...appropriate since rent control is on the ballot for the coming election...
by mikethemadbiologist
Yesterday, the NY Times published a bombshell story describing in great detail how much of Il Trumpe’s fortune was built on his father’s wealth and tax fraud. This part makes you think (boldface mine):
One of the first steps came on Aug. 13, 1992, when the Trumps incorporated a company named All County Building Supply and Maintenance.
All County had no corporate offices. Its address was the Manhasset, N.Y., home of John Walter, a favorite nephew of Fred Trump’s. Mr. Walter, who died in January, spent decades working for Fred Trump, primarily helping computerize his payroll and billing systems. He also was the unofficial keeper of Fred Trump’s personal and business papers, his basement crowded with boxes of old Trump financial records. John Walter and the four Trump children each owned 20 percent of All County, records show.
All County’s main purpose, The Times found, was to enable Fred Trump to make large cash gifts to his children and disguise them as legitimate business transactions, thus evading the 55 percent tax.
The way it worked was remarkably simple.
Each year Fred Trump spent millions of dollars maintaining and improving his properties. Some of the vendors who supplied his building superintendents and maintenance crews had been cashing Fred Trump’s checks for decades. Starting in August 1992, though, a different name began to appear on their checks — All County Building Supply & Maintenance.
Mr. Walter’s computer systems, meanwhile, churned out All County invoices that billed Fred Trump’s empire for those same services and supplies, with one difference: All County’s invoices were padded, marked up by 20 percent, or 50 percent, or even more, records show.
The Trump siblings split the markup, along with Mr. Walter…
While All County was all upside for Donald Trump and his siblings, it had an insidious downside for Fred Trump’s tenants.
As an owner of rent-stabilized buildings in New York, Fred Trump needed state approval to raise rents beyond the annual increases set by a government board. One way to justify a rent increase was to make a major capital improvement. It did not take much to get approval; an invoice or canceled check would do if the expense seemed reasonable.
The Trumps used the padded All County invoices to justify higher rent increases in Fred Trump’s rent-regulated buildings. Fred Trump, according to Mr. Walter, saw All County as a way to have his cake and eat it, too. If he used his “expert negotiating ability” to buy a $350 refrigerator for $200, he could raise the rent based only on that $200, not on the $350 sticker price “a normal person” would pay, Mr. Walter explained. All County was the way around this problem. “You have to understand the thinking that went behind this,” he said.
As Robert Trump acknowledged in his deposition, “The higher the markup would be, the higher the rent that might be charged.”
State records show that after All County’s creation, the Trumps got approval to raise rents on thousands of apartments by claiming more than $30 million in major capital improvements. Tenants repeatedly protested the increases, almost always to no avail, the records show.
One of the improvements most often cited by the Trumps: new boilers.
“All of this smells like a crime,” said Adam S. Kaufmann, a former chief of investigations for the Manhattan district attorney’s office who is now a partner at the law firm Lewis Baach Kaufmann Middlemiss. While the statute of limitations has long since lapsed, Mr. Kaufmann said the Trumps’ use of All County would have warranted investigation for defrauding tenants, tax fraud and filing false documents.
Don’t think Il Trumpe is the only large scale landlord doing this. Even without overt fraud, subcontracting in a variety of areas is a potential problem:
And it’s not just a single subcontract: sometimes these things end up looking like those Matryoshka dolls. One contractor hires contractors, who hires contractors. Leaving aside whether the work itself is shoddier under this system, every subcontractor gets a profit markup (they’re not doing this at cost). I’ve never dived into large infrastructure contracts (and have no desire to do so), but I suspect this plays a big role in why infrastructure costs are so high in the U.S.
Throw tax evasion, fraud, and so on into the mix, and it’s really easy to commit white collar crime. Whenever we don’t prosecute white collar crime, it always ends up hurting people, not just in the short term, but in the long run. A Democratic president (hoping for 2021!) along with Democratic attorneys general need to make this a top political priority.
...and a contrary view (from Yves Smith's Nakedcapitalism.com):
by mikethemadbiologist
Yesterday, the NY Times published a bombshell story describing in great detail how much of Il Trumpe’s fortune was built on his father’s wealth and tax fraud. This part makes you think (boldface mine):
One of the first steps came on Aug. 13, 1992, when the Trumps incorporated a company named All County Building Supply and Maintenance.
All County had no corporate offices. Its address was the Manhasset, N.Y., home of John Walter, a favorite nephew of Fred Trump’s. Mr. Walter, who died in January, spent decades working for Fred Trump, primarily helping computerize his payroll and billing systems. He also was the unofficial keeper of Fred Trump’s personal and business papers, his basement crowded with boxes of old Trump financial records. John Walter and the four Trump children each owned 20 percent of All County, records show.
All County’s main purpose, The Times found, was to enable Fred Trump to make large cash gifts to his children and disguise them as legitimate business transactions, thus evading the 55 percent tax.
The way it worked was remarkably simple.
Each year Fred Trump spent millions of dollars maintaining and improving his properties. Some of the vendors who supplied his building superintendents and maintenance crews had been cashing Fred Trump’s checks for decades. Starting in August 1992, though, a different name began to appear on their checks — All County Building Supply & Maintenance.
Mr. Walter’s computer systems, meanwhile, churned out All County invoices that billed Fred Trump’s empire for those same services and supplies, with one difference: All County’s invoices were padded, marked up by 20 percent, or 50 percent, or even more, records show.
