The Role of Management in Establishing an Ethical Culture
Navigating the Choppy Waters of Unethical Behavior at Wells Fargo

Is Trump’s 1995 $916 million Net Operating Loss Deduction Legal? Ethical?

Debunking Trump’s Claim that Using the Tax Code to His Advantage Makes Him the Only Person to Reform It

Donald Trump reported a $916 million “net operating loss” on his 1995 taxes that allows him to deduct those losses against future taxable income for 15 years. This means through 2010 Trump may have paid little or no taxes. There is no way to know for sure how these amounts were spread out without Trump releasing his tax returns. But, it is undeniable that Trump used the tax laws to his advantage. He is legally within his rights to do so but the ethics of doing it can be questioned.

A net operating loss occurs when a taxpayer (individual or corporate) losses money in one year from a business activity. Since that taxpayer is not eligible for a tax refund in such cases, the taxpayer can carryback the loss and claim a refund for taxes paid the prior three years or carry it forward for 15 years to offset future taxable income. These were the rules in effect in 1995. Today the carryback is two years and the carryforward is for 20 years. The carryforward was extended in the aftermath of the financial recession where many businesses lost lots of money.

The purpose of the NOL is to “save” a business that has a down year(s) hoping it will become profitable in the future. On one hand it makes a lot of sense. If the business can survive as a result of the NOL provision, then it can hire and pay employees, make investors and creditors whole, invest in new business opportunities, and eventually turn a profit. In other words, the NOL does make sense on an economic level. There is no doubt it is a legal maneuver.

The problem is you and I wouldn’t be able to use the NOL absent a loss from a small business operation we own and report on our income tax return. NOL’s are typically triggered by businesses losses that pass through to the individual taxpayer owning the business. This is the case with the Trump Organization, a privately owned company.

The most ironic statement made by Trump is paying no income taxes makes him a genius. He stated that because he was able to use a “questionable” provision in the tax code to his advantage (some would call a tax loophole), he is the only one who can fix the federal income tax laws that favor the wealthy over middle class taxpayers. This is like saying Hillary Clinton is the only one who can fix the U.S. government’s outdated cybersecurity system because she used a personal server for government business; deleted emails; and, apparently, destroyed or had others destroy hard drives on computers.

The bottom line is just because something is legal it doesn’t mean it’s ethical, a concept known as ethical legalism. I’m not saying Trump should forego using a legitimate provision in the tax code. After all, you and I might be able to buy a home, take out a mortgage, and then deduct interest on the loan and real estate taxes paid. We have opportunities to lower our taxable income as well, although lower income folks probably don’t have the same opportunities. I believe the only way around the unfairness in our tax code is to level the playing field by instituting a “fair or flat tax.”

One problem with our current tax code is it offers many advantages for the rich in addition to the NOL. For example, if you own real estate as Trump does, you get to take a depreciation deduction for your property and reduce taxable income from the property. Most of us are locked out of tax advantages on real property owned because of a lack of investible money.

Trump typically lives on the edge of what’s legal and what’s ethical when it comes to things like name-calling and disparaging others. Shaming others is legal but unethical because it shows a lack of respect and lack of empathy. Bragging about using the tax code to his advantage is just as unethical from the perspective of Aristotelian ethics and the “golden mean.” The golden mean in philosophy holds that there is a desirable middle ground between two extreme behaviors: one of excess and the other deficiency. Boasting is one extreme and not taking credit for something you have done is the other. An ethical person accepts credit but exercises humility in doing so, a character trait we have yet to see in Donald Trump.

Blog posted by Steven Mintz, aka Ethics Sage, on October 6, 2016. Dr. Mintz is Professor Emeritus from Cal Poly San Luis Obispo. He also blogs at: