Caroline Ciraolo, an acting assistant attorney general for the Justice Department’s Tax Division from 2015 to 2017, is a partner at Kostelanetz & Fink.
The New York Times laid out an explosive case last week that Donald Trump and some of his family members schemed for decades to evade tax laws. The opening paragraphs read like a formal indictment from a very confident prosecutor.
Using phrases such as “sham corporation” and accusing Trump unequivocally of having committed “overt fraud” in the past, the report details instances in which Trump family members allegedly conspired to undervalue real estate holdings and to hide taxable gifts worth “well over $1 billion in wealth.”
The allegations in the report are thorough, detailed and specific, and the conduct described is clearly unacceptable, particularly when it involves elected officials whom we should hold to a higher standard. But we are a long way from a successful civil or criminal tax case against of any of the Trump family members.
The Times makes a compelling and well-researched argument that the real estate values reported on the gift and estate tax returns of Fred Trump — the president’s father, who died in 1999 — belied their fair market value. However, to assess civil fraud penalties, for which there is no statute of limitations, or to bring prosecutions for tax crimes, the government would have to prove that the values were artificially lowered and, based on the allegations, that the executors willfully conspired with professional appraisers to evade gift or estate taxes.
But valuation issues are rarely as simple as comparing the reported property value to values of other properties, or to sale prices of the property years later.
First, according to the Times report, the Internal Revenue Service audited the estate tax return and, in doing so, conducted a detailed review of Fred Trump’s gifts and gift tax returns. There is no evidence this audit resulted in a criminal investigation.
Second, in civil cases, courts often are presented with dueling experts who prepare detailed reports explaining why their respective estimation of property values should be adopted, leaving the courts to either accept one side’s methodology or to arrive at a value somewhere in the middle. A court’s decision to accept the IRS valuation, of course, would not prompt a criminal investigation.
Third, the president’s father appears to be the person responsible for most of the conduct cited in the Times report. Fred Trump’s activities are alleged to have included, among other things, the use of shell corporations to improperly inflate deductions and reduce taxable income; extensive disguised giving to improperly minimize estate tax liabilities; and improperly devaluing properties to avoid gift, estate and income tax liabilities. However, when Fred Trump died, so did any potential criminal charges against him.
While the article strongly suggests that Donald Trump colluded and conspired with this father and his siblings to defraud the IRS, the Times does not allege any specific illegal conduct or acts in furtherance of tax crimes within the six-year statute of limitations.
Further complicating any potential case is the statement by one of the president’s lawyers, Charles J. Harder, that Trump and his relatives “relied entirely” on “licensed professionals.”
Blaming accountants and lawyers may sound like an attempt to pass the buck, but in both civil and criminal tax cases, it is an accepted affirmative defense. If the Trump family relied in good faith on competent advisers, provided these advisers with full and accurate information to obtain relevant opinions or advice, and then acted in accordance with that advice, the Trump family would have a viable defense against any civil fraud penalties or criminal charges. Certainly, the case would be different if it were proven that they colluded or conspired with those professionals to violate tax laws.
Just because this matter may be difficult — and politically charged — does not mean the IRS and the Justice Department should not take a hard look at what the Times has reported. Given that accusations are specific and serious, I have no doubt they will. While these efforts may not result in criminal charges or even civil fraud penalties, the information is likely to be considered in pending and future investigations.
Any case would depend on the IRS and Justice Department gathering additional evidence, interviewing witnesses and exploring the defenses raised. Only after that can the Justice Department’s Tax Division determine whether there is sufficient evidence to establish the elements of an offense beyond a reasonable doubt. Undoubtedly, career officials at IRS and the Justice Department will be keeping that in mind as they consider whether to pursue this matter.