David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: all the president's returns.

As the 117th Congress drew to a close in December, the outgoing Democratic-led House Ways and Means Committee threw one last curveball: the release of former President Donald Trump's tax returns. These returns have been the subject of debate, speculation, and a number of court battles leading all the way up to the Supreme Court.

What have we learned from the release of these returns? And what kind of precedent does it set for the future? Here to talk about this is Tax Notes contributing editor Joseph Thorndike. Joe, welcome back to the podcast.

Joseph J. Thorndike: Hey, it is great to be here on one of my favorite topics.

David D. Stewart: I know that. Now you're not the first person I've asked, but I like this as sort of an opening question: Did we learn anything interesting from the release of Trump's tax returns?

Joseph J. Thorndike: I guess "interesting" depends on who you are, but we learned things that we pretty much already knew, right? I don't know if that means we learned them or not.

We learned that Trump loses lots of money, right? Lots and lots of money — hundreds millions of dollars he's reported in losses over the years going back into the '90s, and sometimes he's lost so much money that it's wiped out all of his income for subsequent years and years and years. The upshot of that is that he doesn't pay a lot of taxes in a lot of years.

The thing is that none of this is actually news because these tax returns were leaked to The New York Times, or ones very much like them were leaked a couple of years ago, and The New York Times wrote some pretty exhaustive articles about those returns without actually releasing the returns themselves.

We had the bottom line already from the reporting that went on about these. I don't really know that we learned anything, particularly from the returns themselves, but I think it's satisfied a lot of people's interest. How about that?

David D. Stewart: Now I take it these returns were much more complicated than the normal presidential tax returns that you review. How much detail did we get on Trump's tax arrangements?

Joseph J. Thorndike: They're definitely a lot more complicated than your usual run-of-the-mill presidential tax returns. If you look at the ones on our website, they are a lot shorter than these, and they reflect a much less complicated financial life for all of these presidents and candidates that have come before.

So how much detail did we get? Well, we got a lot of detail, and then not very much detail. You can tell a lot about what's going on in Trump's financial life, and really not very much at all. That's the conclusion that the Joint Committee on Taxation came to when they looked over these returns. You can tell a lot, but not everything.

The joint committee ended up, after looking at the returns, with lots of good questions, but not a whole lot of good answers. What they had were sort of like, "Hey, IRS, here's some things that we think you should be looking at," because the IRS has access to a lot of information here that the joint committee did not have, supporting materials for the tax returns that just aren't there.

If there are good answers that are going to come from these returns about what's actually going on with Trump's tax paying, I don't think they're going to come from us looking at these returns. They're going to come eventually from the IRS as part of the various audits that they have opened, and at that point, they're really not going to be available to any of us anyway, because the results of those audits are not going to be public information unless Congress does this again.

David D. Stewart: What sort of things were highlighted, maybe seemed off, or were possible red flags that the committee found?

Joseph J. Thorndike: Well, different people will call different things a red flag, and other people might look at the same set of facts and say, "There's no red flag there." That's completely normal and OK. I think what a lot of people are talking about here are these enormous losses that Trump has claimed, and the big questions are, "Are these losses OK? Are they legitimate?" I don't think that anyone is in a position right now to say yes or no definitively about those things.

It's hard for anyone to really, as I said, to answer these questions definitively. In some ways, the point is not for any one person to be able to see what the problem is, because the point of releasing these things publicly for our president or for anyone else is not so that one person can try to distill what's wrong with this return, but that you can do a crowdsourced audit where lots of people are looking for things that might be problematic — lots of smart, tax-savvy people can look at the returns and find issues that need further scrutiny.

Again, you're going to be limited by the lack of supporting materials that would typically be produced during a real audit. But you can still identify certain issues, as people have with, say, some of these claimed losses. Other people have various different issues that we can talk about. For instance, Steve Rosenthal suggested that Trump had sidestepped a lot of income recognition back in the '90s from discharge of indebtedness income, for instance. That's the kind of thing that somebody might see, and that might come up when you have this sort of crowdsourced audit and a lot of people looking at the returns.

Is there anything off? Well, it might be the size of the losses, that sort of thing, but I don't think that we're going to answer that question definitively.

David D. Stewart: Starting from the issue of these losses, is this just a fact of life because this is a person in the real estate field?

Joseph J. Thorndike: Well, plenty of people say that, including Trump has probably said that a couple of times — more than a couple of times — that real estate investors take advantage of a lot of deductions that are available to them, especially depreciation deductions, which are really front-loaded for real estate investors a lot of the time.

