the weekend revelation of some of donald trump <u+2019>s tax records put the new york real-estate developer on the defensive by showing the extent of his 1990s financial troubles and suggesting those setbacks could have eliminated his federal income-tax bill for years afterward. parts of mr. trump<u+2019>s state tax documents from 1995, published over the weekend by the new york times , show that the republican presidential nominee reported a $916 million loss on that year<u+2019>s tax return. that would allow him to legally soak up years of future income, earned through his television appearances and his hotel and golf-course operations, without paying any federal income taxes. mr. trump, in response, early sunday argued on twitter he knows <u+201c>our complex tax laws better than anyone who has ever run for president and am the only one who can fix them.<u+201d> some of his supporters said on tv the disclosure proved mr. trump was an astute businessman, with former new york city mayor rudy giuliani calling him <u+201c>an absolute genius<u+201d> for his use of the tax code. the revelations about mr. trump<u+2019>s taxes, following last week<u+2019>s lackluster debate performance and his escalation of attacks on a beauty-contest winner, left republicans increasingly concerned he is ceding momentum to democrat hillary clinton. the latest revelation could increase the pressure on mr. trump to fill gaps in his business record, the extent of his liabilities and how he has accounted for it all in the eyes of federal tax collectors. <u+201c>the election is far from over. but we don<u+2019>t have a lot of time left<u+2014>voting begins in ohio in 10 days,<u+201d> said matt borges, chairman of the ohio republican party. <u+201c>so the candidate and the campaign can<u+2019>t spend any more time talking about issues that don<u+2019>t help us win.<u+201d> the big loss revealed in the filing blurs mr. trump<u+2019>s campaign image as a successful new york real-estate developer. the documents also highlight the gulf between mr. trump and voters who have taxes withheld from their wages with little opportunity to alter the timing of their income or hire lawyers and accountants to seek the best possible outcome. the u.s. taxes income, not wealth, and savvy taxpayers often try to avoid reporting much of the former while generating the latter. they don<u+2019>t usually try to do so, however, by actually losing money. after borrowing more than $3 billion to build his business empire during the 1980s, much of it personally guaranteed, mr. trump faced a severe financial crunch starting in 1990. that was because casinos and an airline he owned at the time didn<u+2019>t meet operating projections just as some of his debt was coming due. meanwhile, a downturn in the new york city real-estate market and other factors made it hard for him to sell some assets, according to reports by new jersey casino regulators at the time. during this period, he worked out several restructurings with creditors that bought him time, putting him on a monthly allowance for a period. he leaned on his atlantic city casinos in new jersey, dragging them through bankruptcy court and then borrowing against them to pay off loans elsewhere. he took out around $160 million from the casinos during this time to pay down other debt, a wall street journal analysis showed. he finalized a deal with creditors in 1995 to wipe out the last of his personal debt. the tax treatment of losses, bound to become a subject of national debate, is a typically uncontroversial feature of the income-tax system. the government doesn<u+2019>t pay net refunds when business owners lose money, but it lets taxpayers use those losses to smooth their tax payments as they make money. that reflects the fact that <u+201c>the natural business cycle of a taxpayer may exceed 12 months,<u+201d> according to a congressional report. typically, for federal returns, such net operating losses can be carried backward for two years to offset past income, then kept on a taxpayer<u+2019>s books for 20 years. mr. trump<u+2019>s losses could only qualify for a 15-year carryforward under the law at the time. real-estate developers can generate losses more easily than other taxpayers. they can take deductions for depreciation of their property and can also deduct interest when they borrow. unlike investors in other businesses, they can use those losses to offset other income. it is difficult to determine whether mr. trump used those losses to offset all of his taxable income in subsequent years. he has reported his recent years<u+2019> income on federal disclosure forms, but some of those numbers appeared to refer to total revenue, not taxable income after business expenses and deductions. bryan skarlatos, a tax lawyer at kostelanetz & fink llp, said almost all of the losses appear to predate 1995 and were carried forward to that year. <u+201c>this is all possible because trump appears to have a perfect storm of allowable real-estate losses that can be offset against streams of income from salaries from his companies and royalty fees from the use of his name,<u+201d> mr. skarlatos said. <u+201c>most taxpayers who have large real-estate losses don<u+2019>t have such large steady streams of other ordinary income; they just have losses that may turn into profits in the future when they sell the real estate.<u+201d> during the debate with mrs. clinton last week, when she cited previously available records showing he hadn<u+2019>t paid taxes in some years, mr. trump said that was <u+201c>smart.<u+201d> he is the first major-party presidential nominee since 1976 to not release his own tax returns. saturday<u+2019>s statement from the trump campaign said he has paid hundreds of millions of dollars in various taxes, including <u+201c>federal taxes<u+201d> and <u+201c>state taxes<u+201d> but not specifically <u+201c>federal income taxes<u+201d> and <u+201c>state income taxes.<u+201d> this weekend<u+2019>s revelation helps explain a line in the letter that mr. trump<u+2019>s lawyers released in march, when they detailed his history of internal revenue service audits. the audits of mr. trump<u+2019>s tax returns from 2002 through 2008 were <u+201c>closed administratively by agreement with the irs without assessment or payment, on a net basis, of any deficiency,<u+201d> wrote sheri dillon and william nelson of morgan, lewis & bockius llp. that sounds at a glance like the irs found no problems in his returns. but it says only mr. trump didn<u+2019>t pay the irs any taxes as a result of the audit. that wording, tax lawyers told the journal in august , is consistent with an audit that affected his ability to use his net operating losses but didn<u+2019>t result in immediate payment. mr. trump<u+2019>s lawyers have said he is being audited for the years since 2008, and he has cited that as a reason for not releasing his returns, although he isn<u+2019>t prohibited from doing so. the losses from the 1990s may also explain some of mr. trump<u+2019>s recent transactions. because casino records previously showed that mr. trump had net loss carryforwards at the end of 1993, the 1995 losses may stem from multiple years. the losses from that era are expiring or have expired and are now less available to soak up his income, even if they haven<u+2019>t been used up. when that happens, a taxpayer looking to cut his tax bill would seek to lower his taxable income<u+2014>which mr. trump did in 2014 and 2015. in each of those years, he donated what is known as a conservation easement, essentially extracting income-tax deductions out of the properties. in 2014, mr. trump pledged not to build houses on the driving range at a golf course in california. and in december 2015, typically the time for planning at the end of a tax year, he set aside 74% of his estate in westchester county, n.y. the preserved property in new york contains <u+201c>scattered but impressive<u+201d> stands of huckleberry, the homes of brown bats, potential habitats for mountain dusky and spring salamanders, and <u+201c>mature mixed hardwood forests<u+201d> that <u+201c>are valuable in terms of removing co2 from the atmosphere,<u+201d> according to the document mr. trump signed. he said earlier this year that he is <u+201c>not a big believer in man-made climate change .<u+201d> the charitable deduction in those cases is equal to the difference between the value before he grants the easement and afterward. taxpayers have 15 years to claim the deduction, so they wouldn<u+2019>t want to start that clock ticking unless they had or expected taxable income. mr. trump also, however, donated conservation easements in 1995 in florida and in 2005 in new jersey, and he could have claimed a $39.1 million deduction for the latter, according to local records. <u+2014>alexandra berzon and janet hook contributed to this article. write to richard rubin at richard.rubin@wsj.com
donald trump<u+2019>s tax numbers sharpen focus on treatment of losses - wsj
richard rubin