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You Gave President Elect Donald Trump a Whale Of A Holiday Gift

Just before the long holiday weekend, the Attorney General (AG) for New York State announced a settlement agreement with President Elect Donald J. Trump regarding his now defunct, educational business Trump University. Reportedly, the $25 million settlement agreement resolves two class-action lawsuits and an action by the New York State AG.

About 7,000 students paid up to $35,000 in tuition and allegedly received little to no education. Terms of the settlement require Mr. Trump to pay $21 million to settle the two class-action lawsuits and $4 million to New York State. The New York Times reported:

"Trump University, which operated from 2004 to 2010, included free introductory seminars across the country, focusing largely on real estate investing and learning Mr. Trump’s secrets... Documents made public through the litigation revealed that some former Trump University managers had given testimony about its unscrupulous and exploitative business practices. One sales executive testified that the operation was “a facade, a total lie.” Another manager called it a “fraudulent scheme.” Other records showed how Mr. Trump had overstated the depth of his involvement in the programs. Despite claims that Mr. Trump had handpicked instructors, he acknowledged in testimony that he had not... the conclusion of the Trump University cases brings vindication to former students, mostly ordinary people across the country who felt they had been robbed of their savings by Mr. Trump..."

The settlement terms did not require Mr. Trump to admit any wrongdoing:

"At a hearing on the case in San Diego on Friday, [Trump's attorney] Daniel Petrocelli said Mr. Trump had settled the case “without an acknowledgment of fault or liability.” "

Why settle now? The Los Angeles Times reported:

"The law firm Zeldes, Haeggquist & Eck, which helped represent the plaintiffs, said in a statement Friday that it was “incredibly painful” to end the legal battle now. “We stand behind their claims 100%,” the firm said, “but there is always risk in taking a case to trial and that was particularly so here, when the defendant was poised to be the next president of the United States.” The lawsuits dogged Trump on the campaign trail, and he denied the allegations many times and said he would not settle the cases."

Some might conclude that not having to admit wrongdoing is a whale of gift. Reportedly, attorneys for the students waived their fees so the students would receive more compensation. Students would received 55 to 100 percent of the money they spent. Some might also say that settling 3 lawsuits for pennies on the dollar is also a whale of a holiday gift. Sadly, there is more.

Much more. Forbes Magazine explained:

"Of course, the real cost to Mr. Trump is after tax, not before it. And most business settlements are fully tax deductible. The only part that arguably may not be here is the $1 million in penalties. But barring express non-deductibility commitments, many penalties can be deducted, too. In general, fines and penalties paid to the government are not deductible. Section 162(f) of the tax code prohibits deducting "any fine or similar penalty paid to a government for the violation of any law."

Despite punitive sounding names, though, some fines and penalties are considered remedial and deductible. That allows some flexibility. Companies often deduct ‘compensatory penalties,’ a maneuver affirmed in a recent Circuit Court ruling. Some defendants insist that their settlement agreement confirms that the payments are not penalties and are remedial. Conversely, some government entities insist on the reverse.  Explicit provisions about taxes in settlement agreements are becoming more common."

You may remember the fines and payments paid by JPMorgan bank in a 2013 settlement agreement. Frobes explained that only $2 billion of the $13 billion was not tax-deductible. So, taxpayers nationwide have given Mr. Trump a whale of a holiday gift similar to gifts given repeatedly to big banks: tax-deductible payments in settlement agreements that allow them to pay less taxes. You'd think that the tax-deductible benefit would come with a price: having to admit wrongdoing.

Is this fair? Is it right? A 2014 survey by the U.S. Public Interest Research Group Education Fund found that most Americans disapprove of tax-deductible payments in settlement agreements, and want more transparency and disclosures about the contents of settlement agreements.

It is infuriating to this taxpayer. Hopefully it infuriates you, too. It seems that often payments and fines to resolve and penalize a defendant for wrongdoing are anything but. What are your opinions?

Comments

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Chanson de Roland

While the deductibility of settlements as a business expense is debatable, it is not as easy a question of right or wrong as it may seem. Every active business of any size will be sued; it is simply part of and a cost of doing business. Some of those suits will have merit, while others won't, but suing and particularly being sued or at least the risk of being sued is part of being in business. So the question becomes this: If being sued is part of being in business, then why shouldn't at least damages and remedies arising from a civil suit be deductible just like any other business expense? The answer today is that such remedial expense arising from a lawsuit should be and are deductible. Penalties and fines, however, aren't deductible, because committing crimes or engaging in acts involving moral turpitude are not part of the normal and permitted course of doing business and, therefore, are not business expenses and may not be deducted as such.

Where do Donald Trump's settlement of the lawsuit, supra, fit in this framework. Was there a violation of criminal law or even of civil law? Had the case or rather cases gone to trial and criminal fraud or civil fraud or exemplary breach of contract or gross negligence, etc., been proven against Mr. Trump and/or his companies, then perhaps one could make an argument that Trump or his companies had committed a crime or had at least engaged in immoral acts. But that didn't happen here. What happened here was that Trump and the plaintiff and prosecutor settled their dispute, and it is black letter law that a settlement is in the nature of a contract, which does not determine liability or guilt on any of the laws at issue.

Moreover, both the plaintiffs and even more so the prosecutor received an ominous warning from the judge presiding over the case. It was reported that the judge having seem the parties pleadings and dispositive motions had warned the parties that they should settle the case. That is code, which every lawyer well understands, that the judge has problems with the case, and since it is the plaintiff or prosecutor who is alleging wrong, the judge is usually signaling plaintiff or prosecutor that their are weaknesses in his case that may well result in them losing as a result of a judicial disposition. So, while it can't be said with certainty, that the judge was telling plaintiffs that they would lose, a lawyer should urge his client, after such a judicial admonition, to negotiate seriously and accept the best viable offer must, because his failure to do so may result in him losing the case and getting nothing.

So the bottom line is that, whatever the merits of the deductibility of remedies, Trump's settlement, supra, even much more than other settlements, does not support the idea that the deductibility of his settlement is an instance of the tax payers subsidizing a person's, here Trump's, private wrongs, because there was no determination of wrong by trial, and because it seems that the judge thought that the plaintiffs’ case against Mr. Trump was weak.

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