Trump Indictment – 34 Counts Of Falsifying – What Is The Other Crime?

So I spent a couple of hours, that I will never get back, watching coverage of the arraignment of our once and aspiring future President Donald Trump. Sensible tax oriented CPAs were probably for the most part more productively occupied what with that deadline coming up in a couple of weeks. The most interesting thing I took away from the coverage was the remark by DA Alvin Bragg that in Manhattan prosecuting people for falsifying business records happens a lot. Then I read the indictment and the supporting statement of facts and got a bit of a shock as I absorbed what the crime of Falsifying Business Records In The First Degree – New York Penal Law § 175.10 – consists of according the DA. It is disturbing how often it might occur.

As I discuss further on I confirmed with attorney Jeremy Saland that prosecutions for falsifying are not unusual. What is unusual, he says, is charging falsifying without charging a crime related to the falsifying. In the absence of some other crime, the falsifying is a misdemeanor not a felony. We will get to that, but first let’s see how they got it up to thirty four counts.

Thirty Four Counts

If you understand a little bit about accounting systems it makes it easier to see how they got to thirty four counts. The company receives an invoice from a vendor and the invoice is somehow processed, marked, as they say in the indictment. The invoice created by the vendor is now a business record of the company. The first count concerned an invoice dated February 14, 2017 from Michael Cohen that was “marked as a record of the Donald J. Trump Revocable Trust (Trust), and kept and maintained by the Trump Organization”.

In a dinky little business like the one I run – Risorgimento Productions LLC – the next thing is to cut a check and we’re done until year end when we create a spreadsheet with the scores of transactions that have happened during the year. The Trump Organization which is running over 500 business entities needs a more sophisticated systems. So, also on February 14, 2017, voucher number 842457 is created to support an entry in the Detail General Ledger of the Trust. One of the two questions I had to answer to get hired at Joseph B Cohan and Associates in 1979 was what a general ledger was. I will refer you to Investopedia rather than try to reconstruct the answer I gave to Herb Cohan.

“A general ledger represents the record-keeping system for a company’s financial data, with debit and credit account records validated by a trial balance. It provides a record of each financial transaction that takes place during the life of an operating company and holds account information that is needed to prepare the company’s financial statements. Transaction data is segregated, by type, into accounts for assets, liabilities, owners’ equity, revenues, and expenses.”

The effect of that voucher would be a credit to accounts payable and a debit to something or other. According to the statement of facts the Accounts Payable Supervisor marked the invoice with the general ledger code 5105 which stands for legal expenses. Accounts payable is a liability account so it will increase as will the expense account. They increase by the same amount. Debits equal credits. The trial balance must, you know, balance..

The third count was voucher number 842460 entered on February 14, 2017. The reason there were two vouchers was that the invoice was for January and February “services”. Subsequent invoices would only generate one voucher. The fourth count was check number 000138 also dated February 24, 2017. The fifth count is an invoice from Michael Cohen dated February 16, 2017 processed on March 17, 2017, which is followed by a voucher and check making for the sixth and seventh count. The invoice, voucher, check sequence is repeated nine more times. There is a switch though. After the first two transactions the remaining nine are done with the Donald J. Trump account rather than the Trust.

If your mind works like mine you have been very troubled by 34 not being divisible by 3. The deal was, as we shall see, twelve payments of $35,000 each. The first invoice covered two months which generated two vouchers, but apparently only one check presumably for $70,000. So we have eleven three step transactions and one extra voucher. You can do the math from there.

The Background

The Statement of Facts (SOF) accompanying the indictment explains the background of this wild spree of invoice marking, vouchering and check writing. According to the SOF the Defendant had orchestrated a scheme to influence the 2016 presidential election by identifying and purchasing negative information to suppress its publication. He violated elections laws, although it doesn’t say which and caused false entries in business records of various entities in New York and mischaracterized for tax purposes the true nature of the payments made.

One component of the plan was having “a lawyer who then worked for the Trump Organizations as Special Counsel to Defendant (“Lawyer A”) covertly pay $130,000 to “an adult film actress” to prevent her “publicizing a sexual encounter with the Defendant”. I’m pretty sure they are referring to Michael Cohen and Stormy Daniels. “Lawyer A” had since pleaded guilty to making an illegal campaign contribution and served time in prison. False entries were made in New York business records to effectuate this payment separate and apart from the New York business records to conceal this payment. It is not immediately clear to me how that relates to the transactions itemized in the counts, which when you boil it down are eleven checks to Michael Cohen that were made after the election.

