Exclusive: US presidential hopeful Donald Trump signed off on
a controversial business deal that was designed to deprive the American
government of tens of millions of dollars in tax, the Telegraph can disclose.
The billionaire approved a $50 million investment in a
company – only for the deal to be rewritten several weeks later as a ‘loan’.
Experts say that the effect of this move was to skirt vast
tax liabilities, and court papers seen by the Telegraph allege that the deal
amounted to fraud.
Independent tax accountants and lawyers said that the
documents Mr Trump signed – copies of which were obtained by this newspaper as
part of a three-month investigation - contained “red flags” indicating the deal
was irregular.
But the Republican presumptive presidential nominee signed
nonetheless.
Bob McIntyre, director of the US-based Citizens for Tax
Justice campaign group, said the disclosures raised serious questions about Mr
Trump’s judgment as well as that of his advisers.
Mr Trump’s tax affairs have come under scrutiny in recent
weeks when he broke with US political convention and refused to disclose his
tax returns before this November’s presidential election.
The outspoken tycoon – who revealed last week that he had
earned more than $500 million in the last year – has previously boasted of how
he pays as little tax "as possible".
Jack Blum, chairman of the Tax Justice Network and a
financial crime attorney, said Mr Trump was a "poster child" for tax
avoidance property schemes, which ultimately harm the middle-income American.
Donald Trump Jr, Ivanka Trump and Donald Trump at the Trump
Soho Launch in 2007
Donald Trump Jr, Ivanka Trump and Donald Trump at the Trump
Soho Launch in 2007 CREDIT: MARK VON
HOLDEN/WIREIMAGE
The allegations centre on Mr Trump's business alliance with
Bayrock Group, the property company that was building Trump SoHo, the mogul's
prized New York building - as well as
two other projects to which he had licensed his name.
In 2007 Bayrock struck a deal with FL Group, an Icelandic
company that had agreed to invest $50 million in four of Bayrock's subsidiary
partnerships. However, the deal was later relabeled as a loan.
It's not a loan - it's really equity. I don’t think they
would survive a challenge [by the IRS].
Howard Abrams, law professor
In New York, the sale of a stake in a partnership would make
the existing partners liable to pay more than 40 per cent in tax on their
'gain', based on the highest tax rate.
However, if the investment is classified as a loan no tax
would be payable.
Former employees of Bayrock have alleged in a case against
the company that the deal was intended to fraudulently evade some $20 million
in tax through a disguised sale of partnership interests.
They also claim the participants mislabeled the sale as a
loan in order to avoid paying a further estimated $80 million taxes on the
projected profits from the real estate.
The Telegraph has obtained copies of the letters Mr Trump
signed for both the original version, and the new form as a “loan”. He and his
lawyers were sent copies of the relevant paperwork, including the final loan
agreement.
Alan Garten, Mr Trump’s lawyer, claimed that the billionaire
“had nothing to do with that transaction” and by signing the letters was simply
acknowledging the deal as a “limited partner”.
“He was not signing off on the deal,” he insisted.
How much is Donald Trump worth?Play! 01:05
But copies of the final agreement, seen by the Telegraph,
reveal that deal required Mr Trump's approval because he was a key player in
Bayrock's investments. He had a 15 per cent stake in Trump SoHo.
Independent experts who have reviewed copies of the final
agreement have said the documents appear to be an equity investment disguised
as a loan in order to avoid tax payments on the profit FL was expecting to
receive.
Inside Trump SoHo in New York
Inside Trump SoHo in New York
Howard Abrams, professor of law and director of tax at the
University of San Diego, said: “Converting the original equity into debt
improved their tax position dramatically. However they have changed the labels,
but they didn’t really change the economics at all.
"It's not a loan - it's really equity. I don’t think
they would survive a challenge [by the Internal Revenue Service (IRS)].”
Experts said that the matter would usually be one for the
IRS, who could audit, or re-audit, the deal and attempt to recover any tax that
should have been paid. In such cases the IRS can subsequently pursue fraud
charges if there is sufficient evidence of intentional wrongdoing.
