'People v. Trump'?
The Manhattan District Attorney’s investigation has nothing to do with federal law, public acts, or violations involving the political or electoral process. Moreover, as possible charges brought by a sovereign state, they cannot be pardoned by an outgoing President.
Much has been written about whether Donald Trump should be prosecuted for certain conduct while in office. Leaving aside his conduct as president, which inevitably raises political issues, is the question of his conduct as a businessman and that of the company that bears his name. Long before Mr. Trump and his family brought their reality show to Washington, they ran their real estate empire from New York, with great flash but questionable reputation. The Manhattan District Attorney’s investigation has nothing to do with federal law, public acts, or violations involving the political or electoral process. Moreover, as possible charges brought by a sovereign state, they cannot be pardoned by an outgoing President.
The ongoing investigation by the Manhattan District Attorney into Mr. Trump’s tax filings and financial dealings focuses on possible financial crimes undertaken by the Trump Organization and Donald Trump the businessman and (former) Manhattan resident. The contours of the public information suggest serious issues regarding criminal tax fraud and/or insurance and bank fraud. Such frauds are undertaken and prosecuted every day against wealthy New Yorkers who believed their riches and social prominence insulated them from criminal exposure. In other words, it is irrelevant to these prosecutions whether Mr. Trump was president; it all has to do with the way he ran his business and paid (or did not pay) his taxes.
While the District Attorney’s focus initially was reported to be the tax treatment of hush money allegedly paid to porn stars, it appears the scope of the investigation has since broadened. Famously now, Mr. Trump paid only $750 in taxes in each of 2016 and 2017. According to the New York Times, his 2017 tax return included $373,000 in wages, $6.7 million in taxable interest, and $7.6 million in capital gains. Certainly, a tax payment of $750 on income of over $14.6 million in stated income merits a close look. He arrived at this exceptionally low tax liability by claiming business losses and expenses of $15.3 million, and losses carried from prior years of $12.3 million. To the extent that his New York state returns showed similar disjunction between revenue and tax liability, that would raise major red flags under the New York state tax laws, over which the New York County District Attorney would have jurisdiction.
In many tax crime prosecutions, the devilish details are found in the expenses. Many tax cheats evade paying their fair share by manufacturing false deductions. It is essential however to distinguish between tax avoidance and tax evasion. The tax code provides many legal loopholes, deductions, and incentives that allow people to lawfully avoid taxes. It may be an unfortunate feature of our system that the wealthy successfully lobby for tax breaks that lead to tax bills lower than those of their hourly employees, but it is not a crime.
Tax evasion is different than tax avoidance. Tax evasion is not aggressively claiming deductions that may be subsequently disallowed. One famous aspect of Mr. Trump’s tax returns is the $70,000 he paid to have his hair done. The IRS may disallow the deduction, but it does not appear criminal. Tax crimes require criminal fraudulent intent. Tax evasion is deliberately lying, hiding, disguising, and cheating. It is creating expenses that do not really exist or moving funds through shell companies to manufacture deductions. Put somewhat differently, you have to lie, and you have to know you’re lying.
It is almost certain that part of the District Attorney’s investigation is examining or will examine the claimed business deductions on Mr. Trump’s tax returns. What do these show? Of course, we don’t yet know. Much has been written about deductions claimed by Mr. Trump’s golf courses—huge losses well in excess of the economics one would expect from golf courses. This is a possible area of interest. Much has been written about Ivanka Trump’s work as an “independent contractor” while at the same time she was a salaried wage earner of the Trump Organization. This is a fairly common scheme that is often prosecuted as a state tax crime. There may be a rationale for it, but it may also be criminal. Only the people reviewing the evidence—the prosecutors and perhaps later the grand jurors—can know for sure.
The other area of possible state crimes would arise from false documents filed with lenders or other businesses. New York has a straightforward and often-used statute that makes it a crime to cause false entries in the records of a business. One example is offering false valuation paperwork to obtain a loan. It is difficult to predicate a criminal prosecution where a valuation is merely higher than one might expect. It is much easier to do so where the person or entity filing the document claims a low valuation for one purpose (e.g. property taxes or insurance); and claims a high valuation on the same property for a different purpose (such as obtaining a loan). Mr. Trump’s former lawyer, Michael Cohen, admittedly a problematic witness, reported that Mr. Trump engaged in such fraudulent schemes. Again, long-serving prosecutors will review the evidence and make recommendations based on the evidence.
A prosecution of an executive in Mr. Trump’s position would be a daunting prospect in any event. He has layers of executives, lawyers, and accountants reporting to him. This makes it difficult to pinpoint his personal knowledge or responsibility for any false information in his tax returns or business filings. He may be able to claim he was advised by professionals that his actions were proper. Mr. Trump’s casual acquaintanceship with the truth is now well documented, but a criminal prosecution requires proof of intent and knowledge of the specific conduct at issue.
How will this play out? District Attorney Vance previously declined to prosecute Ivanka and Donald Trump Jr., reasoning that not all lies are crimes. That is true. Mr. Vance has also proven himself willing to take on difficult cases. My bet is that if the evidence is there, Mr. Vance will bring charges. If I were in Mr. Vance’s shoes, I would only bring a case if the legal theory was clear and the evidence overwhelming. About big cases, the late, great District Attorney Morgenthau would say, “if you’re going to try to kill the king, you better kill the king.” Donald Trump is no king, but a former President should not be prosecuted unless the case is bullet proof. A case based on overwhelming proof, however, will demonstrate once and for all that this would-be Emperor is buck naked.
Adam Kaufmann is a partner at Lewis Baach Kaufmann Middlemiss PLLC and practices in the areas of white-collar criminal defense, asset recovery, investigations, and complex financial fraud. Before entering private practice, Mr. Kaufmann served as a prosecutor for over 18 years at the Manhattan District Attorney’s Office, where he specialized in international financial crime and ultimately served as Chief of the Investigations Division.
Reprinted with permission from the January 12, 2021 edition of the New York Law Journal © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or firstname.lastname@example.org.