I have posted a copy of the Michael Cohen criminal information. Much of the media attention on Cohen’s guilty plea has been focused on the campaign finance violations. But the criminal information outlines potential tax issues that could be more troublesome for Trump. I will outline the facts (beginning at ¶ 37 of the criminal information) briefly.
- In January 2017, Cohen billed one of the Trump companies a total of $420,000. This amount represented (i) the $130,000 paid to Stormy Daniels, (ii) a $35 wire fee, and (iii) an additional $50,000 described as being for “tech services,” but which was really for “work [Cohen] had solicited from a technology company during and in connection with the campaign.” These payments totaled $180,035, but the invoice “grossed up” the total to $360,000 so that Cohen could be reimbursed for the $180,035 he paid on behalf of the Campaign, but with sufficient amounts left over to pay his taxes on the entire amount. To that amount, Cohen added an additional $60,000 as a “bonus.”
- The entire sum ($420,000) was to be paid to Cohen in monthly installments of $35,000 each, with invoices reflecting separately the amounts due for each month.
- The first invoice was sent on or about February 14, 2017 for the months of January and February 2017 “[p]ursuant to [a] retainer agreement, . . . payment for services rendered.” (There was no written retainer agreement.)
- In ¶ 38, the information states that “Executive-1 [presumably Trump Organization CFO Allen Weisselberg] forwarded the invoice to another executive of the Company (“Executive-2″ [probably either Jim Petrus, Donald Jr., or Eric]) the same day by email, and it was approved. Executive-1 forwarded that email to another employee at the Company, stating: ‘Please pay from the Trust. Post to legal expenses. Put ‘retainer for the months of January and February 2017’ in the description.'”
Now the criminal information focused on Cohen. But the facts outlined in the passage outlined above are potentially more troublesome for Trump. That’s because of the way the payments have been booked. No part of the payments (except, perhaps, Cohen’s “bonus”) were actually for legal services. Thus, on the Trump Organization’s 2017 partnership tax return, payments actually made to Cohen cannot be deducted. Rather, they have to be categorized as distributions to Trump himself. Now, it is quite possible that the 2017 partnership return has not yet been filed. In that case, the individuals who prepare the return and those who sign it can cast the transactions correctly. If, however, the return has already been filed, it is likely that the payment was categorized by the LLC in a fraudulent manner.
The trust referenced in the criminal information is probably the Donald J. Trump Revocable Trust. Without getting into tax details, that trust is what is known as a “revocable trust” and for income tax purposes is little more than a personal pocketbook for Trump. None of the income or loss to the trust is reported on a separate tax return, but, rather, is reflected on Trump’s 1040. Here’s a summary of the trust terms that was set forth as an exhibit to the GAO letter that (wrongly) concluded that Trump’s ownership of the Old Post Office did not violate the terms of the ground lease with the federal government. If the payment was made directly from the trust, it was certainly not a tax deductible payment, but a “below the line” campaign contribution.
Here’s the problem this poses for Trump: The Special Prosecutor indicted Manafort for tax crimes that the office uncovered, but that were collateral to the main investigation. In fact, the Cohen material was uncovered by the Special Prosecutor and was determined by that office to be so outside of its grant of authority. Thus, it referred the matter to the U.S. Attorney for the Southern District of New York. The transactions outlined above, while outside of the Special Prosecutor’s main grant of authority, may be sufficient to prompt either the Special Prosecutor to investigate Trump’s and/or the Trump Organization’s tax returns or to refer such an investigation either to the IRS, the Criminal Division of the Justice Department, or a U.S. Attorney’s office with appropriate jurisdiction. Stated simply, it is possible that, as a result of the Cohen investigation, the wraps may come off of Trump’s long-hidden tax returns.
Update: Now this story from the NYT:
The Manhattan district attorney’s office is considering pursuing criminal charges against the Trump Organization and two senior company officials in connection with Michael D. Cohen’s hush money payment to an adult film actress, according to two officials with knowledge of the matter.
A state investigation would center on how the company accounted for its reimbursement to Mr. Cohen for the $130,000 he paid to the actress, Stephanie Clifford, who has said she had an affair with President Trump, the officials said.
Both officials stressed that the office’s review of the matter is in its earliest stages and prosecutors have not yet made a decision on whether to proceed.