A former federal prosecutor in the Department of Justice's
tax division, said that if action were taken by the IRS it could see Mr Trump
deposed in court.
Being audited only means they didn’t catch anything. It
doesn’t mean there isn’t anything to catch.
Frederick Oberlander, tax lawyer
A source at FL Group - which went bankrupt in the Icelandic
banking crisis in 2008 – separately stated that “whether it was structured as a
loan or an equity investment we were always buying an interest in certain
projects.”
Mr Trump’s lawyer said the tax implications of the deal were
not relevant to Mr Trump because he was not
a “party” to the transaction.
“Our interests are protecting our rights,” he said.
Bayrock described the allegations in the legal complaint by
Jody Kriss, its former finance director, as “baseless”.
The company said the deal was “vetted and approved by
outside accountants and tax counsel". It claimed that the deal's “tax
treatment” was subject to an “extensive field audit … conducted over many
months” by the IRS, which “concluded that it was entirely appropriate”.
However it refused to provide proof of the audit or answer a
series of questions about what information had been made available to
officials.
Frederick Oberlander, the tax lawyer who has represented Mr
Kriss in his complaint against the company, said: “Being audited only means
they didn’t catch anything. It doesn’t mean there isn’t anything to catch.”
Inside story of the $50m deal signed off by Trump
Even by Donald Trump’s standards it had been a busy week.
It began with the finale of season six of The Apprentice,
his famed show, and continued in a style that was trademark Trump.
He settled a bitter legal fight with a Florida local
council, agreeing to shorten the pole of a massively oversized American flag at
his Palm Beach resort (but then raised the ground to keep it at the same
height). He used a media interview to
reignite a feud with a television presenter who had labelled him a “snake-oil
salesman” over his handling of the Miss USA pageant.
But in between the high drama manoeuvres, he managed to
carve out time to attend, behind closed doors, to a particular business matter
that had been on his mind.
Bayrock Group, the multi-million dollar property development
firm to which he had lent his name for projects, had struck a $50 million deal
to partner with an Icelandic investment company.
The projects included the Trump SoHo, Mr Trump's prized
hotel and apartment complex in New York.
Mr Trump had a 15 per cent stake, and a further 3 per cent went to
Ivanka and Donald Jr, his children.
Mr Trump was their star partner, and it was written into the
agreement between Bayrock and FL, the Icelandic company, that his consent would
be needed for the deal to go ahead.
Bayrock, which was housed in Trump Tower, sent copies of
paperwork to Mr Trump’s lawyers as the deal progressed. And when
representatives of FL visited New York, Bayrock's executives brought them to Mr
Trump's penthouse office to meet the real estate mogul, a source said.
When the consent letters finally came, Mr Trump seemed only
too happy to sign on the dotted line.
On Thursday April 26 2007 – four days after the Apprentice
finale – he spoke to his chief legal officer Jason Greenblatt, an experienced
property and corporate lawyer, about signing the papers - which he did that
night.
At the same time, however, intense final negotiations were
ongoing between Bayrock and FL. Their representatives had met in London, where
Bayrock’s “man in the room” was Felix Sater, a Russian-born businessman who
spent a period in prison in the Nineties for stabbing a man with a broken
margarita glass. He was then convicted of helping lead one of the biggest stock
fraud heists of Wall Street of the era, involving New York mafia families.
Sater was panicking and wanted to close the deal.
He rang Julius Schwarz, Bayrock's executive vice president
and general counsel, demanding to know what was taking so long.
But Schwarz was caught up in frantic emails circulating in
New York about the tax that would have to be paid as a result of the deal.
Under the current deal the partners were liable to be hit
with a $20 million tax bill, according to figures in court papers filed by
former employees, including the then finance director Jody Kriss. Separately,
FL would be liable for tax on its expected income of around $143 million (£99
million) from the four property schemes.
Emails seen by this newspaper appear to capture the concern
among key players at Bayrock about their tax liabilities.
