There’s an old saying that pigs get fat and hogs get slaughtered—that is, while there’s room for some playing around in the pen, the consequences could be quite severe if you go too far. Former President Donald Trump, his organization, and his three oldest children have just been accused some of some very hog-like behavior: allegedly inflating the value of his properties and overall net worth to potential lenders and insurers to get preferential interest rates. This is a civil, not criminal, suit, but New York State Attorney General Letitia James has referred the case to those responsible for enforcing federal criminal laws. Until now—with a few exceptions, like Trump University—Trump has avoided consequences for a variety of supposed wrongs. But the sheer scope of his allegedly false claims, and the documentary proof contained in James’ complaint, may finally have crossed that line. It should serve as an object lesson for all who are tempted to cheat the system.
Property values are difficult to assess absent a sale. Appraisers are notorious for valuing properties in ways that benefit their clients. Practically speaking, there’s some wiggle room. But at some point, valuations can be so high or low that no reasonable person could believe them to be accurate. On Wednesday, James alleged, and seems to have clear proof, that Trump and his organization routinely increased the value of his properties with no basis in fact to gain a variety of benefits, including both the ability to get loans and to get them with very low interest rates. While Trump might argue that the dispute over the values offered simply reflects a difference of opinion or was done without the intent to deceive, the attorney general has also asserted that Trump and his organization misrepresented cold, hard facts, like the square footage of his own apartment.
As I like to tell my law students, there is always a tax angle, and this case is no exception. As detailed in the complaint, some of the strongest evidence that Trump intentionally inflated the value of his properties—and hence his net worth—are found in claims he contemporaneously made for state property tax purposes. Not surprisingly, he gave low valuations to tax authorities, while giving much higher ones to his possible lenders. As the attorney general sees it, either he committed tax fraud by using unreasonably low valuations when dealing with tax authorities, or he committed fraud on his lenders and insurers by using valuations significantly higher than those he reported to the state and federal governments.
And there is some evidence in the complaint that Trump was fully aware of the difficulties of claiming one value for tax purposes and another for financial purposes. For instance, he apparently took the position that Trump Tower in Chicago was worthless, creating a substantial loss that could lower his tax liability. Not wanting to contradict that claim, he excluded the value of that building from his Statements of Financial Condition, which he provided to lenders. He was apparently less careful with his Las Vegas property, tinkering with assumptions and the discount rate to provide one lower valuation to Clark County, and a much higher one to potential investors and bankers.
Tax issues also come into play with his Trump Seven Springs property in Westchester County, New York. He represented that estate was worth almost $300 million, based on the notion that the property could be developed into a number of $23 million estates, despite the fact that he did not have approval from various towns to do that. At the same time, he was working on creating a conservation easement for the land that would preclude the very development he described in his valuation.
A conservation easement binds current and future owners from developing property, which arguably creates a public benefit and reduces the value of the property in question. To compensate taxpayers for creating such easements, Congress permits them to deduct the value of a conservation easement as a charitable donation. As such, this is one of the few times when a higher valuation is good for tax purposes, because it increases the value of the easement created. According to the complaint, contemporaneous valuations done for tax purposes yielded a number much lower than the almost $300 million asserted in financial documents, and even that smaller number overstated the property’s value, leading to an improperly high tax deduction.
Inflating the value of the property for lenders induces them to make loans they might not otherwise have made and to charge less in interest rates, on the theory that they were taking less risk. As it stands, many of those loans are coming due in the next few years, and it is not clear whether or how Trump and his organization will be able to repay them. Meanwhile, understating the value of property for tax purposes allows Trump to pay less in taxes than he otherwise should, leaving the rest of us to make up the difference in the form of higher taxes or reduced government services.
While the vagaries of valuation create some wiggle room in either direction, submitting radically different valuations for different purposes at the same time falls more on the hog side of the spectrum than the pig one. New York’s civil complaint may only be the beginning. Tax and criminal actions may be in the offing. In this case no one is talking about slaughter, but the defendants could earn a ticket to a different kind of pen.