works on conservation easements. He was not negative about the appraisal other than to comment that it could have been clearer.
Given what else is going on in the conservation easement tax world, there is probably not an enormous tax issue here. It seems that when it comes to this issue, the Trump Organization might be more cautious with the IRS than they are with Deutsche Bank.
Mar-a-Lago
Any tax issues around conservation easements on Mar-a-Lago are old and cold. The concerns about easements and restrictions on Mar-a-Lago have to do with them being ignored in the valuations that were used in the Statements of Financial Condition.
The Trump Organization and Mr. Trump knew that Mar-a-Lago was subject to a host of onerous restrictions and limitations—agreed to and signed by Mr. Trump—that precluded any usage of the property as anything other than a club, precluded the property’s residential subdivision, and required considerable preservation expenses, among other limitations. Despite full knowledge and awareness of those facts, the Trump Organization valued Mar-a-Lago in each year from 2011 to 2021 based on the false premise that those restrictions did not exist. For these and a host of other reasons, all of the valuations of this property were false and misleading.
Trump National Golf Club Los Angeles
At TNGC LA there were geologic concerns about a plan to develop 16 lots where there was a driving range and putting green. Given the difficulties, the Trump Organization ended up deciding to donate a conservation easement that would allow continued use as a driving range. The lots had been valued along with others at $2.5 million each in compiling the Statement of Financial Condition. When Trump’s tax counsel Sheri Dillon engaged appraisers to look at the property for purposes of an easement deduction they came back with values in the $1.7 million range.
Trump himself argued that the lots to be subjected to the easement were in a more prestigious Zip code than other lots and should command a “zip code premium”. That turned out not to be the case. Appraisers ended up pushing the valuation down even further to as little as $20.5 million. Revised estimates of development costs threatened to push it down more. Trump pushed for a higher appraisal. It ended up at $25 million.
The complaint notes several problems with the $25 million appraisal, but does not indicate how much they amount to except in the case of the benefit to the golf course in continuing to have the driving range available which, according to the complaint, inflated the value of the donation by $500,000. It is worth noting that a valuation can be pretty far off before it is subject to substantial or gross misstatement penalties for income tax purposes. The thresholds are 150% for substantial and 200% for gross.
There was a press conference to announce the donation. Dillon advised against having the press conference.
“Remind him that the larger the value and the more he makes of it, then he is telling the world how large a tax deduction he is taking for it. In this case, this is tantamount to the US taxpayers paying Donald Trump to keep his driving range and use it for exactly what he is already using it for – and some could argue that as long as he is operating the golf course, he would continue to keep the driving range – effectively, the US taxpayers are paying him to do what he would already do anyway, and perhaps this isn’t the best use of taxpayer dollars. Bottom line – the more publicity this gets, the more we invite scrutiny. This may cause renewed interest in the issue.”
Dillon there was asking one of the in-house lawyers to remind Trump that conservation easements on golf property are controversial. That did not stop the press conference.
In the context of what goes on with conservation easements, there does not appear anything here that is really exciting from a tax perspective. The allegations in the complaint don’t appear to be at the gross valuation misstatement level. There is nothing here comparable to the shenanigans going on with syndicated conservation easements where properties held for a very short time will be marked up by a factor of ten or more.
As with Seven Springs we see the Trump Organization being more cautious with what goes into Donald’s tax deduction than what gets sent to Mazars for the Statement of Financial Condition.
Reflection
The complaint was a fun read for somebody like me. It reminded me of my younger days before I focused exclusively on tax. I was running an audit of the financial statements of a real estate partnership. I had just become a partner and it was the biggest deal I had ever worked on. We were doing a procedure called analytical review to give extra scrutiny to expenses and income that were way off from what they were expected to be. Since we did not have a prior year we were using the work papers of a much larger firm that had done projections that were used to sell interest in the partnership.
There were a host of significant variances that on net showed the projection understating expenses. When we discussed our puzzlement with someone in the management company, they responded “Oh. You are using those XYZ firm numbers. Those are for the bankers and investors. Here’s the real budget.” That did not end well for the general partners and several of their employees.
That is the sort of behavior that the complaint itemizes on a grand scale. Trump’s response in an interview with Sean Hannity, where Hannity tosses softballs and then catches them for “the 45th President” is interesting.
He tells us that the banks have their own lawyers and they don’t rely on the Trump Organization for values. There is a “disclaimer right at the front that basically says. Get your own people. You’re at your own risk.” It would be great to know what he is referring to. If it is the opinion at the opening of the Statement of Financial Condition, it is Mazars that was disclaiming.
There is a lot here, but at least superficially, there does not seem to be that much for the IRS. It is not in the same ballpark as to what has been going on with syndicated conservation easements.
On the other hand, Senator Ron Wyden of Oregon does not seem to look at it that way,
Another View
It seems that Senator Wyden is a little less easygoing than I am. He released the following statement in reaction to the AG report.
Attorney General James has provided significant evidence of violations of federal tax law. This alleged conduct could land the typical American in prison for years, and it’s critical that the IRS fully investigate these issues.
Every day, prosecutors bring cases involving a fraction of the fraud alleged here, and the federal government can’t send the message that only regular folks face accountability while people like Donald Trump break the law with impunity.
I’m particularly concerned by Donald Trump’s alleged abuse of the conservation easement program, which was the focus of an extensive Finance Committee report. This underscores the need to get our bipartisan bill reforming the syndicated conservation easement program across the finish line.
The Finance Committee has written to Trump’s accounting firm Mazars on this matter, and we intend to fully investigate the role played by other intermediaries involved in preparing allegedly false statements.