But to go back to Rosenthal at the Tax Policy Center, who I think has done one of the best jobs of looking at these returns, some people don't think that depreciation deductions really explain the size of Trump's losses, especially when you get back into the '90s, when the losses are really huge and they reach almost a billion dollars.

Again, Rosenthal thinks that it has something to do with the income that he's not really recognizing on his returns. But I think that the losses themselves might be real. They might very well be real. He might really have been losing all that money, and it's certainly not uncommon for real estate investors to report large losses thanks to depreciation.

It's just the question is whether that really explains the losses in Trump's case. I don't think we know that answer; we haven't nailed down the answer to that yet, but at least some people are skeptical about that.

David D. Stewart: Could you explain what you mean by this discharge of indebtedness question that has been raised?

Joseph J. Thorndike: When Trump restructured his debt, you're supposed to report some of that as a form of income when the debt is forgiven, and Trump managed to not do that. Now, whether or not that was allowable is something that he took a fairly aggressive position on. That is my understanding.

I haven't seen these parts of the returns myself. I don't think that Rosenthal has suggested that that was clearly a violation of the law, but that it was an extremely aggressive position relative to the IRS, and that it might not stand up ultimately when it's challenged.

David D. Stewart: Now that we're in this sort of crowdsourcing period of this, do you expect the IRS to take action based on information that they receive from the public?

Joseph J. Thorndike: That's a good question, and I think that has a lot to do with what sort of resources the IRS has to put into this, what sort of pressures that they're under now that it's all been put out in public. I think that this has turned into a significantly embarrassing episode for the IRS for reasons we can get into.

But I would be wary of predicting the IRS's behavior in this situation because they have pressures on them from both sides. On the one hand, you have a set of tax returns that seem to have some issues, and if you don't pursue them, then you're going to look like you're playing favorites. On the other hand, if you pursue those issues immediately and vigorously, it might look like you're persecuting somebody.

I don't envy the IRS having had this stuff brought into the glare of public scrutiny, having to find their way through it now, and I wouldn't want to predict how they're going to handle that, because it's not going to be easy for them.

That being said, when it was being done behind closed doors, I think they did a pretty poor job of handling these audits, even given their own procedures and their own rules that they have for these.

David D. Stewart: Let's get into that. What we heard from the committee was that even though the IRS is required to be auditing presidential tax returns, it doesn't sound like they were doing that.

Joseph J. Thorndike: Right. Here's the problem: Trump has always said that he's under permanent audit. Basically, his tax returns are always under audit, and that seems to have been more or less true — that when he entered the presidency, a lot of his past returns were under audit, and that they remained under audit while he was president.

That's one set of issues: They never closed any of the audits from those pre-presidential years, many of which involved those enormous losses that he had claimed before.

Then he becomes president. Now, the IRS manual requires the IRS — these are their own rules — to audit a sitting president every year during which that president is in office. That is also true for the vice president. The manual has some very specific rules about how that audit is conducted, even down to what color envelopes the tax return should be placed in and how they need to be locked up and that sort of thing.

But it says they have to be audited every single year by these people, in this place, and supervised by these officials, and that sort of thing. Those rules went into effect, and I think they've been changed a little bit over time. But essentially those rules have been in place since 1976, when Jimmy Carter was president, and presumably the IRS has been auditing every sitting president ever since.

But what happened is when the joint committee finally went in and took a look, it turned out that the IRS had not been auditing Trump's tax returns filed during the years in which he was president. Why is that? Their own rules said they have to audit the returns filed while he was president, and they didn't do it.

The obvious explanation might be, "Well, they hadn't closed the audits from the years prior to that, and the tax returns for his presidential years, those were going to be dependent on the results of those prior audits, at least to some degree." This is the case that I've heard made a couple of times: "We have to finish the old audits before we can really sensibly do the new ones."

There are two sets of questions. To me, the problem here is that you're explaining one failure — the failure to conduct the mandatory presidential audits — by pointing to another failure — the failure to close these audits, which have been open forever, literally.

I don't know that this is especially compelling. The fact that the IRS was unable to complete audits for year after year after year is not really much of an excuse for why they were unable to complete the presidential mandatory audits, which are really sort of a different animal, too. What we discovered is that the IRS couldn't complete the pre-presidential ones, so they didn't even try to complete the presidential ones.