“HOW DARE YOU,” Mr
Schwarz wrote in a email reply to Sater’s demand that the deal be finalised.
“DO YOU REALIZE THAT WE ARE TALKING ABOUT LOOSING [sic] 50 CENTS ON THE DOLLAR?
I HAVE BEEN WORKING MY ASS OFF TO GET US THERE.
He added: “REMEMBER I AM DOING THIS, TRYING TO FIX CHANGES
BEING MADE TO THE DOCUMENTS AT LIGHT SPEED BY OUR LAWYERS WHO ARE SCREWING SOME
THINGS UP, BEGGING EVERYONE FOR CONSENTS, DEALING WITH EGOS AND DOCUMENTS…”
One of the consents, of course, was that of Mr Trump, who
had signed that evening. But the sands were shifting – quickly.
Intent on resolving the tax problem, a solution was
engineered by Bayrock, FL and their lawyers that, court papers allege, amounted
to fraud.
The complex restructure, Mr Kriss' complaint claims, evaded
$20 million of tax on the initial $50 million buy-in by FL and was designed to
shun a further $80 million of tax payments on the projected profits - which
never materialised.
Copies of correspondence seen by this newspaper show how an
FL lawyer put forward “as a tentative suggestion” that rather than FL buying a
“preferred equity interest” in Bayrock, the company instead make a
"participating loan”.
If the money from FL were presented as the company
giving Bayrock a loan, FL's income on
the profits from the deal could be termed as “interest” which would not be
taxable.
The loan, would be "respected as "debt" for
tax purposes" a Bayrock lawyer wrote, citing a proposal by his FL counterpart,
in an email included in Mr Kriss’s legal complaint.
In other words the deal could be relabeled as a loan, but
keep the economic effects of an equity investment. And yet it wouldn’t be taxed
as an equity investment because the Internal Revenue Service would not tax a
debt.
Had tax been payable, because FL was a foreign company,
Bayrock would have been responsible for “withholding” the relevant portion from
FL’s share of the profits in order to pay it to the IRS. Lawyers therefore advised that FL set up a US
subsidiary - a shell company in Delaware - thereby further alleviating
Bayrock's responsibilities.
In order to add a feature to the "loan" which
would "give it legs for tax purposes”, lawyers recommended creating a time
frame by which Bayrock should "repay" the debt. They set it at 15
years.
Bayrock appeared to welcome the suggestions and immediately
set about revising the paperwork accordingly.
On 30 April Mr Kriss, the firm’s finance director, asked Mr
Schwarz whether the money should be treated as an equity investment or a loan.
He wrote: “Is FL coming in as equity or debt?”
Mr Schwarz replied: "Call it equity but for tax
purposes its debt. Otherwise we write a huge check to the IRS. As a 49 per cent
equity partner they are still equity. There is no other way around it.”
The “contribution agreement” quickly became a “loan
agreement”.
This loan agreement was sent to the Trump Organisation along
with a revised consent letter for Mr Trump to sign in May 2007. An email to Mr
Trump’s then general counsel stated that the letter reflected “the revised
structure of Bayrock's recap[italisation].”
Court papers allege that the deal as it was finally
structured was fraudulent in several ways. In addition to masking the equity as
debt, the former Bayrock employees have alleged that the deal also involved a
“disguised sale of partnership interests”.
Independent experts who reviewed the deal documents for the
Telegraph identified “red flags”
indicating these two practices – which, once discovered, would generally
lead to the IRS claiming back unpaid tax.
An accountant, who did not want to be named for fear of
being sued by Mr Trump, said it should have been clear from reviewing the
documents that were sent to the Trump Organisation that something was amiss.
Looking over the details of the loan agreement he said: “[FL
Group] contributed $50 million and then they had rights to get the distribution
of their $50 million back first, and then they got 49 per cent of the income as
a partner, and then at the end of the 15 years they're bought out. This is
equity - this isn't a debt.”
Howard Abrams, a law
professor at the University of San Diego, said: "It's not a loan - it's
really equity. I don’t think they would survive a challenge [by the IRS].”
