Thread by @smbrnsn

One thing that the @nytimes report on #TrumpTaxReturns that seems weird is his personal guarantees of loans, guarantees that are largely coming due within the next 4 years. After all, guarantees came back to bite him before. So what's up with those? 1/

Last night, @Omri_Marian made a couple important points: there's an advantageous tax reason for doing it and he may not actually be on the hook for the guarantees. 2/

I don't have a lot of personal knowledge about the second point; I'm pretty sure that Omri's right that it's possible not to actually be on the hook and that taking that kind of position would be a tremendously aggressive tax position to take. I don't have anything to add tho. 3/

I'm going to add a little color to the first part, though, because it's important for understanding what's going on. And frankly, partnership tax rules are probably the most complicated part of the tax law.

So here goes: 4/

First things first: what is a "guarantee"?

It's a promise to pay a debt if the actual borrower doesn't repay the debt. So say my daughter wants to borrow money from the bank, but she doesn't have established credit. The bank probably won't lend to her. 5/

(Or at least it won't with decent terms.)

But I come in and I sign a document saying, "If <daughter's name> doesn't pay you back, I will."

If I have decent credit or sufficient assets, the bank's going to be more comfortable lending to my daughter 6/

because it knows it will get its money back.

It's important (well, "important" may be an overstatement) to note that I'm not primarily liable on the debt. That is, the bank can't come to me and demand that I pay the debt back until after my daughter has defaulted. 7/

A friend in real estate tells me that banks generally require a guarantee on real estate loans. Which is clearly possible; that's totally outside my knowledge base. 8/

But, as Omri pointed out, there may be partnership tax reasons for doing that.

Which requires a shallow dive into the world of partnership taxation.

See, for tax purposes, partnerships aren't taxpayers. 9/

[Brief intermission while I get a couple things done.]

What does it mean that a partnership isn't a taxpayer? It means that a partnership does not pay taxes. Rather, it sends a tax document to each partner telling each partner their share of its income. The partners then treat that income as if they earned it directly. 11/

That's a big advantage of partnerships--their income is only taxed once (as opposed to corporations, which pay taxes when they earn money, and whose shareholders then pay tax when that money is distributed to them). 12/

Also, partnership pass through their losses. So if you're a partner in a partnership and the partnership has a loss
(like, apparently, all of Trump's partnerships), you can use that loss to reduce your taxable income from other sources. 13/

(It's more complicated than that, of course, but that's the general gist.)

There's a limitation, though: you can't take losses in excess of your "basis" in your partnership interest.

"Basis" is another of those tax words with a specific meaning. 14/

The simplified version is, basis is the amount of money you've paid for your partnership interest adjusted by certain things.

One way that you can increase your basis: bear the economic risk of loss on partnership debt.

One way to bear that economic risk of loss? 15/

Guarantee the debt.

So assuming the guaranteed debt is partnership debt, Omri's point is that through the guarantee, Trump is able to use more of the partnership's losses. 16/

Now generally to get the benefit of economic risk of loss, the guarantee means you actually have to be on the risk. There are ways to structure around that, though. And, while we don't have a lot of information about the guarantees, 17/

it would be really interesting to know how on the hook Trump is. 18/18