Is Trump like Conway Twitty?

I didn't watch any of the Trump Show yesterday, but like a lot of people I did read the indictment to see exactly what they charged him with. Right away I appreciated their bringing in the Playboy model and the National Enquirer – nice touches by the prosecution. 

I'm still brooding about the indictment today, though, because as I understand it, what makes this a felony is that Trump allegedly was planning to use his false bookkeeping entries – calling the payoffs "legal fees" paid pursuant to a "retainer" – to commit other fraud crimes. One of the things the prosecutor mentioned in his press conference was potential state tax crimes.

Now, I don't know diddly about New York State tax law, but on the assumption that it's a lot like federal tax law, which I do know something about, I'm still wondering how mislabeling the payments to the lawyer, Michael Cohen, would have helped Trump on his taxes. Specifically, I am wondering, wouldn't he have been able to deduct the hush money even if he told the truth about what it was?

You're allowed to deduct the "ordinary and necessary" expenses of your business. That includes illegal businesses. On the business side of your life, the types of expenses that are disallowed on public policy grounds, and Congress has spoken to this specifically, are fines, kickbacks, and certain kinds of bribes and other illegal payments. I'm assuming the payments Trump made were not fines or kickbacks. So that leaves bribes.

The section of the federal tax law disallowing business expense deductions for bribes is Section 162(c). It has three paragraphs. Paragraph 1 deals with payments to government officials and government employees, so that doesn't apply. Paragraph 2 governs certain other types of illegal payments, but it may be a stretch to fit the Trump hush money into that category:

any payment (other than a payment described in paragraph (1)) made, directly or indirectly, to any person, if the payment constitutes an illegal bribe, illegal kickback, or other illegal payment under any law of the United States, or under any law of a State (but only if such State law is generally enforced), which subjects the payor to a criminal penalty or the loss of license or privilege to engage in a trade or business....

Are payments to cover up sexual peccadillos a crime, or grounds for losing a license of some kind that Trump needed? I'm no criminal lawyer, but I don't see it. And anyway, if the payment itself was already criminal, there would be no need for the prosecutor in the Trump case to be referring to any kind of tax crime.

That leaves paragraph 3 of Section 162(c). It relates to kickbacks, rebates, and bribes under Medicare and Medicaid, also not applicable here. There are other types of expenses that are disallowed as deductions – payments to settle sexual abuse cases, for example – but they don't apply here, either.

So I'm not seeing anything in the federal tax law that specifically denies a business deduction for a hush money payment to a private person. Now, of course, to take a deduction, there has to be a connection to your trade or business, but couldn't Trump show that? By paying off Daniels, McDougal, and the doorman, he arguably would have avoided damage to his campaign, and to his brand. Presumably he has made a lot more money as President and former President than he would have made if he had lost to Hillary Clinton.

Paying money to protect your business reputation may give rise to a tax deduction. There have been several prominent cases in which the IRS has challenged such deductions, but the government's success rate in these cases is less than 100 percent.

One case they lost involved country singer Conway Twitty, whose real name was Harold Jenkins. He opened a chain of restaurants named Twitty Burger, and they bombed. To avoid damage to his reputation in the music industry, he paid the investors back, even though he didn't have to, as a legal matter. The Tax Court allowed Twitty a business deduction. The judge wrote, in part:

Although, as [the IRS] argues, the chances of a successful lawsuit against Conway Twitty by any of the investors or the Securities and Exchange Commission was remote we agree with [Twitty] that the possibility of extensive adverse publicity concerning [his] involvement with the defunct corporation and the consequent loss of the investors' funds was very real. We do not believe it is necessary for us to find that adverse publicity emanating from Conway Twitty's failure to repay the investors in Twitty Burger would have ruined his career as a country music singer. Rather, we need only find that a proximate relationship existed between the payments and [Twitty's] business. We find that such relationship exists. 

