D.C. Firms Taxed Illegally, Court Says
Wednesday, March 15, 2006
The District could lose tens of millions of dollars in business taxes after a recent D.C. Superior Court judge's ruling that the city is illegally taxing many businesses whose owners live in the suburbs.
The ruling, by Judge Jose M. Lopez, would especially affect real estate developers and owners, many of whom operate in the city through partnerships but live elsewhere. Lopez ruled that the District was breaking federal law when it applied the city's unincorporated-business-franchise tax to those partnerships that passed on profits and losses to investors and others who live outside Washington.
Such partnerships typically include some of the District's biggest developers, which regularly form new entities to build or manage individual projects.
"The court is mindful of the gravity of this holding," Lopez wrote in his March 8 decision.
The District has for years been fighting unsuccessfully in the courts and Congress for the right to tax commuters and other nonresidents. D.C. officials, who said they would appeal the decision, did not offer an estimate of how much the ruling might cost the District.
"If upheld on appeal, this decision would cause significant damage to the revenues of the District," the D.C. Office of Tax and Revenue said in a statement yesterday.
Several observers suggested the loss in revenue would be sizable.
Ed Lazere, executive director of the D.C. Fiscal Policy Institute, which analyzes D.C. tax and budget issues, said the tax generates about $100 million a year for the city. If the ratio of suburbanites to D.C. residents is the same among real estate investors and other owners of unincorporated businesses as among workers generally -- roughly two-thirds suburban to one-third District -- then the loss could round to $70 million, "which is huge," he said.
The effect would be so large, said attorney Paul G. Marcotte Jr. of Paley, Rothman, Goldstein, Rosenberg, Eig & Cooper in Bethesda, that "I suspect this is not the final word."
"The District strongly believes that this decision is incorrect," the tax office said.
Lopez's ruling was in response to a suit by Kenneth Bender and other members of a prominent area real estate family who sought a refund of about $240,000 for taxes they paid over three years on income from their interests in companies such as Jack I. Bender & Sons, Rhode Island and M Associates, and Twelfth and L Streets LP.
Yesterday, some developers said the ruling might make the District more attractive for investors.