According to the SOF each check was disguised as a payment for legal services “rendered in a given month of 2017”. The SOF then takes us back to August 2015 when the Defendant met with Lawyer A and the CEO of American Media Inc, which among other things owns the National Enquirer. The AMI CEO agreed to be on the lookout for negative stories about the Defendant and alert Lawyer A before the stories were published. In one of them there was an agreement with AMI to transfer rights to the story to a shell company owned by Lawyer A, but AMI backed out of the transaction.

Then comes Woman 2, who is pretty clearly Stormy Daniels. There is a negotiation by Lawyer A with her lawyer to buy her story for $130,000. According to the SOF Defendant directed Lawyer A to delay the payment as long as possible and that if it went past the election they might avoid paying because it would not matter then if the story went public. Apparently there are emails and text messages among Lawyer A, Lawyer B and the AMI Editor-in-Chief on this topic.

Ultimately they decided the payment had to be made. Defendant instructed the Trump Organization CFO to figure out how to make it happen. After discussing various options they left it to Lawyer A to pay her with a promise that he would be repaid. Lawyer A opened a Manhattan bank account in the name of Essential Consultants LLC and used that to make the payment funding it with a home equity loan. I have to say that is service above and beyond.

What Created The Indictment Transactions?

In January 2017 Lawyer A met with the CFO to discuss how he would be repaid the $130,000. He brought along the Essential Consultants bank statement showing the payment. The CFO came up with $420,000 being the number. There was the $130,000 and another $50,000 for some other expense. Then they decided they needed to double it, since Lawyer A would have to recognize the whole amount as income. That got it to $360,000. And then there was another $60,000 thrown in as a bonus. The agreement was that there would be twelve monthly payments of $35,000 throughout 2017 invoiced as legal services pursuant to a retainer agreement.

According to the SOF the Defendant and Lawyer A met in the Oval Office to confirm the repayment arrangement.

The SOF gives us more details on the checks indicating that the first two checks covering three months and coming out the Trust were signed by the CFO and the Defendant’s son with memos indicating retainer for the respective months. The remaining nine checks were signed by the Defendant.

Where Is The Other Charge?

In my crash course on § 175.10 the first thing I learned is that the charge is made frequently enough that there are attorneys who advertise their services in defending against it. I managed to get through to Jeremy Saland of Saland Law PC. He confirmed that falsifying is a frequent charge. He also indicated to me that making it thirty four counts by considering each invoice, voucher and check a separate offense is the way DAs do things. He also indicated that unless you are inclined to be an apologist it is best to assume good faith on the part of the DA.

What he does find unusual is that generally you don’t find falsifying as the only charge. In order for the falsifying to be a felony there has to be some other crime involved, although it does not have to be charged. It happens that CNN got to Mr. Saland before I did, so you can listen to him if you want.

The two possibilities that are hinted at in the Statement of Facts are some sort of election related crime or some sort of tax crime. I’m going to pass on the election stuff, but I am willing to stick my neck out a bit on the tax piece.

Is This How To Make Something Deductible?

I’ve never been involved with a 1040 as complicated as Trump’s, but I have been involved in some complicated ones. It appears from the discussions that I have seen that the Trump Organization is a bunch of disregarded entities each of which will have its own schedule of taxable income and expenses. The tax return is not going to drop straight from a single trial balance. Presumably there are over 500 general ledgers, although I would think that some or all of them are somehow integrated systemically. The indictment mentions two of them the Donald J Trump Revocable Trust GL and the Donald J Trump GL.

Much is made in the SOF of the invoices being charged to legal expense, when strictly speaking they were not legal expense. Well people making these decisions have to work with the chart of accounts that they have. Few things will drive accountants crazy as much as making up lots of new accounts all the time. In the early days of personal computers we really had to discourage it. I have never seen a chart of accounts that included “Pornstar Payoffs”. The payment was to a lawyer, so as an accounts payable supervisor you will likely figure it is legal expense.

Here is the tax thing about legal expense. Is a legal expense deductible ? Well it depends. Until 2021 Trumps return was done by a firm called Mazars. Mazars is rated number 30 in Accounting Today’s latest top 100. I am going to go out on a limb and speculate that Trump was the most famous client of Mazars. So the team doing the return is probably not a bunch of people who just fell off the turnip truck. If I was the TO CFO and I was looking to bury this expense so it would be deducted without question the last account I would have it be paid out of is Trump’s personal account. That is the account which seems most likely to include nondeductible legal expenses.

If it is a tax crime they are going for, I would think they will need to put someone from Mazars on the stand to ask them how they would have been inclined to treat the payment. I would vote for probably not deductible. There is no description of the services on the invoice. If it was deductible it would have been run through one of the businesses.

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