Now comes the kicker: The losses he wrote off were probably not even his losses. More likely, they were losses to his creditors. To him, they were a boon — as if nearly a billion dollars fell out of the sky and landed in his lap.
That is not to suggest that Trump did not rack up huge losses in the early 1990s. Perish the thought. The Trump Taj Mahal in Atlantic City had to file for Chapter 11 bankruptcy in 1991 because it was billions in the red — and in the restructuring, Trump gave up half his ownership interest. The Trump Plaza Hotel, also in Atlantic City, declared bankruptcy in 1992, when it owed $550 million; Trump ended up turning 49 percent of the hotel over to Citibank. In the interim, the Trump Shuttle flopped. Trump had purchased the Eastern Airlines Shuttle in 1989, through a $380 million loan from a syndicate of 22 banks. Eastern’s shuttle service had been popular not for glitz but for convenient flights between Boston, New York City, and Washington. Trump’s vision, to the contrary, was luxury travel. From a know-thy-customer perspective, this was non-starter; it became a rout when war in the Persian Gulf sent fuel prices skyrocketing. By late 1990, having never turned a profit, Trump defaulted on the loan, forfeiting ownership to his creditors.
With these major, heavily leveraged businesses now either failed or in bankruptcy proceedings, the big losers were the banks that had lent Trump and his companies hundreds of millions of dollars. This, however, is where an anomaly of the IRS Code comes in, as expertly explained by Janet Novack of Forbes. Prior to 2002, you see, the federal tax code allowed a debtor to deduct his creditor’s losses as if they were his own.
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