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Republican presidential candidate Donald Trump speaks to the Republican Hindu Coalition, Saturday, Oct. 15, 2016, in Edison, N.J. (AP Photo/ Evan Vucci)

The loophole Donald Trump reportedly used to avoid a huge income tax bill is now illegal


WATCH  | Donald Trump has bragged about not paying income taxes for years, claiming it makes him "smart." (See above clip for proof.)

The New York Times reports the way Trump avoided paying income taxes was legally shady at the time, and outright illegal now.

How it went down

As Trump's casino empire fell in the early 1990s, he was facing hundreds of millions in debt, and he wanted that debt forgiven. But to the IRS, forgiven debt counts as taxable income. 

His tax advisers offered a plan that didn't involve him paying full price: Trade equity in the casino partnerships for debt forgiveness. A similar practice, trading stock for forgiveness, was made illegal in 1993, but trading partnership equity was still allowed at the time.

Lawyers spoke out

Trump sought legal advice before carrying out his plan. Formal tax opinion letters can lead to immunity if an adviser approves of a strategy, even if the IRS ultimately finds it improper. 

However, Trump's tax advisers said there were at least six different reasons the plan could be ruled improper if he was audited. In short, this wasn't a "smart" plan, but a legally dangerous one. Trump went ahead with the plan and was later audited by the IRS, but the results of that audit aren't clear.

He's getting something for absolutely nothing.
John Buckley

John Buckley, former chief of staff for Congress's Joint Committee on Taxation from 1993 to 1994, condemned the move, saying, "He is double-dipping big time."

Meanwhile, the Times reports, the partnership-equity-for-forgiveness swap was banned by the IRS in 2004. Then-Senator Hillary Clinton voted in favor of closing the loophole.

Trump has argued his exploitation of loopholes shows only he can fix them if elected.

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