Given this precedent, it's hard for me to see how Trump would have been denied a deduction for hush money payments, even if he told the truth about them. Now, again, that's under federal tax law, not New York State tax law. But I'm not coming away with a good feeling about the prosecution's position here.

On a different front, do you think Stormy Daniels, Karen McDougal, and the doorman reported as income any money they got for not talking about Trump? It wasn't a tax-free gift, given the obvious quid pro quo. Enquiring minds might want to know.

UPDATE, April 6:  Good comments herein by fellow tax prof Gregg Polsky, and followup by me here.


  1. You can't deduct campaign contributions. The payments were intended to get Trump past the election without another scandal about his tendencies towards women. He even asked if he could delay the payments until after the election so he could stiff her on the payments "after it didn't matter if it came out" (paraphrase). So it was clearly a contribution to his campaign. Unreported. And definitely not a tax deductible expense of either him or his mob outfit.

  2. He's going to say it was to protect his businesses, and that the campaign was just part of that. It's a weasel argument, but that's Donnie! Good luck with the jury.

    1. More than one people in The Don’s orbit have said that the whole campaign was a PR stunt to build his empire more and that there was no one more surprised to win than the Trumpsters. It certainly appeared that way at the time.

    2. Exactly. So whatever he spent to get elected could be a business expense.

      There's no way Bragg wants to turn this into a tax case. Juries hate that. I'm a little surprised he even went there yesterday. So what other type of crime was lying about the payoffs furthering? Election finance violations? That's beyond my pay grade.

    3. Disappointment all around

  3. Well written.

    It seems like they pick the most ridiculous stuff to try to pin on trump, and If they had to charge past presidents w/crimes & set the precedent that you could really face consequences when the job is to make deals and do foreign policy crimes, would anyone run for or want the job?
    And if you did charge Trump or some similar real estate pass thru slimeball / celebrity, would you want to set the bar that all the other guys similar to him wheeling and dealing are guilty? Doubt it?

    I confess, with most of your posts about federal news that doesn’t directly impact local stuff or tax law stuff you might know something about, I kinda roll my eyes at your blog?
    I definitely read the tax, employee benefits and local deep cuts with interest even if it’s taken a bit of a reactionary tinge.

    It gets clicks/maybe you get something outta it, but on the informative, entertaining & originality/more primary source expertise, they’re not the posts I read? We all get caught up in it from time to time.

    I’ll be shocked if anything comes of it, for any former president, game show host and polarizing or one that sells TV time or not…
    …it’s probably a good deal for NY persecutors to look busy/particularize it snd sell TV eyeballs, right?

    Sounds totally thin, doubtful if the jury really thought much about what precedent it might set that they’d convict, or impose much relating to that charge other than the most minor or technicalities…

    1. “Persecutors” your true stripes are really showing.

      If it sets a precedent that the other swirling investigations now feel more comfortable indicting an open criminal and insurrectionist I’m fine with it.

    2. ^prosecutors* that’s Apple type for ya…

      They’re not gotta do shit to any sitting or former living president…
      …the ‘job’ is to do crimes, dude…

      Trump is pretty gauche, and *maybe* he’ll, at some point, long after it matters, have a little bout of house arrest (hang out a mar-a-lago with his Florida fans & play golf & watch TV/do what he already does haha?…’arrest’) or have to (be initially asked to) pay a fine for some clerical bookkeeping NY fuss, but that’s probably it?

      If he’d lost the election & croaked or covid in the lame duck period shortly after one of his super-spreader amateur hour Nuremberg rally’s meets Golden Corral / Klan bake events & his surviving family gets swamped by lawyers/creditors and fights each-other to the death , I’d be the first to have maybe a slightly better outlook/mood & laugh myself silly, but nice try?

      But other than that, I’ll critique Jack, but I think he’s spot on when he sez that we’re not likely to be shut of the guy until he’s dead/incapacitated.
      And who knows; in the times we live in, what/who comes after might not be much better?