I think that's pretty disappointing; it says something important about what kind of resources the IRS has at its disposal. The agency seems to have been pretty seriously outgunned by Trump's tax team. The IRS didn't have enough people to assign to this to really get the job done, and so they really weren't making any progress. I think that sort of failure really is disappointing, despite the fact that it can be explained away through this sequential argument about things.

I think that the mandatory audits of sitting presidents are not just the regular run-of-the-mill audits; they're really meant to do something. They have a substantive and symbolic value. I don't want to get all mushy about it, but these are meant to guarantee something that's not just about the president's personal finances, but they're really about how American government operates.

They're supposed to say that the country's chief law enforcement officer is not above the law; that the tax collector in chief is also a taxpayer in chief. There's literally no other way under normal procedures that you can do this because, since tax returns are protected by law from public disclosure, we can't know if the president is complying with the law, and the IRS can't tell us because they can't tell us anything about a taxpayer, including the president.

So we have to rely on the IRS and its professionalism and the procedures that it's put in place — like these automatic audits that it publishes and talks about in the manual — to keep the president honest. We've been doing that for 50 years, and we all took them at their word, and then somebody finally checked up on them, and it turns out that they weren't really doing the job.

I do think that's disappointing. I think we were left with a lot of questions about these audits, about the IRS's ability to audit presidents, and in fact whether they have been. So, as far as I'm concerned, has the IRS audited other American presidents?

They say they have, but do we really "know?" Because they didn't audit Trump all these years. The presidents have released their tax returns prior to Trump, and that's encouraging. That makes us think, "Hey, these presidents probably did file their tax returns."

But were those returns accurate? Did the IRS discover problems? Were there audits that discovered problems? Were these presidents held accountable for those problems? Did they pay up?

These are questions we just don't know the answers to. The fact that the IRS dropped the ball here I think shakes people's faith about whether or not they were on the job in those earlier years, too. This isn't really all about Trump, and I think that's the important thing — that this is really a story about the IRS, to me at least, much more so than it is a story about Trump, at least right now. I think it may be a story about Trump again later on.

David D. Stewart: I guess the big question to me at this point, then, is, seeing this as a failure going beyond the instant case with the changeover in Congress, do you expect them to keep pulling on that thread to find out what happened?

Joseph J. Thorndike: I hope so. I think maybe that the Senate might continue this investigation. When the House Ways and Means Committee began this investigation, there was a lot of suspicion — and I think it was not unreasonable to be a little dubious — that when the Ways and Means Committee said that they were investigating the IRS mandatory audit program that was really just a fig leaf for wanting to take a look at Trump's tax returns. That certainly was what Republicans were saying. That's what Trump was saying.

There were plenty of Democrats talking about Trump's returns in ways that made you think, "Yeah, this is probably a fig leaf." But actually, I think that the Ways and Means Committee was serious about that for the reasons that I just laid out about why these audits are actually important to our ability to trust the government, to trust the tax system, to trust the IRS. I think that the committee was genuine and serious about that, and then when they finally did release their report at the end of December, the report was really all about the IRS mandatory audit program.

They chose to release the tax returns. I'm not entirely convinced that it was necessary to release the actual returns themselves. I think that might have diluted the case, actually — diluted their argument that they were looking at the audit program. But putting that aside for the time being, I think that they were serious about this.

I think that for that reason it's possible that the Senate Finance Committee might take the baton here and run with it because this is still a very important issue, and I think there are people in the Senate who believe that that's true.

I'd be pretty surprised if the Republican majority in the House decides that they want to pursue this. I think they should, because I think that this is not actually a partisan issue. You might look back at previous presidents and find that the IRS dropped the ball with Democrats in the White House. So I don't think that this is really a partisan issue, but I think it's become one, unfortunately.

David D. Stewart: You've long talked about this tradition of presidents releasing their tax returns, and for anyone who hasn't heard you speaking passionately on this issue, could you briefly give us your take on it?

Joseph J. Thorndike: Presidents have been releasing their tax returns voluntarily or quasi-voluntarily — in the case of Richard Nixon, he was sort of at the point of a gun releasing his tax returns — they've been doing it since Nixon, and then completely voluntarily since Carter.

The idea here was, as I was saying, tax returns are private records, and the IRS can't release them or any information about them. They can't say anything. They can't even say whether a president filed or didn't file. The only way that Americans could really be sure that a president wasn't cheating on his taxes was for that president to release their tax returns when they were filed.

Carter began this tradition, really released his tax returns voluntarily, and every president since then has followed suit until Trump. I think that that's admirable. I think that it's not legally required, but we can all say, "Gee, that's a nice thing to do to help reassure Americans; that form of voluntary transparency is a good thing." I've said that, and so I applaud it. Let's put it that way.

