Tax Loopholes Trump May Have Used to Avoid Payments

— -- Donald Trump may have used a questionable and now-prohibited tax maneuver to avoid tens of millions of dollars in personal income taxes, the New York Times reported.

In its story, published Monday night, The Times said documents it had obtained while researching bankruptcy filings on his New Jersey casinos shed new light into Trump’s tax dealings in the early 1990s.

"As he scrambled to stave off financial ruin, Mr. Trump avoided reporting hundreds of millions of dollars in taxable income by using a tax avoidance maneuver so legally dubious his own lawyers advised him that the Internal Revenue Service would likely declare it improper if he were audited," The Times wrote.

In those years, Trump may have swapped outstanding debts for partial ownership in the corporate arrangements behind his New Jersey casino empire. According to The Times, through this method Trump may have been able to avoid paying taxes on debts that were forgiven by lenders when his casinos went bust.

Because Trump has broken with the decades-long tradition of releasing tax returns as part of his bid to run for president, the tax acrobatics he may or may not have performed are unclear.

This is the second report in the past month about questionable finance practices that may be in the Republican nominee’s unreleased tax returns based on portions of his documents that have been discovered.

About a month earlier, the Times reported that Trump had claimed a $916 million business loss in 1995, which -- through a legal provision of the law -- could have allowed him to write-down taxes for up to 18 years.

As he has continued down the campaign trail, Trump has deflected his opponents’ criticisms. He claims he can't release his returns because he is under audit. However, the IRS has said that there is no law preventing those under audit from releasing their tax returns to the public. When asked during the second presidential debate whether he had used a business loss to avoid paying taxes as had previously been alleged, he said, "Of course I do."

The 'Tax Maneuver' Explained

In short, the report claims that Trump had used a complex arrangement whereby each of his three Atlantic City casinos was owned by a partnership. A partnership was formed between himself and a company he wholly-owned, the Times explained in a complementary story.

"The corporations were basically alter egos," Steven Rosenthal, who is a Senior Fellow at the Tax Policy Center and one of those who reviewed the documents for the New York Times, told ABC News. "When the partnership restructures its debt to public bondholders or other creditors like banks, the partnership is really acting as an alter ego for Trump."

The arrangement the Times claims existed would have come in handy when Trump’s casinos hit hard times.

If lenders -- knowing that Trump’s partnerships were unable to repay their debts -- had cancelled their share of the debt, the amount of that forgiveness would have counted as income to Trump's partnerships for tax purposes, Kyle Pomerleau of the nonpartisan Tax Foundation, a think tank, told ABC News.

Realizing that canceled debt as income could have resulted in a massive tax bill for the embattled casino-owning partnerships, The Times said Trump instead may have offered lenders a deal: equity, or partial ownership, in his partnerships in exchange for canceling his debts to them.

Such an equity-for-debt swap would mean that lenders would have been given partial ownership of the casino-controlling partnerships in place of the debt payments.

If this scenario did occur, as The New York Times suggests, then the casino-owning partnerships would not have to report canceled debt as income on their taxes, according to Pomerleau.

"The partnership, in effect, is allowed forgiveness on its debt," Rosenthal explained, "but no income to Trump because the partnership purports to use its own equity to retire its debt."

Meanwhile, Pomerleau said, the lenders may have been able to claim the forgiveness as a business loss -- potentially saving on their own tax bills.

The expert had an additional concern: if the equity in the partnerships that the lenders had been given declined in value, those lenders could claim a capital loss on their taxes, as well -- potentially providing even more tax benefits.

In other words, lenders "would be able to take another deduction on a transaction that really didn’t create any economic activity," Pomerleau told ABC News.

However, because Trump's tax returns have not been released to the public, whether or not Trump used these tactics is uncertain.

"It’s quite possible that the IRS slapped this down, when he attempted," Pomerleau said. "We just don’t know."

According to The Times, Congress barred the use of equity-for-debt swaps by partnerships in 2004. The paper said that Hillary Clinton, who was a Senator at the time, voted in favor of the measure.

Responding to the story, Trump Campaign spokeswoman Hope Hicks told the New York Times: "Your thesis is a criticism, not just of Mr. Trump, but of all taxpayers who take the time and spend the money to try to comply with the dizzyingly complex and ambiguous tax laws without paying more tax than they owe. Mr. Trump does not think that taxpayers should file returns that resolve all doubt in favor of the I.R.S. And any tax experts that you have consulted are engaged in pure speculation. There is no news here."

On ABC's "Good Morning America" Tuesday, Trump Deputy Campaign Manager David Bossie called The Times' report "incredibly unfair" and reiterated that Trump's taxes were not available because he is under audit.

Anchor George Stephanopoulous pointed out, however, that the allegations stem from the 1990s and any audit cases would be closed by now.