  4. Brant Hellwig and I analyzed the hush money issue in the context of Tiger Woods's hush money transaction back in 2010 (126 Tax Notes 863, for those interested). Here's the relevant analysis:

    "Even if Woods could establish that he made the payment primarily to preserve his earning potential, the IRS might still disallow the deduction on the ground that the payment originated out of Woods's personal activities. Consider, for example, the case of Bonney v. Commissioner, 247 F.2d 237 (2d Cir. 1957). The taxpayer in Bonney made payments to his ex-wife in exchange for her agreement to cease making derogatory allegations against the taxpayer. The taxpayer claimed that the payments were deductible business expenses because his ex-wife's allegations were impugning his professional reputation as a lawyer. The court rejected this argument, concluding that the payments were nondeductible even assuming that they were made to protect the taxpayer's professional reputation.

    Likewise, in Nadiak v. Commissioner, 356 F.2d 911 (2d Cir. 1966), a pilot was denied business expense treatment for successful criminal defense costs where a criminal conviction would have resulted in the revocation of the taxpayer's pilot's license. The court determined that, because the criminal allegations stemmed from his personal activities, the expenses were nondeductible even though they preserved future earning capacity. These cases stand for the proposition that if the events giving rise to a payment are personal in nature, the taxpayer cannot rely on the consequences of nonpayment to support a deduction of the payment. See also Bell v. Commissioner, 320 F.2d 953 (8th Cir. 1963) (no deduction for unsuccessful criminal defense costs of accountant where the criminal allegations arose out of personal activities); Lewis v. Commissioner, 253 F.2d 821 (2d Cir. 1958) (no deduction for costs incurred in contesting incompetency proceedings even if the result of the proceedings could have affected the taxpayer's earning capacity as an author); United States v. Gilmore, 372 U.S. 39 (1963) (no deduction for legal fees incurred to defend taxpayer's stake in a corporation because dispute originated in the taxpayer's divorce proceeding). These cases suggest that Woods would not be able to deduct the payment to the National Enquirer under section 162 by arguing that nonpayment would have affected his future earning capacity. Rather, because the payment stemmed from a personal matter not related to his trade or business as a professional golfer or celebrity endorser, it probably would not be deductible."

    1. Point well taken. But if the payments aren't deductible because of the origin of the claim, what difference would it make for tax purposes whether they were labeled "legal fees" or "hush money"? I'm still having trouble seeing how the bookkeeping entry advanced a crime or attempted crime..

    2. Hush money payment would be non-deductible (as would be the repayment of a loan from Cohen to make a hush money payment, which is technically what happened). Payment of fees for legal services by a business is typically deductible as a business expense. So the argument is that they attempted to deduct a nondeductible payment. Complicating matters is that they overpaid Cohen (i.e., grossed him up for taxes), so it didn't actually help Trump overall. And if Cohen and Trump were in the same tax bracket and if Cohen reported the payments as income, then there's no lost tax revenue either (and in fact given Trump's typical loss position, Cohen may even have been in a higher bracket). Regardless, Trump's tax return is false due to mischaracterizing the payment.

    3. You just established with a line of cases that legal expenses in connection with personal matters are in fact not deductible. And so there's no distinction between the deductibility of the hush money and the deductibility of the legal fees. The bookkeeping entries just say "Legal fees," they don't say what the matter was about. If Trump is found guilty on any of these charges, and it's upheld on appeal, I'll buy you dinner at Mar a Lago.

  5. Just for the record, Trump is nothing like Conway Twitty. Conway Twitty was an accomplished artist, and a good and decent human being. Trump is a talentless bore, who views every human interaction as a transaction he is determined to come out on top of, no matter how desperately he has to lie, cheat, steal, and strongarm to do so.

  6. Although I love delving into the tax code, I don't have the time today. This is fascinating stuff.


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