 Okay, we're back on Community Matters. I'm Jay Fidel. This is ThinkTech. And today we're going to talk about income and estate tax fraud by Donald Trump with the tax attorney and vice president and co-founder of the Asia Pacific Group, Roger Epstein. Hi, Roger. Hey, Jay. Nice to be here again. Nice to have you here again. This is so important, you know. We have all this very detailed discussion and analysis in the New York Times about a week ago, reporting a huge story for them with three separate reporters looking for, you know, an award in journalism, I think, and reporting that they somehow got all the records on Trump and have concluded after a lot of analysis that he was guilty of major tax fraud and also that he was not a self-made man, that his father, Fred, made him by giving him lots of money. So, you know, you're a tax attorney, and I wonder if you could help us understand what Trump did, and then we can analyze exactly whether that's legal or not. Okay. Okay. I'm happy to do that. And let's start with the second point you made first. I think there's no doubt that the New York Times article clearly established that Trump was not a self-made man, that he was not a person who got a million dollars that he paid back to his father. He got many hundreds of millions of dollars from his father, and that started his empire, and he lost quite a bit of that. So he's made some of it up. We're going to find out did he make it up by getting laundered money from the Russians. All this is to come. So that's point two. I think the New York Times shed a lot of light on that and things that can't be disputed. As to item one, first of all, let's get clear. This is really about dad's taxes. I think what it shows about Donald is his participation in dad's tax evasion, avoidance, whatever you want to call it. We don't know at this point. But mostly what we need is Donald's tax returns to see what he did on his own. What I think this shows is a clear family plan to use everything that the tax law offers and beyond to reduce the estate taxes that his family would have to pay, and that estate tax that his family would pay would reduce the money that he and his siblings inherited from mom and dad. So they maximized everything. They crossed the line. They crossed the line of legality in some ways. And let's talk about the estate tax first. How do you do tax fraud in estate tax planning and in reporting on estate tax? So estate taxes, I've done lots of estate tax audits with the IRS over the years. You were an IRS agent. I was an IRS agent, not an estate tax, an income tax agent for a couple of years. I worked at the National Office of IRS for a few years. And then I practiced tax law for 45 years. I've done a lot of estate tax planning. And I've done a lot of estate tax litigation with the IRS. Some people say you were or still are the premier tax lawyer in the state of Hawaii. But I just want to throw that in, yeah. I like those people. And I'm glad you threw that in. Okay. So let's look at this. I'm trying to explain. One of the things I like to do on the show, Jay, is try to get people to understand what was going on here. It's complicated. But basically, estate tax is a, and gift tax, estate and gift tax run together. So whatever you gave during your life is added to what you give on your death to your heirs. And there's a tax paid on the value of what you gifted over a certain amount. So you get an exemption amount. But the basic idea is you find the value of your assets and then you multiply that by the tax rate. In these years, the tax rate for anything over a few million dollars was 55 percent. And the article states that basically Fred Trump's values were $900 million that you could demonstrate from sales of his properties as well as others. And the Times got their information from public records as to those sales. Yes. And that's why I started out saying this is about Fred Trump. This is about a tax on Fred as the donor and the testator, the decedent, transferring his property to his kids. And it's big planning for somebody with that much money. You sit down with the lawyers, you go over everything. They tell you how you can minimize this and there are legitimate ways to minimize it. And then you decide, this is what I do as a lawyer. And I say, here's what we can do. You have to decide how aggressive you're going to be. And you have to keep it within a fair limit. So if I said to you, what's your house worth? You might say in Hawaii, a million dollars. Well, is it worth 980? Is it worth a million two? Is it worth 850? There's a range. So the basic way to get the value to start with is get an appraisal. So the appraiser can find a range of values. There's a lot of subjectivity. There's a lot of guesswork. When you go to an appraiser, and I apologize to all the appraisers, but they know this joke for a long time. The lawyer is a member of the ABA, and appraiser is a member of the MII, M-A-I, M-A-I is the name of their association. People say