The Trump siblings split the markup, along with Mr. Walter…
While All County was all upside for Donald Trump and his siblings, it had an insidious downside for Fred Trump’s tenants.
As an owner of rent-stabilized buildings in New York, Fred Trump needed state approval to raise rents beyond the annual increases set by a government board. One way to justify a rent increase was to make a major capital improvement. It did not take much to get approval; an invoice or canceled check would do if the expense seemed reasonable.
The Trumps used the padded All County invoices to justify higher rent increases in Fred Trump’s rent-regulated buildings. Fred Trump, according to Mr. Walter, saw All County as a way to have his cake and eat it, too. If he used his “expert negotiating ability” to buy a $350 refrigerator for $200, he could raise the rent based only on that $200, not on the $350 sticker price “a normal person” would pay, Mr. Walter explained. All County was the way around this problem. “You have to understand the thinking that went behind this,” he said.
As Robert Trump acknowledged in his deposition, “The higher the markup would be, the higher the rent that might be charged.”
State records show that after All County’s creation, the Trumps got approval to raise rents on thousands of apartments by claiming more than $30 million in major capital improvements. Tenants repeatedly protested the increases, almost always to no avail, the records show.
One of the improvements most often cited by the Trumps: new boilers.
“All of this smells like a crime,” said Adam S. Kaufmann, a former chief of investigations for the Manhattan district attorney’s office who is now a partner at the law firm Lewis Baach Kaufmann Middlemiss. While the statute of limitations has long since lapsed, Mr. Kaufmann said the Trumps’ use of All County would have warranted investigation for defrauding tenants, tax fraud and filing false documents.
Don’t think Il Trumpe is the only large scale landlord doing this. Even without overt fraud, subcontracting in a variety of areas is a potential problem:
And it’s not just a single subcontract: sometimes these things end up looking like those Matryoshka dolls. One contractor hires contractors, who hires contractors. Leaving aside whether the work itself is shoddier under this system, every subcontractor gets a profit markup (they’re not doing this at cost). I’ve never dived into large infrastructure contracts (and have no desire to do so), but I suspect this plays a big role in why infrastructure costs are so high in the U.S.
Throw tax evasion, fraud, and so on into the mix, and it’s really easy to commit white collar crime. Whenever we don’t prosecute white collar crime, it always ends up hurting people, not just in the short term, but in the long run. A Democratic president (hoping for 2021!) along with Democratic attorneys general need to make this a top political priority.
...and a contrary view (from Yves Smith's Nakedcapitalism.com):
Trump Engaged in Suspect Tax Schemes New York Times. This is impressively detailed. I don’t mean to sound unduly skeptical, but the tax pro I reached was underwhelmed by this story, so I think we need to let the tax mavens chew over this one. The shortcomings here apparently include: 1. Settlements of big estates often involve disputes between the IRS and the estate and heirs over valuation of assets. IRS usually loses. Famous example was Sy Newhouse. This example from the story is not part of the estate but another apparent abuse (failure to pay gift taxes): the article goes through a fishy-looing valuation of Trump Palace shares bought by Fred Trump and later sold to The Donald at an extremely knocked-down price, but omits that Fred Trump bought the shares at the peak of the 1980s cycle, in 1987, and the NYC real estate market collapsed in the early 1990s. So even though Fred Trump still almost certainly exaggerated how much the value of his shares fell, both the residential and commercial RE markets in NYC tanked during this period, and the article is remiss in not mentioning that. 2. A lot of the alleged abuse in this article is of the father not paying gift taxes on gifts to The Donald. The donor is the one who has the tax liability, not the recipient. The story also reminds readers of a particular illegal gift for which fines were paid: the purchase of chips at one of Trump’s casinos with money that came from Trump’s father. The article puts likely gift tax abuses next to accounts of the father setting up trusts and partnerships from which The Donald benefitted. That sort of thing is very common among the rich; you’d need to know a lot more to see if there was anything improper (the big allegation is valuation abuse, see point 1 above). Note the father was clearly moving income aggressively into his kids’ hands when they were young, witness the article saying Trump was getting $200,000 a year at age 3, and even states: “Fred Trump was relentless and creative in finding ways to channel this wealth to his children.”. Recall the drama over Trump’s ginormous tax loss deduction in the 1990s, which tax experts have chewed over and came up with at least two routes by which this could have been kosher.
Put it another way: let’s see how tax experts who have some knowledge of how much people on the high end get away with calibrate what in this story is really bad v. what looks bad but the IRS has lost enough cases on that the tax pros think they are at little risk in pushing the envelope way beyond where mere mortals could go.
Having said that, there is a long discussion of overpaying for third-party services to various Fred Trump properties, with the excess proceeds largely going to Trump heirs with the apparent intent to escape gift taxes (note the recipients presumably paid income taxes). What does this look like? Private equity charging portfolio companies fees for services not rendered at all (as in they are disguised dividends) and/or inflated fees. They likely got this idea from NYC real estate families (most NYC big end commercial real estate is developed and owned by families like the Fisher Brothers and the LeFraks). The higher costs also served to justify rent increases in rent-regulated residential buildings that would otherwise have been impermissible. In other words, this looks like a hot new grifting idea making the rounds among the lawyers that served families like the Trumps.
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