Some thoughts on the 2016 U.S. presidential election

Flash: 2016 presidential candidate will never release his income tax returns

I just figured out how to add the substance of the current U.S. political environment (the 2016 presidential election) to one of my novels. I had this epiphany when I happened to read a recent article about U.S. tax law that mentioned the term loss carryforward. I was vaguely aware of this term but had no real experience with it since I’ve never had a business loss that I carried forward. However, others have had and it may even be used as a corporate strategy to reduce a business’ income tax burden. Consider the following scenario:

Hillary Diane Rodham Clinton (the inspiration for the fictional Hortensia R. Clarkson in one of my novels) is running for president of the United States against Donald John Trump (a.k.a. Carney J. Barker). Mr. Barker is a successful businessman. He owns a global giant company known as Barker Organization. The primary source of his wealth is from commercial real estate investment. He owns hotels, exclusive condominium complexes, casinos, golf courses and such in a number of locales, both foreign and domestic. He promotes himself with all manner of consumer products bearing his name, such as furniture, lines of men’s clothing, premium foodstuffs, wine, in fact, anything on which the Barker name can be slapped to keep that name in the forefront of consumer sentiment. Except for the wine and the premium steaks, these products are manufactured in places such as China, Mexico, Bangladesh and Vietnam. Interestingly, Mr. Barker claims foreigners are stealing American jobs but as you can see, Mr. Barker himself prefers to use foreign manufacturers of the stuff that bears his name. He has also been (prior to winning the nomination of his party for the office of president) a successful television personality specializing in a genre known as reality TV. Unlike all previous candidates for the office of president since Harry S. Truman, Mr. Barker refuses to release his income tax returns. Why not, inquiring minds wonder, since those returns will prove conclusively what a great businessman Mr. Barker is, another of his recurring claims?

Releasing those tax returns might actually reveal a quite legal but glaringly unethical set of business practices, for you see, Mr. Barker has filed for corporate bankruptcy either four or six times, depending on which knowledgeable source is speaking. Here’s where loss carryforward gets really interesting.

Suppose for the sake of argument Barker Organization owns only two commercial properties, Asset A and Asset B. These two properties represent Mr. Barker’s portfolio of assets. Like all investment portfolios, some assets perform better than others. Suppose every year Mr. Barker assesses his portfolio and ranks their financial performance and this year Asset B is significantly underperforming Asset A, so much so the Mr. Barker, a ruthlessly efficient asset manager, decides Asset B was a mistake and should be eliminated from his portfolio.

He could sell Asset B but perhaps the market for this type asset is depressed such that it would be difficult or even impossible to realize the amount of money Mr. Barker has invested (or the value Mr. Barker claims such an asset is worth in a grossly over inflated real estate market). Asset B is also debt-ridden because Mr. Barker prefers to use OPM (other people’s money) to the greatest extent possible. Suppliers of all types with unpaid claims represent a form of OPM.

A better strategy might be to declare bankruptcy for the business entity that owns Asset B. This entity is not Mr. Barker, himself, but rather a partnership or a corporation specifically created to hold Asset B. It is legally and organizationally separate from the entity created to own Asset A. Thus, it may be taken into Chapter 11 without any financial impact on the results of or operation of Asset A. For Mr. Barker, the benefits of bankruptcy may, in fact, be more valuable than an outright sale of Asset B. Mr. Barker employs an army of expert accountants and lawyers to make this assessment and by training Mr. Barker is also an accountant, so he can and does appreciate the fine distinction and nuance between sale and bankruptcy. Two such distinctions come readily to mind: unpaid creditors, be they suppliers with unpaid bills for services or materials, and financial institutions that have supplied OPM, can be stiffed. They may have to settle for a fraction of what they are owed, say ten cents on the dollar, or even zero, depending on the ranking order of their claims, secured debts being given a higher priority over unsecured claims. And, of course, perhaps the most valuable aspect of bankruptcy is the loss carryforward that can be applied to other sources of income, most usefully, to future years’ taxable income. Mr. Barker is a master at keeping his effective tax rate very, very low.

Now, in fact, Mr. Barker’s Barker Organization owns many more assets than two. His portfolio numbers in the dozens, perhaps hundreds of separately organized entities that each own exactly one commercial asset. Those that underperform, and in such a portfolio there are always a few losers, are ruthlessly pruned using whatever method nets Barker Organization the greatest financial benefit, one of which is the reduction or elimination of income taxes on Mr. Barker’s profitable assets. Mr. Barker, who claims to be a billionaire, is very proud of how little he pays in income taxes. How much did you pay last year, not just in absolute dollars but in percentage of your income?

Now one wonders why anyone would do business with Mr. Barker, given his history of stiffing people and organizations with legitimate claims against one of his entities, and remember, they are not claims against Barker Organization but against Asset A or Asset B, or whatever legal name each entity possesses? Unpaid claims against Asset A do not apply to Asset B, nor to Barker Organization as a whole, Mr. Barker’s family business. The answer is that new ventures use a different mix of investors and service providers. Mr. Barker would be unlikely to borrow money from a bank he had stiffed in a previous failed business deal. There are a great many banks in the world that could and would lend money to Mr. Barker, despite his history with bankruptcy, especially after he explains to them how they can share some of the financial benefits of those loss carryforwards. Mr. Barker’s attorneys and accountants are experts in how to take advantage of tax rules that exploit a legal notion known as the “bankruptcy exception to the limitation on loss carryforward due to a change of ownership.”

Mr. Barker will never release his income tax returns, since to do so would reveal for all to see what a ruthless, unscrupulous, morally corrupt and unethical person he really is. I have a great place in one of my novels for Mr. Barker. Better there than in the real White House.

Update, Sunday October 2, 2016: Someone in New York City, apparently living or working in Trump Tower, leaked three pages from the Donald’s, a.k.a. Carney J. Barker, 1995 income tax returns to The New York Times. They show the Donald was an incredibly bad businessman, losing almost a billion dollars running into the ground “three Atlantic City casinos, his ill-fated foray into the airline business and his ill-timed purchase of the Plaza Hotel in Manhattan,” not to mention defaulting on financial obligations to his suppliers. He used this humongous loss to offset future taxes by the generous provisions of loss carryforward. How does a big brain like the Donald lose that much money, on casinos, no less, where the house odds make it impossible to lose, if he truly is so smart, and is such a brilliant businessman? Seems more likely he inherited great wealth from daddy and then nearly lost it all, and might have except for the overly generous tax rules that favor wealthy real estate developers.

Yes Rudy and Chris, he’s smart for knowing (or hiring people who know) and taking advantage of the tax code but he’s incredibly stupid for losing that much money in the first place.