it's made as instructed, joke. But it's true, to a great extent, made as instruction because the first thing that they'll ask you is, you want a high number or a low number? Are you trying to sell this? Or are you doing this for the IRS? And what that means to me as a tax lawyer is I want to take the lowest in the range of reasonable values. The Trumps, as you'll see, didn't care about reasonable. They just liked the word lowest. So when you get past a reasonable value, now you run into an area of penalties for being careless and negligent. Or if you really go bad, it's fraudulent. So fraud is a crime in the tax law. Fraud is a crime. It's subject to a 50% money penalty, and you can go to jail. Now it's a felony crime? Yes. Now, you have to really understand this. The Times took a position in this that I think was very assertive for them. They used the word fraud. You know as a lawyer yourself, criminal fraud in any area requires a strong showing of intent. It would be very difficult to demonstrate intent just from the papers. You've got it. Willfully deceive somebody? Yes. That person is going to rely on what you have told him to your benefit and his detriment. Yeah. And in this case, the lie is told to the IRS for the benefit of you paying lower taxes and them getting lower taxes. Now, Trump has made it clear that he doesn't believe in taxes. He doesn't think when he was doing his campaign. Yeah. It is campaigned, but not only that, when he had the conversations with Hillary Clinton, she was taught, you know, he said, how did you get away with not paying tax? And in the background somewhere, he said, because I'm smart. I mean, if that's an example for the country, it's a bad one. He said that many times. He said, I don't pay any taxes. I'm too smart to pay taxes. All you guys after you pay the taxes, not me. I'm too smart. Right. So this is the example for the government. I can tell you as a tax lawyer for 50 years, people pay taxes. Everybody pays taxes. If you make the kind of money he's making, you have to pay taxes. You can reduce them and minimize them, but you have to pay taxes. Now in the estate tax area, if you go beyond a certain reasonable calculation, it can become criminal fraud. It's got to go really far. You've got to investigate what happens. It's kind of hard to know from the article in the Times whether they got to that level. But let me show you how this works. OK. All right. So how does an appraiser first come up with a value for a commercial property, like an apartment building? OK. It starts out, it's not just, sometimes it looks like they pulled it out of the air, but they start with the income. So if I said to you, your building is generating $100 of income. How much is the building worth? OK. You've got to work backwards. So let's suppose you're going to buy a Treasury bill that pays 1% interest. OK. You buy a $100 bill, it's going to pay you $1 of interest a year. So we would say in that case, the dollar, somebody would pay $100 to get a Treasury bill that only paid $1 a year income. So if your building pays $100 a year income, then it's worth 10, it's worth a multiple of the 100. Now the Treasury bill is the safest thing you can get. So it gives you a 1% return. So in order to decide how much I'm willing to pay for the building, you have to say in today's market, how much of a return would an investor be willing to get? An investor would be willing to pay $100 to get a 1% return on the Treasury bill. Let's say in the market that Fred was dealing, you needed to get a 10% return. So therefore, if you want to get a 10% return on $100 as your return, then you need to pay $1,000 to get a $100 return. That's 10% of the 1,000. So you work backwards, OK? So it starts with the income. So the first... That's the income method of appraisal. Income method of appraisal. Another way to do it is to compare to other buildings that were sold, to see when yours is sold, all these kind of things. Comparables method. Comparables method. But even the comparables method basically starts with a value. What's the income on this property? Now there may be unusual cases, all this kind of thing, but let's say that. Now so the first thing that Fred and Donald, according to the Times article, was the guy on the ground doing this with the lawyers on behalf of his father. He was the main guy. And as we know, he became the main protege for Fred. His father's favorite son. Father's favorite son, yeah, OK. But also his father's business partner, OK. And so Donald knows exactly what happened here. He knows all this stuff to the T. He was watching everything. He was agreeing with the lawyers. So the first thing they said was, well, look, if we're going to get paid on the income, if that's how we're going to capitalize this and we want to keep the values down, we ought to lower the income. If $100 of income gets you $1,000 value, $80 of income gets us an $800 value. Now we've skimmed $200 of value off the property. Which is not going to be