But on 17 May, 24 hours after receiving the new consent
letter, Mr Trump once again signed on the dotted line.
In an interview with The Telegraph, Alan Garten, Mr Trump’s
general counsel, refused to say whether the presidential candidate's lawyers
identified flaws in the agreement.
Instead Mr Garten said Mr Trump was simply “acknowledging”
the deal, not giving his consent, and that the form of an agreement between
Bayrock and another company was none of his business, as long as it did not
affect him directly.
That position appears at odds with the wording on the revised
consent letter – dated May 16 –which requested “that you indicate your consent
to the Transaction as evidenced by the Transaction Documents by
counterexecuting and returning to the undersigned a copy of this letter at your
earliest convenience.”
Provisions in the
Loan Agreement also indicate that Mr Trump’s signed approval was one of the
elements that Bayrock had to secure in order to complete the deal.
Trump didn’t even apply a smell test.
Richard Lerner, US lawyer
Other parties with interests in the deal similar to the
Trump Organization questioned the details of the agreement.
A lawyer for CBRE, which like Mr Trump had interests in one
of the four projects, asked searching questions about the structure of the deal
while discussions were ongoing, including questioning the introduction of a
loan "for tax reasons”.
CBRE eventually agreed to sign after being told that Mr
Trump had done so.
Richard Lerner and, right, Frederick Oberlander
Richard Lerner and, right, Frederick Oberlander CREDIT: BBC
Richard Lerner, a lawyer and colleague of Frederick
Oberlander, a tax lawyer who drew up the court complaint for Mr Kriss
said: " The lawyer looked at the same documents as Trump’s team
of the best and the brightest, and she spotted the problem – the equity
investment being disguised as a loan. And she called them out. Trump didn’t
even apply a smell test."
Experts consulted by the Telegraph said that if the IRS were
to carry out audits that concluded that the deal was equity and a disguised
sale, Mr Trump would not be held directly responsible.
He was not a recipient of the payments from FL, and any tax
liability on the $50 million would rest with Bayrock Group’s formal partners –
although the tax professionals said that saying they acted on legal advice
would likely to shield them from any potential criminal charges.
Mr Trump, however, could be deposed if the IRS decided to
take action, according to a former tax prosecutor.
Mr Oberlander said that Mr Trump signing off on the deal
also raised serious questions about his judgement and whether he was a suitable
candidate for the presidency.
Analysis: what effect could revelations have on Trump's
presidential campaign?Play! 01:23
"I cannot yet say if Trump has any legal
responsibility,” Mr Oberlander said. "But as a citizen of the US, I worry
about living under a president who could be so negligent, or perhaps even
wilfully blind."
Mr Oberlander and another lawyer, Richard Lerner, are now
facing contempt charges brought by Sater for allegedly disseminating
information revealing that he began collaborating with the FBI following his
fraud conviction. Mr Sater’s lawyer
claimed last week that the complaint against Bayrock amounted to “extortion”.
Trump International Hotel in Phoenix that was never built
Trump International Hotel in Phoenix that was never built
CREDIT: AZCENTRAL.COM
Whether or not the deal was legal or deprived the Treasury
of funds to which it was entitled, the experts consulted by the Telegraph
agreed that something was wrong – and that that much was apparent from the
documents.
Jack Blum, chairman of the Tax Justice Network and a
prominent financial crime and tax lawyer, said this deal was emblematic of an
industry that had made mastery of tax avoidance - at a cost for the middle
income American.
"My feeling is this whole arena of real estate taxation
ought to be cleaned up. Because there is no rational reason for the tax that
the rest of us pay; for the rest of us to subsidise these real estate deals,” he said.
"This is how people who are very wealthy don’t pay tax.
This is how this system can operate, relieving them of the tax burden without
anybody out there in what I would call the civilian world understanding what
happened."
"If you dig through all these real estate deals of
Trump’s, I’m sure you’ll see that he took advantage of it again and again.
"He is a poster child for this industry”.
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