I also think it's no way to run a modern transparency program for a real government. I think that voluntary traditions are not the way to manage official transparency. If we think that tax transparency is important for American presidents, then I think that we should actually make it mandatory. We should pass a law to that effect.

I think it's corrosive in certain ways to have this be a voluntary tradition, and I think we discovered just how corrosive it is during the Trump years. The big issue here is that it becomes all about shaming and guilting and moral grandstanding, in which we turn to some president who, well within their legal rights, says, "I don't want to release my returns." That is completely legal for them. Then we try to guilt them into doing it anyway, and my feeling about this is that if you really think that they should have to do this, then you should simply require them to do it the way we would require them to release information about their personal finances with their financial disclosure forms.

I really am not into this sort of moral pressure thing. I honestly feel this way about a lot of arguments that go on about, say, the corporate income tax and where a lot of progressives get very worked up about companies that don't pay any tax and how angry they get about that. I always feel like saying, "If you're really angry about that, you should actually be complaining to the lawmakers who make that possible rather than complaining about the companies that take advantage of the laws as they are written."

There are gray areas here. Obviously you can take advantage or you can really take advantage. You can push the boundaries of the law or live well within it. But you get my point, right?

I just think that if you have the courage of your convictions, then make this a law. If you don't have the support of enough people to make this a law, then Americans don't value it enough, and you should deal with that. You should try to convince them. You should try to create the majority that you need.

But I just don't think that any of us benefit from this sort of hectoring that goes on around trying to guilt people into releasing their returns. I'm sure that's quite useful from a partisan political standpoint — you can beat up on somebody quite nicely by shaming them for not releasing their returns. 

I'm sure if I were running for office and I wanted an issue to beat up on my opponent, that might be helpful. But I don't think that that's actually good for the rest of us. I don't think it's good for the tax system, because it obscures the fact that, hey, nobody has to release their tax returns if they don't want to.

So again, either change the rules or don't change the rules, but that's the way I think it should be conducted. I have ideas about how the rules should be changed, but I do think it should all be conducted with bright lines, not with moralizing.

David D. Stewart: Are there any prospects for a law to be passed on this?

Joseph J. Thorndike: I'd say less than zero anytime soon, because this has become a partisan issue. I think, like so many things in recent years, it's a nonpartisan issue and was a nonpartisan issue for decades. But the Trump years have been divisive, and I don't know that we can lay that all at the feet of Trump personally. It's just the way that the politics have played out.

But I do think now that it's going to be hard to rescue this from the divisiveness of modern politics, especially because of the way that Trump at first promised to release his returns, than hemmed and hawed about releasing his returns, and then was less than honest about why he wasn't releasing his returns. That created a lot of distrust, and then he didn't release his returns. Then there was this long pursuit of his returns by the House Ways and Means Committee, followed by the forced release of his returns, the forced disclosure at the hands of the House Ways and Means Committee.

All of this has made this a very contentious issue. I would be shocked if Republicans were willing to talk about mandatory disclosure in any way. In fact, I think that this really may have just about killed the bipartisan tradition of voluntary tax return disclosure by presidents or presidential candidates. I could be wrong, and I hope I'm wrong.

But I would be pretty surprised if Republican candidates — including Donald Trump, but other than Donald Trump — were willing to release their tax returns this year. Because at this point, my expectation is that that would be interpreted as a sign of weakness, because there's a lot of unhappiness, or at least expressed unhappiness, about the Ways and Means Committee's decision to release those tax returns against Trump's wishes. However you may feel about that, I do think that it's become a point of conflict between the two parties.

I also think that we're likely to see some blowback from that. Now that the Republicans are in charge, they have a majority that could vote to do the same sort of public disclosure of tax returns that the Democratic majority did.

Who are they going to do it for? Well, they're not probably going to do it for President Biden, because he releases his returns anyway. But people forget that the committee's authority to release tax returns doesn't just apply to presidents or to vice presidents, or to members of Congress or Supreme Court justices. It actually applies to anybody who files a tax return.

It's not hard to imagine that an investigation that the committee might say, "Hey, we're going to investigate political donations and their effect on American democracy, and so here are the tax returns of the top 100 donors to the Democratic Party."

They might release tax returns for labor union presidents or the CEOs of large charities, or on the other side of the aisle, maybe large corporations. Lots of people could find themselves the target of this sort of thing. If you can gin up a plausible legislative purpose for your investigation, then you might be able to convince courts that you need to see these tax returns, and once you have the tax returns, you can release them.

