The public inquiry into how the District tax office mucked up the collection of an obscure but lucrative real estate tax came to an uncertain end today.
It was the first opportunity for the lawyers who brought the issue into the public eye to make their case in a public forum. Jeffrey A. Mitchell explained the basis for his claims that the city potentially lost out on hundreds of millions of dollars by mishandling collections of the deed recordation tax, a small levy on certain commercial property transactions.
With associate James V. Stanton, Mitchell explained how his fellow real-estate lawyers reacted to a tax law passed in 2001, switching to a particular type of legal instrument that the city doesn’t levy taxes on. He held up documents from four property transactions on one block that, he claimed, should have net the city $2.5 million but didn’t because of a legal interpretation that has “no support and no basis anywhere in [D.C.] statute.”
Extrapolate that to the entire city over the decade since the tax law change — “the most active, productive, robust time for real estate financing not only in the city’s history, but possibly in the world’s history” — and you get the picture.
Mitchell and Stanton also sought to defend themselves from attacks from Chief Financial Officer Natwar M. Gandhi and his aides, who since May have sought to portray the two as crackpot theorists who wanted to shake down the city for a “sole-source contract” without offering proof of their theory.
In an odd soliloquy, Stanton took aim at Gandhi not by name but as the “great one,” who would never take a meeting to discuss their claims. “I could get to see the president quicker,” he said. “The ‘great one’ is the problem in my judgment.”
All parties at this point agree that the lawyers’ original intent — to collect the taxes owed the District under their legal theory for a small cut — is a nonstarter. Last week, Gandhi and deputies testified that the city tax office in fact decided in a 2007 policy memo to stop collecting the tax, claiming that the 2001 law was “ambiguous.” That move means the city would be on impossibly shaky ground asking property owners to pony up now.
But now the D.C. Council is faced with addressing the supposed “ambiguity.” Though many agree that the statute on the books is perfectly clear as written, numerous real estate types don’t like what it says — that the recordation tax should be charged on the full amount of a refinancing, not just the debt incurred above the original principal.
A number of real-estate industry representatives lined up to oppose Mayor Vincent C. Gray’s wish that the tax be levied on the full refinancing amount. Jeffrey Gelman, a lawyer active with the D.C. Building Industry Association, said the city’s efforts to balance its budget “must begin with spending controls rather than the administrative reinterpretation of tax laws.” Or, as Ed Krauze of the Greater Capital Area Association of Realtors put it, “I feel like this is a search for more money, in particular more real estate money. ... This is highly, highly unsettling to our group.” Ed Lazere of the D.C. Fiscal Policy Institute, usually a reliable advocate for any proposal that might bolster social service spending, did not take a position on the tax. He suggested that the issue be forwarded to the pending Tax Revision Commission that will soon begin the process of making recommendations on an overhaul of the city tax code.
The Council did not hear from Gandhi or his deputies today, though they are officially neutral on the question of how the tax should be applied in the future. In the end, the whole thing will likely end up a fiscal wash.
But the matter has been an ongoing headache for the chief financial officer and his deputies. The hearings revealed that Gandhi’s subordinates in the Recorder of Deeds office in 2001 adopted a reading of a law that Gandhi’s office had helped draft, but that reading was at odds with what Gandhi now professes to have been the law’s intent. And in 2007, his deputies reversed that original reading in an unpublicized decision that meant forgoing $15 million in revenue before it was noticed by lawmakers.
The whole affair, though arcane and parochial, has given Gandhi’s longtime sparring partner David A. Catania (I-At Large) more fuel for his attacks. Those attacks are often intemperate, but Catania was accurate today in noting the lack of consequences here. “Not one person,” he said, “has been held accountable for this colossal problem.”