included in taxing the estate. Right. Right. So they said, OK, let's set up a management and services company. And we'll get that company to be owned by the children. By Donald and his siblings. And then what we'll do is we're already running this business. Fred had his own management company. He was all, you know, a huge man. He owned, I don't know how many, 6,500 units. You can imagine what an operation was to get supplies, to find people to clean the place, all the bookkeeping. OK. We've already had that. But this company arbitrarily charged 20% on all the expenses, OK? So that means, let's just say we got another 20% of the expenses. That brings the value down by those additional expenses. In other words, you got $100 of income. The way you got your net income was to take your receipts and then reduce it by your expenses. So what we've done is, we minus, we take these expenses off of the income. So it's way less than $8,000, and therefore it's way less than $800,000 for the value. Exactly. Exactly. So now we got it down. Let's just say we said 20%, but that's 20% of the expenses. We don't know how that compares to this at all. That 20% could have got him to $60 of income. So that would make the value $600,000, or $6 million, or whatever we're multiplying this by, assuming this 10% rate of return. So that's the first thing they did. That is not illegal, but it has to be justified. What did these people do to increase, to deserve a 20% return? Here's my company. It does all the buying. It does everything. And I say to you, you're my son, or you could be my father, or you'd be my son today. Okay. So we say to you, Jay, look, just put a 20% override on everything and send out a bill to all these people that this is what it cost. Instead of costing $100, it costs $120. We do these services really well, so our services can be billed higher. Yeah, only they're not doing anything. Right. They're not doing anything, extending out the invoices at a 20% override. So you mentioned before the show began that they managed to reduce the value of these properties to a 16th, or thereabouts, of what the value should have been by a reasonable appraisal. So this is the first methodology that they used. Okay. Okay. All right. So if you get it really low, then you're going to have a really small value. That million over there becomes $800,000, becomes $600,000, and so on. And then you get a value that's really low, even at 16th. So you get $1,000 value, and the rate was 55%. So now you owe $550 in tax. If you get that down to $500 at 55%, you owe half of that, which would be $275. So just by siphoning off this money, you get a huge reduction in the value. So you have to pay income tax on the 20% that's going to the management company? Yes, but the company that pays the management company has an increase, but the ownership company has a decrease. So the 20% goes from one pocket, the management company owned by dad, to this kid's pocket, and they pay the same tax rate. So it's a lower tax rate than 55%, and it's subject to expenses as well. So 20%. We're confusing, let's not confuse the income tax with the estate tax. So two things happen here. This $500 value moved over to the kids tax-free. So without the kids involved, the property would be worth whatever million, but we're using $1,000. Now they use this technique to get it down to $500. So that means that $500 of value passed to the kids without any tax. You said to me, well, in order to get there, they had to increase expenses by 20%. Let's say that's $1,000. Now that plays into the income tax. So let's say the real estate company made $10,000, and it would have to pay tax on the $10,000. But instead, it gave a $1,000 to the kids company. So now the real estate company goes down to $9,000 in income, and the kids go up from $0,000 to $1,000. They still pay tax at a 35% rate, which is a lot less than 55%. Well, yes. So they got $500 of value, and they didn't increase their income taxes at all. The income taxes stayed neutral, and they got all this value to the kids tax-free. They avoided the $275. They cut it in half. So when we come back from this break, Roger, I want to talk about how you catch somebody who has done this and who has done this to a degree where it has crossed the line. OK. That's Roger Epstein. I'm happy to talk about that. I want to tell you there's two other schemes they use to do this. OK. We'll get to those two. We'll see, right after this break, with tax attorney Roger Epstein, who is a vice president and co-founder of Asia Pacific Group, and a tax lawyer is telling us about what Trump was doing. We'll be right back. Aloha. I'm Wendy Lo, and I'm coming to you every other Tuesday at 2 o'clock live from ThinkTech Hawaii. And on our show, we talk about taking your health back. And what does that mean? It means mind, body, and soul. Everything you can do that makes your body healthier and happier is what we're going to be talking about, whether it's spiritual health, mental health, fascia