Trump's NOL and the Complexity of Taxation

Lots of news stories and excitement over the first page of three of Trump's state tax returns for 1995 (NY, NJ and CT)! The New York Times broke the story: "Donald Trump Tax Records Show He Could Have Avoided Taxes for Nearly Two Decades, The Times Found," New York Times, 10/1/16. It's a big NOL carryover - over $916 million (almost $1 billion). Several observations:

• We can't tell a lot from the first page of three state tax returns. Yes, he had a very large loss generated in one or more earlier years. What caused the loss? Likely Trump owns numerous pass-through entities (partnerships, LLCs and S corporations). How many generated losses? How did he have basis to use the losses (cash investments, basis from debt, something else)?
• How long did it take him to use the NOL carryover and did he get to use it all or did the time limit expire? The NOL may have been reduced if he had cancellation of debt income in a later year. Or, depending on the type of debt (recourse or non-recourse) and how it was cancelled, he might have had large gains in later years that absorbed the NOL.
• Did any of the NOL carryover go with his wife (Marla) when they divorced? Generally, it goes with the spouse who generated the income. We don't know how various assets and business activities were owned so possibly, some of went to her.
• State and federal tax laws differ. Perhaps the federal NOL was much larger (might also be smaller, but likely was larger due to federal depreciation rules that are often more favorable than state depreciation rules).
• For AMT purposes, an NOL can't reduce your AMT income by more than 90%.  So, he should have had AMTI on which he owed federal income taxes in subsequent years.
• An audit does not mean that a candidate can't release his tax returns. Trump's tax returns are likely quite complex due to the likely numerous entities he has his properties in. But we can still learn a lot from them such as his effective tax rate, types of income, and donation amounts.

Are NOLs legitimate or a loophole? I wrote about this eight years ago when I saw a lawmaker refer to an NOL carryover as a loophole, This is not a loophole. What makes up the NOL might involve overly favorable debt and basis rules that Trump was able to use - that's a different matter. See a 10/3/16 CNN story for some of this background.

The House Republican tax reform blueprint includes a proposal to allow an NOL carryover for an indefinite time period adjusted for the time value of money. However, it would not let taxpayers reduce their taxable income by more than 90% by an NOL carryover, thus ensuring that if you have positive income in a year, you'll pay some tax.  I think given the Trump news, this proposal could easily become law with or without major tax reform.  We'll see.

What do you think?