I just think we've opened a door, and I'm withholding judgment on whether it was good or bad to release the returns. I'm not sure I even want to get into that, because I don't honestly know. I don't have strong feelings one way or the other about that.

What I do have a strong feeling about is that we have opened a door, and it will be hard and probably impossible to shut that door going forward. I fully expect to see tax returns released by this House majority. I just don't know whose tax returns yet.

David D. Stewart: So we've clearly, as you see it, opened a sort of Pandora's box. Is there a way to fix this, and can it be done?

Joseph J. Thorndike: I mean, eventually, someday there should be legislation. There was legislation that was passed by the House in the last Congress that would've required the mandatory disclosure of tax returns by presidents and vice presidents and candidates for that office — major party candidates, I think.

I think that's very reasonable. If it would get that kind of a law across the line on Capitol Hill, I would exempt all sitting members of Congress, all sitting presidents and vice presidents, anyone running in the next election, whatever, push it out for five or 10 years. Anything that it would take to get it on the books I think would be worth it, because I do think it's that important. It should not be an issue of, "Hey, let's get Donald Trump or let's get Joe Biden and his family because they're corrupt."

It's not about the candidates that we've got right now. It's not about the politicians we have right now. This is about building a system that's transparent, not about exposing these particular people. So what I wish is that we could convince all members of Congress, like, "Hey, let's do this going forward so we can avoid this in the future."

But I'm not naive enough to think that's the way that things really work. However, if we could, I'd put together a law that required that sort of mandatory disclosure. I think we'd need to have a debate about who it should apply to — I mean, we could all agree it should be presidents and vice presidents, probably. Should it apply to members of Congress, or at least the leaders of Congress? That would be plausible. Should it apply to the Supreme Court justices? Lots of people these days are talking about that. We can draw the line wherever we want to draw the line.

That's what Congress is for, is to debate that sort of issue. I think once we debated it, then we'd have to debate how we're going to do this. My preference would be to have these returns released directly by the Treasury Department after they were filed so that they're not coming from the candidates, from the sitting officeholders. They would come directly from the agency so we would know that these are the actual returns as filed, and then we'd get the materials that came after them. If they were audited or the tax returns were amended, we'd see those as well.

Because actually right now we get these voluntary release returns, but we don't know if these are the returns as they actually ended up down the road. They could have been completely changed and amended later on, and we have no idea. They might have been audited and there might have been big changes to them. We have no idea.

So again, these are the details. These should be ironed out by lawmakers. I hope that someday we can get to the point where we do that. But again, I think it has become so politicized around the Trump issue that we think of this as a Trump issue, and we're going to continue to because he's running for president again.

So everyone is like, "Oh, well, thank goodness we're done with this now because we've been arguing about Trump's tax returns for years, and now, finally, here they are. They're out."

Well, we're about a month away from somebody going down to Mar-a-Lago and saying, "Hey, President Trump, you're running for president, are you going to release your tax returns?" Because somebody's going to, because that's a reasonable question for a candidate running for president.

We're not done with this issue, not in general and not around Trump. We're just about to open the door all over again. So welcome to the game. It never ends.

David D. Stewart: And I'm sure that we will have you back to talk about this more. Joe, thank you so much for being here.

Joseph J. Thorndike: Hey, it was my pleasure, although I got even a little weary talking about it myself, I have to say.

David D. Stewart: For listeners interested in reading up on the presidential tax returns of presidents past and present, you can check out a link in our show notes to the Tax History Project.

And now coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?

Paige Jones: Thanks, Dave. In Tax Notes Federal, Laura Barzilai examines what is an identifiable event proving the worthlessness of securities or debt. Jay Soled and James Alm argue that some provisions of the Inflation Reduction Act could encourage taxpayers to make auto-related gifts as a way to achieve significant income tax savings.

In Tax Notes State, Amy Nogid continues her discussion of SALT issues for foreign businesses operating in the United States. Martin Eisenstein and Matthew Pick describe the decisions determining whether services and software are taxable based on the true object test.

In Tax Notes International, Harold McClure examines recent debt pricing litigation in France and New Zealand related to the pricing of intercompany convertible debt. Bruce Lemons examines the treatment of S corporations as partnerships for many important international provisions of the code.

Finally, in Featured Analysis, Carrie Brandon Elliott reviews the inversion regs' definitions of business activity and inversion gain.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. As always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.