By Shawn Tully
September 26, 2016

It’s plausible to believe that, deep inside Donald Trump’s many years of tax returns, which he has declined to make public, a surprise lurks. Heck, we already know him to be a serial exaggerator, at minimum, a person who has testified that his “feelings” influence his calculation of his net worth. More than one commentator has speculated that should Trump’s tax returns surface, they could reveal him to be worth dramatically less than he proclaims.

Wouldn’t it be remarkable if the tycoon, who was claiming even in his darkest days in the 1990s to be worth over $1 billion, was admitting to the IRS that he was really not just dead broke, but hugely under water? And that a special escape provision called “insolvency”—a place Trump has never publicly confessed to being—saved him a bundle in taxes?

With no tax returns to read, we don’t know if any of this happened. But the question is one of the most intriguing in the saga of Trump’s revival.

(The following analysis does not imply that Trump did anything unethical. Employing the insolvency exclusion, if indeed he used it, is a legitimate way to lower liability. It’s a strategy that responsible tax advisers recommend all the time. The Trump campaign, presented with a detailed list of the points in this article, did not make anybody available for comment.)

Related: 5 Things You Need to Know About Donald Trump’s Tax Returns

In the early 1990s, Trump skirted personal bankruptcy by forging deals with lenders that substantially lowered his mountainous debt load. Under IRS rules, debt relief is considered taxable income. The borrower is required to report as income every dollar that creditors write down in loans that he or she has personally guaranteed, minus the fair market value of the assets surrendered to the banks as part of the restructuring package. The resulting income is then subject to both federal and state taxes.

The Trump debt relief saga peaked in 1992, when his major lenders agreed to shave $1.3 billion from the $3.5 billion Trump owed them. The crucial concession: Trump shed $770 million of the $885 million in loans from a group of lenders led by Citibank, guaranteed with his signature. In exchange, the banks seized parts of Trump’s empire, including the Trump Shuttle, the Regency Hotel in Atlantic City, and his 28% share in the Alexander’s department stores. But Trump kept his three Atlantic City casinos, the sprawling Penn Yards flanking the Hudson River, and his flagship Trump Tower in Manhattan, all assets crucial to his mid-1990s comeback.

The amount of “income” generated by those debt reductions is unclear, because we don’t know the fair market value of the assets the banks took in exchange for forgiving personally-guaranteed debt, including loans on the Trump Shuttle. The taxable amount would consist of the $770 million minus the value of properties surrendered to the lenders.

Even so, Trump’s tax liability from debt relief for that year could still have been substantial, possibly tens of millions of dollars. The maximum combined federal income tax rate in 1992 stood at 31% for individuals and 34% for businesses, and New York State added an additional 7.9%.

Related: Business, The Trump Way

However, the IRS rules provide an escape hatch. If the borrower is “insolvent,” meaning that their liabilities exceed their assets, and if the dollar amount of their negative net worth exceeds their assets by more than the amount of the debt relief, they owe nothing in income taxes on debt relief. In other words, the amount of negative net worth becomes a big exclusion, potentially big enough to erase all taxes due. “Insolvency is the way out,” says James Rosa, a CPA and principal at HBK, a firm in Youngstown, Ohio. “If liabilities exceed the fair market value of the assets, the borrower is absolved from paying taxes,” adds Gary Bode, a tax accountant in Wilmington, N.C.

What’s considered a “liability”? The taxpayer can count all the personally guaranteed debt, and loans taken out against assets, in Trump’s case buildings, that exceed the value of those assets. The banks wrote down a total of $1.3 billion of Trump’s liabilities that year. So it’s possible that Trump’s total eligible remaining debt, when it came to tax relief, was big enough to eliminate, or substantially lower, the amount of taxes Trump would otherwise owe the IRS. “The amount of tax due is reduced not just by the negative net worth on the recourse part, but also debt forgiveness on non-recourse debt in certain cases,” says Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax and Accounting.

Of course, it’s also possible that Trump paid lots of taxes on debt forgiveness. It’s not clear, however, where he would have gotten the cash, given his super-stressed finances circa 1992.

What’s noteworthy is that the episode may follow Trump’s pattern of telling two different stories to two different audiences—in this case, one to the IRS, and another to the media. At the time of the big bailout in 1992, Trump boasted to Business Week that he was still worth $1.5 billion. (BusinessWeek was bought by Bloomberg in 2009.) BusinessWeek did a detailed analysis that, Fortune has learned, was based on reliable, confidential sources extremely familiar with Trump’s true condition. That accounting valued Trump’s liabilities at $1.4 billion more than his assets. Trump responded at the time by reiterating his previous position that his net worth was $1 billion-plus, but he did not specifically challenge BusinessWeek’s calculations.

At the time, Trump was jocular about his financial woes when he was alone with colleagues, as Fortune reported in a 1996 story about his comeback. When he and his lieutenants would stride across Fifth Avenue to lunch at the Plaza Hotel, according to sources who were present at the time, Trump would point to a bum begging for handouts and quip: “That bum isn’t worth a dime, but at least he’s at zero. That puts him $900 million ahead of me.” Trump hates that story because it contradicts the triumphant image that he was selling the media.

So it would be fascinating to learn if The Donald used a condition he’s never admitted to—insolvency—as he get-out-of-tax card. Despite all the investigation into Trump’s finances, here’s a mystery that’s yet to be fully explored.

Update: Donald Trump tax records show candidate may have not paid any taxes for nearly two decades

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