The Trump Organization - Tax Troubles - A Case Of Fringe Benefits?

Industry Observer with Ocean Consulting Services LLC

For this post I’m veering from the tax collection area into an issue of tax avoidance. Although this commentary relates to “Trump” it is in no way a political commentary. My comments are solely related to recent events relating to the Trump Organization.

As reported in an article by Vice (11/1/22) a trial involving the Trump Organization recently kicked off. The article describes the court proceeding as relating to “channeling off-the-books benefits to senior executives to avoid taxes”. Other articles have described the situation as a mishandling of the reporting of fringe benefits. Some commentators have questioned the government’s interest in pursuing a tax case “just” related to the reporting of fringe benefits.

I’d like to dispel this notion. This is not case solely related to the reporting of fringe benefits. It is a case that relates to intentional tax avoidance - by the company and the executives.

Let’s step back a bit and discuss “fringe benefits”. The common meaning of this term relates to non-monetary personal benefits provided to corporate employees. The nature of the benefits controls taxation. The rules relating to the taxability of the benefits are beyond the scope of this discussion.

As an example of fringe benefits say a plumbing company provides an employee with a work truck. It’s used by the employee in providing services to the employer. As a benefit to the employee the employer allows for personal use of the truck on the weekends. From a tax perspective this personal use of the company owned truck would generally be considered a taxable benefit.

Let’s presume this is a small business and the owner runs his own payroll and generates W-2’s at each year end. The owner has a basic understanding of taxes but is not an expert. So in reporting taxable income to the employee the owner does not include the value of the personal use of the truck in the employees income.

Is this treatment incorrect - did the employee “evade” taxes. Well yes - however the underreporting of income was clearly unintentional. The owner reported the total cash paid to the employee as taxable income and the employee reported taxable income reflected on a W-2. Would the government prosecute the company or the employee in this situation. Of course not - it was an unintentional error.

Now let’s look at another situation. An executive leases a pricey apartment in New York City from say “TrumpCo”. His annual rent for the space is $100k. He is hired by the company for an agreed upon salary of $1 million. After the position is accepted the company and the executive agree that instead of the company paying the executive $1 million in cash and the executive turning around and paying the company $100k in rent the company won’t charge rent to the executive and will decrease the cash compensation paid to $900k. The company and the executive agree that the reported compensation in connection with this arrangement will be $1 million - in that there is no economic difference between the two arrangements. In this case the providing of the apartment to the executive “rent-free” is not a fringe benefit. The parties entered into this arrangement in order to simplify the cash payments between the parties.

Finally let’s say an executive works at TrumpCo and receives a cash salary of $1 million. The executive also happens to lease an apartment from the company for an annual rent of $100k. At this point all parties agree that the payment of $1 million is deductible by the company and included in the executives income. The rent payments represent taxable income to the company and a non-deductive personal expense of the executive.

Now let’s say the executive comes up with a brilliant “tax savings” strategy. Why not have the company reduce the cash compensation to the executive, provide the apartment rent free, and only report the cash payments as taxable compensation income. From an economic standpoint nothing has changed - total net cash from the company and to the executive is unchanged. However the company saves tax money (via reduced payroll taxes) and the executive saves tax money - a reduction in reported compensation income.

Does this strategy work. Of course not! The company did not provide a “fringe benefit” to the executive and just forget to report it as taxable compensation. This is a case of tax evasion.

Now let’s bring it back to the real Trump Organization. In the current trial the government’s assertion is that the arrangement entered into between the company and certain executives amounted to tax evasion - there was a decrease to cash compensation in exchange for the payment of certain personal expenses of the executives.

On July 1, 2021 the Manhattan District Attorney issued an indictment naming the Trump Organization and Allen Weisselberg - the company’s Chief Financial Officers. The government asserts that the company paid for the rental of an apartment provided to Weisselberg (as well as other personal expenses) and made a corresponding decrease to his cash compensation. The rent payments were not reported as taxable compensation expense to Weisselberg but were claimed as tax deductions by the Trump Organization.

As you read about the current trial keep in mind that this is not just a case of the misreporting of fringe benefits. As asserted it is a case of outright tax evasion.

Bill Salvatore - East Valley
Arizona Elite Properties - Chandler, AZ
Realtor - 602-999-0952 / em:



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Feb 03, 2023 06:14 AM