health, beautiful smile health, whatever it means. Let's take healthy back. Aloha. Aloha. My name is Mark Shklav. I am the host of ThinkTech Hawaii's Law Across the Sea. Law Across the Sea is on ThinkTech Hawaii. Every other Monday at 11 a.m., please join me, where my guests talk about law topics and ideas, and music, and Hawaii Ana, all across the sea from Hawaii and back again. Aloha. Okay, we're back with Roger Epstein, and we're looking at some tax law having to do with what the New York Times wrote about in terms of Donald Trump's and his family's tax fraud. So we talked about one thing, and that is the establishment of value for purposes of a state tax. Yeah. Now, you have two other points on the board here that you want to talk about. Okay. So here's what our... The razor, and what's the last one? Minority discount. Okay. Okay. So let's take a look back. The way they reduce their estate tax, which you've called a fraud, not me, but you've called it, is by reducing the value of the assets, the real estate they transfer to the kids. Beyond a reasonable amount. Well, yes, beyond a reasonable amount. So if the correct value, whatever that means, was a thousand, if you would start with a thousand, then you take off half of that, you get it down to 500 by creating this management company that did no work. So that... What they would argue is, oh, the management company did a lot of work. And what I would say to them is, if the management company did work, we can demonstrate what the work is, we can show what they did. What would a comparable payment be for that? And according to the New York Times, the comparable payment would be zero. So that is out there and could possibly be a criminal. But again, we don't know. We don't know. They say that they did stuff when they didn't do stuff. That's not true. That's right. That's classical fraud. Yeah. Well, we don't know if they did anything. Maybe they did something. And you know, so... Then it's a valuation of what they did. Yeah. And you got to get into that. All right. So that's the first thing they did. The second thing they did was they got an appraiser who went beyond reasonable in terms of the value. So the appraiser looks at this and he has to decide. We talked about the income. We talked about comparable properties. The appraiser says, oh, this thousand isn't right. The low end of the value is really 200. So he goes way down. First of all, he starts with this low number. He's getting there by using appraisal methodologies. Yes. A whole bunch of appraisal methodologies. Yes. And what happens here is the IRS comes in and they say, no way. This should be 500 is what we talked about. And then they argue about it and maybe they come up with something. In the real world, if you get an appraiser to say 200 and he's qualified, it's going to be hard to show it was fraud. You may have penalties for understating it and there's substantial penalties. But it looks like the guy they chose has some experiences in appraiser. But he's willing to take values that are way below what a regular person would do. Some appraisers do that on a regular basis. Yeah. And that's the industry. I told you, made as instructed. It's hard to value these things. It's hard to go after the Trump family if the appraiser is coming up with the value. Not if they know it's not the appraiser. Then you've got to show them not only that he was wrong, but that they knew he was wrong. Right. And so I wouldn't put a fraud in that category ordinarily. It'd be hard to do it in this piece. This piece maybe be hard to say fraud, but what the IRS would do is try to use comparables and other appraisers to show, no, that's the correct number. And then they'd be charged penalties. All this again goes to that. Nobody goes to jail that way. Nobody goes to jail that way. Okay. This is where I would think is the biggest. And in the overall situation, maybe you take it apart or, okay. So here's the third thing they did. They said the appraiser gave a very low, extremely low value. Okay. So now you've gotten the value based on the, now we're going to make it even lower based on the numbers he's using. Okay. Then what they did was they said, hey, if the building, if you go to buy a building, and you get 100% of the building, you're willing to pay 200. That's what the number they had. But you know what? You're not getting the whole building. I'm not giving you the whole building. I'm only giving you a fraction of the building. So what fraction? Well, Fred Trump owned 100%. So he broke up his ownership into 0.4918 for Fred, and the same number, 0.4918 for Mom, Mrs. Trump. And then the kids ended up with this small percentage. Okay. Whatever that is, 0.085. Okay. Now, then Fred said, well, my 49% is less than half. I don't even control this company. I can't force a termination of the company or a sale of the asset or anything. So you've got to give me a big discount for that. Now the IRS fought this when it was in the family and they lost. So the question is not, can they get some minority discount? The question is how much? How big is a minority discount in an ordinary situation? Say with those numbers, mom and pop have less than 50%. Somebody has a swing vote. They can argue they don't control the property. It's really hard to know. Appraisers come into that? Appraisers come in. Not a real estate appraiser, but a business appraiser. And when I do this work, I get one real estate appraiser and one business appraiser. And the business appraisers that are good, they go out and they get figures about how stocks or bonds are sold, how stocks are sold, what discount there is. The market. They're looking at market comparable. And then remember, it's not only a minority interest. This is not a marketable security, you know. Marketability is effective. It's really two discounts that sometimes control minority interest and marketability. Okay. All that considered, it doesn't sound like the general revenue service is going to go after him. I mean, for one thing, he can fire the Commissioner of Internal Revenue, which, you know, or take some steps that will stop the government from prosecuting any of this, even assuming there's no statute of frauds that bars that statute. Statute of limitations. Statute of limitations. I'm sorry. And Fred died in 1999. That's a long time ago. It's 19 years ago. Statute of limitations would probably bar at least some of these claims. But the other thing is a lot of states, a lot of attorneys general, a lot of state tax offices, where these things were happening, where state taxes and mirror image, you know, a state planning, a state tax, a state taxes and income taxes were being paid or not by this family. Right. They could go after the family. Right. And that's easier in a sense that it's not involved in federal politics the way the IRS would be involved. But it's still 19 years ago. It's still 19 years ago. So what is your sense in general about whether this really means anything, aside from the fact that maybe he overstated his, you know, self-made man image? Yeah. What does it mean in terms of the way he gets away with it or not gets away with it, the way he's prosecuted or not prosecuted, the way his family gets away with it or is prosecuted? I really think he's gotten away with it. And I think it just shows the incredible lengths that the family went way outside normal boundaries of what's reasonable, what's fair on the risk that they wouldn't get caught. These are clients that I wouldn't represent because they're too far out there. I told you, what is the most, what's the lowest reasonable value that we can substantiate? Now he's got $100. It was really $16 out of 100, according to the Washington Post. So this is one-tenth. So he really ended up with something like, what, $50? That would be 20. So he's got like $65, and he started with $1,000. So that is really outrageous. And this is just crooked. This is just beyond reasonable. This we don't know because we don't know what the facts were, what was the real market value. But again, like you said, this is hard to prove on a fraud basis. This one, you know, the IRS allows some big discounts, big discounts. So it's expensive. It's expensive for the IRS to spend the money chasing him around. It's expensive for anyone to get into an argument with the IRS about this sort of thing. And especially if you have the money, you can drag things for a long time before you ever have to pay the piper. Yes, but the IRS doesn't look at the expense. There's a lot of litigation on this kind of thing. And they have a whole separate group that, based on valuations, and they look at it. They woefully understaffed compared to the private industry. And their budget was cut last year. And they can't do fraud investigations in the same way because they don't have the money anymore. Well, what they do is they get somebody to come out and look at it from a civil standpoint. And then if they think it's fraud, they go to a criminal division to look at that, Jay. So here's what it is. This demonstrates that what they did was way beyond what an ordinary taxpayer who's operating in good faith would do because they didn't think they'd get caught. And you know what? For the most part, they didn't. OK. Well, the proof will be in the pudding. We'll see if those attorneys general in this state, in that state, especially in New York state, are going to pursue them and how much success they'll have. But as a matter of the politics of it, you expect that some of those guys will pursue it, at least they'll investigate it, and go into this very kind of analysis that Roger has made. Roger Epstein, thank you so much for coming down. My pleasure. It's wonderful to be able to talk to you now. And I know that beyond all the tax you've learned and practiced all through the years, you are also an expert in penmanship. Aha. That will never be demonstrated. But I appreciate it. Thank you, Roger. Thank you, Jay. It's a pleasure. And let's.