The chairman of the House consumer subcommittee has suggested that the Internal Revenue Service should start taxing discounts that developers give to employes, family members and "other insiders" involved in condominium or cooperative apartment conversions.
Rep. Benjamin Rosenthal (D-N.Y.), chairman of the House Government Operations subcommittee on commerce, consumer and monetary affairs, told the IRS that his panel had found "a widespread pattern of non-arms-length, below-market sales of condominiums and cooperatives by converters to employes, family members and regular investors."
In a letter to the agency, he cited American Invsco Corp., the nation's largest condominium converter, as having sold a number of its units to members of the Gouletas family, which owns the corporation. From 1973 to 1981 Nicholas Gouletas, Invsco chairman of the board, bought 70 units (most put in trust for his children); Evangeline Gouletas (now married to New York Gov. Hugh Carey), 18 units; and other family members, 109, according to a list provided by American Invsco.
Generally, condominium converters provide substantial discounts to tenants who buy, selling the apartments to them at less than the price quoted to the general public. If the tenants do not buy, the converters may give them cash to help them move.
In answer to an earlier letter from Rosenthal, the IRS said that relocation payments to tenants who choose not to buy their apartments may be taxable.
Discounts are not considered taxable, however, when they are given to tenants who buy their apartments when the units are converted to condos or co-ops, Assistant IRS Commissioner Gerald G. Portney wrote in his response.
But, Portney noted, the general rule exempting tenant discounts from taxation "may not be applicable if the purchase and sale did not constitute an arm's-length transaction." An arm's-length transaction is one which does not occur between close family members and does not substitute for another form of payment.
For example, a shareholder in a corporation which received a discount on a condo might in essence be receiving a corporate dividend, which is taxable.
"We would like to see them do auditing and examination to see if big converters have accounted properly" for the discounts -- in other words, if they have included them as taxable income to family members or insiders -- which is highly unlikely, a subcommittee staff member said.
American Invsco has converted the Grosvenor apartments in Rockville to condominiums and is attempting to sell apartments at the Promenade in Bethesda as cooperatives.
The panel found that on the average 30 to 40 percent of the apartments in converted buildings are sold to speculator-investors rather than owner-occupants, but that the rate in American Invsco buildings was higher.
"In American Invsco buildings studied by the subcommittee, the percentage of speculator-investors is on the high side due, in part, to extensive speculative holdings by Invsco principals and insiders on thier own behalf," a subcommittee report states.
"The Gouletas family and American Invsco insiders own, in their own names, substantial blocks of units in almost every Invsco converted building," it adds.
At the Grosvenor in Rockville, for example, 186 units, or 45 percent, went to investors, the subcommittee report states. Family members bought 10 units there, and Invsco company officers and other employes own 16 units, it says.
Employes or self-employed contractors who get bargains on condominiums instead of part of their pay also may be taxed on the value of the discount, Portney said.
Rosenthal has written again to ask if the IRS intends to do anything about taxing some of these discounts. Clearly, Rosenthal is concerned about high-level corporate executives, investors and family members who are making money personally by getting bargain-basement prices on valuable condominiums but who are not taxed on the value of the discounts received.
The same principle of taxation would apply, however, to a resident manager or other paid worker who received the discount price as part of his or her pay.