Whether D.C. failed to collect taxes on large property transactions under review

Authorities are reviewing whether the D.C. government, over the course of a decade, failed to collect taxes on certain large property transactions.

When some loans are refinanced, the city is supposed to collect a tax, which can total hundreds of thousands of dollars for some big downtown properties. At the center of the inquiry is whether the District missed out on millions of dollars in recordation taxes.

Representatives of Chief Financial Officer Natwar M. Gandhi and D.C. Attorney General Irvin Nathan confirmed that their offices are reviewing the matter and will publicly issue their findings in the coming weeks.

The legal review comes months after two Washington lawyers approached Gandhi’s office claiming knowledge of a method used by large property owners, their lenders and their attorneys to evade the payment of those taxes. During several meetings, the would-be whistleblowers proposed, for a fee, to search on the city’s behalf for any owed taxes and penalties.

City officials reacted warily, and the lawyers now say they are no longer seeking profit.

But in a letter sent to Gandhi and Nathan last Wednesday, Jeffrey A. Mitchell did not back down from his assertion of a widespread problem, saying it was “pervasive . . . potentially resulting in hundreds of millions of dollars of unpaid taxes.”

Mitchell, a partner with the Oldaker Law Group, joined with James V. Stanton, a lawyer and former Ohio congressman, in pursuing the collections. Douglas J. Patton, a former deputy mayor and a colleague of Mitchell’s, arranged and participated in meetings with city officials, including Mayor Vincent C. Gray (D).

David Umansky, a spokesman for Gandhi, who oversees the city’s tax collections, said Tuesday that his office is skeptical that the issue is as widespread as Mitchell and his associates allege. “At no time did they provide us with proof that millions and millions of dollars have been lost in illegal transactions,” Umansky said.

Representatives from Gandhi’s office, including General Counsel David C. Tseng and Deputy Chief Financial Officer Stephen M. Cordi, who heads the tax office, met with Mitchell and his associates on three occasions, most recently March 29.

Without an audit, it is difficult to estimate how much revenue the city could have failed to collect if Mitchell’s reading proves correct. For downtown office buildings — which are regularly bought and sold for tens of millions, if not hundreds of millions, of dollars — recordation taxes often total hundreds of thousands of dollars per transaction. And the period in question includes the most active and prosperous years the city’s real estate market has ever seen.

The issue dates to 2001, when the D.C. Council passed a broad package of tax reforms. One change ended a tax exemption for the refinancing of loans used to purchase commercial buildings. Previously, those transactions were exempt from the 1.1 percent recordation tax assessed on the loan’s principal. (The rate on most commercial properties was increased to 1.45 percent in 2006.)