In 1990, Donald Trump opened the biggest casino in Atlantic City. In 1991, that casino filed for bankruptcy. Lots of the debt Donald Trump had personally guaranteed in his completely unworkable attempt to operate three competing casinos in the same small city, and to finance his casino with high interest junk bonds, fell back on his shoulders. So he did what any big businessman in America would do—he went crying to Congress.
Speaking in a flurry of words, without notes, Donald J. Trump painted the matter in apocalyptic terms. Unless Congress did as he urged, he said, the United States would face catastrophe. “We are not different right now than the Soviet Union,” Mr. Trump said. “They have no incentive, and we have no incentive.”
It took a couple of years, but Trump got exactly what he wanted—a rule change that gave real estate developers unmatched flexibility in writing off losses and tax-free forgiveness of debt.
“The debt forgiveness rule was most important to highly leveraged, big players like Trump,” said Edward D. Kleinbard, a law professor at the University of Southern California. “The 1993 act was designed to loosen the screws on the real estate industry.”
Well, no one would ever say that Donald Trump doesn’t have his screws loosened.
Trump created a public company onto which he could shovel his private debt, but he couldn’t have done it without the rule changes Congress provided.
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For almost seven years, real estate developers had to live by … rules.
Like much of his industry, Mr. Trump was taken somewhat by surprise when Congress moved aggressively in 1986 to crack down on real estate tax shelters. Tax treatment of real estate losses then allowed developers to acquire or build properties purely to generate paper losses for their investors—the proverbial lawyers and dentists—to apply against other earnings. Even ruinous projects like a half-finished, unleased office tower could be converted into a profit-making venture for some investors.
Even under the 1986 rules, real estate developers still had more flexibility in the scope and means of reporting losses than other industries. But it wasn’t enough. Without a better means of getting rid of debt, developers couldn’t enrich themselves off losing investments.
What did Trump want? One word: loopholes.
“It is a very bad-sounding word, even though it isn’t necessarily a bad thing,” Mr. Trump said.
No. It’s also a bad thing. With it, Trump went on to bankruptcy, after bankruptcy, as well as two decades of going income tax free.