Thursday, October 12, 2006
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Calling Tom Maguire or Clarice Feldman: Reidorama Needs A Forensic Blogger
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Posted by:
Hugh Hewitt at
7:16 PM
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The Harry Reid story looks very, very bad for the Democrats' number one senator. CNN has run an amazing story, and this jumps out:
Reid and his wife, Landra, personally signed the deeds selling their full interest in the property to Brown's company, Patrick Lane LLC, for the same $400,000 they paid in 1998, records show.
Despite the sale, Reid continued to say on his public ethics reports that he personally owned the land until it was sold again in 2004. His disclosure forms to Congress do not mention an interest in Patrick Lane or the company's role in the 2004 sale.
So, did Harry own it or not after 2001? Sure, he violated the Senate's rules, but why? Why go to all this trouble?
Forensic bloggers Tom Maguire and The American Thinker's Clarice Feldman are the go-to duo on such matters. Watch those spaces:
JustOneMinute
TheAmericanThinker (And a special backgrounder on Reid here.)
And here, for reference, is Harry Reid's January 17, 2006 press release calling for an end to the D.C. culture of corruption: "REID: REPUBLICANS CANNOT BE TRUSTED TO END THE CULTURE OF CORRUPTION" Opening graph:
The idea of Republicans reforming themselves is like asking John Gotti to clean up organized crime. I thought I’d seen the last of corruption when I helped clean up Las Vegas thirty years ago. But, while its not quite the mafia of Las Vegas in the 1970s, what is happening today in Washington is every bit as corrupt and the consequences for our country have been just as severe.
Flopping Aces has the visual.
Has Harry Reid become Harry Greed? And aren't there some parallels with Duke Cunningham's sweetheart real estate deal that led to the investigation of Cunningham? From Wikipedia's account of Cunningham's scandals:
In June 2005 it was revealed that a defense contractor, Mitchell Wade, founder of the defense contracting firm MZM Inc. (since renamed Athena Innovative Solutions Inc.), had bought Cunningham's house in Del Mar for $1,675,000. A month later, Wade placed it back on the market where it remained unsold for 8 months until the price was reduced to $975,000.
Obviously Cunningham's real estate deal was a $700,000 gift. What was Harry Reid's deal? And what did he declare on his IRS forms? Will the media be requesting his returns from 1998, 2001, and 2004?
UPDATE: Here's the Financial Disclosure Form for the Senate. See Part IV, "Transactions."
And here is Reid's 2005 financial disclosure form. There's a whole lot of buying and selling going on.
With the "windfall" having arrived in 2004, that's the year's disclosure form that will show where Harry Reid stuffed the $1.1 million.
UPDATE: Much more detail here. Interesting graphs:
Nevada land deeds show Reid and his wife bought the property in January 1998 in a proposed subdivision created partly with federal lands transferred by the Interior Department to developers.
Reid's two lots were never owned by the government, but the piece of land joining Reid's property to the street corner, a key to the shopping center deal, came from the government in 1994.
One of the sellers was Fred Lessman, a vice president of land acquisition at Perma-Bilt Homes.
Around the time of the 1998 sale, Lessman and his company were completing a complicated federal land transfer that involved Arizona-based developer Del Webb Corp.
In the deal, Del Webb and Perma-Bilt bought environmentally sensitive lands in the Lake Tahoe area, transferred them to the government and then got in exchange several pieces of Las Vegas land.
For years, Reid had been encouraging Interior to make land swaps on behalf of Del Webb, where one of his former aides worked.
In 1994, Reid wrote a letter with other Nevada lawmakers on behalf of Del Webb and then met with a top federal land official in Nevada. That official said in media reports he felt pressured by the senator. Reid denied applying pressure.
The next year, Reid collected $18,000 in donations from Del Webb's political action committee and workers.
In December 1996, Reid wrote a second letter on behalf of Del Webb, urging Interior to answer the company's concerns. The deal came together in the summer and fall 1997, with Perma-Bilt joining in.
"This land investment was completely unrelated to federal land swaps that took place in the mid-1990s," Manley said.
From an e-mailing CPA:
Harry Reid’s transaction was done, obviously, to hide his ownership in the underlying land. His indirect ownership of the land after his contribution to the LLC should have been disclosed. His initial contribution of the land to the LLC in exchange for an LLC interest is non taxable under IRC section 721. He should have received a capital account in the partnership equal to the fair market value of the land. This is required under the capital account maintenance rules of IRC section 704(b). If this fair market value is in excess of the cost of the land, this too is not taxable. The tax rules would require any pre contribution gain, ie, the fair market value increment in excess of his basis, to be allocated to him under IRC section 704(c).
I only caught a piece of the segment on this, but it sounded like he received his cash back almost immediately. This is a bad fact if so. The IRS has some really awful rules to recharacterize this as a sale transaction if he received a cash distribution that, when looked together with the contribution of the land, is more properly characterized as a sale of the property. These are referred to as the disguised sale rules and reside in IRC Section 707(b) and the regulation thereunder. There is a presumption that any distribution of cash to a partner within two years of a property contribution is part of a disguised sale and requires disclosure and rebuttal on a tax return if it is not treated as such by the partnership and the partner. This could be a significant tax issue to Mr. Reid if he did not recognize a gain on this. The only way it would not be taxable is if he completely liquidated his LLC interest for cash equal to his basis in the land. If he retains any interest in the LLC, then he has a taxable gain.
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Fair enough, but I am not seeing a lot of the "wait and see" so far in the blogoshphere, and based upon the incorrect characterizations in the article, I don't blame people who are on the opposite side of the fence to Reid jumping to their conclusions. To me, this is an awfully researched article written by a person who thinks he has discovered a scandal. Rather, his naivete as to real estate business transactions has made him reach wrong conclusions, and those conclusions are being used as a basis for various insinuations of wrongdoing. I have no idea who Brown is (I am a WA/IL lawyer.) I have no idea how detailed the Senate reporting form is. However, the intention of disclosure forms is typically to give the public information of transactions (and sometimes, business associates, as in the case of liquor license and gaming license applications - I just don't know what are the requirements of the senate disclosure rules and I am not that motivated to wade through the Code of Federal Regulations to find out). Sure, we can tar and feather a man for keeping compamy with people of ill repute or a stained reputation, but that is hardly American of us to do so unless those allegations are proven to be fact. Again, my purpose here has been to give my opinion of the transaction based upon the facts given in the article and those i found on the clark county website. Where I do not know the facts, I give my opinion based upon speculation. Whether Republican or emocrat, we owe each persona fair hearing before judging him/her. |
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JP,
In your above post, you admitted:
"I am not familiar with Senate reporting rules in the slightest."
Exactly.
And nor am I an expert in Senate reporting rules, therefore, I'm happy to defer to those who are. Let's welcome a proper collection of facts.
The transaction may well turn out to be 100% clean.
However, at the very least, failure to report is a violation of Senate rules.
The Senate takes its rules very seriously, as do many taxpayers.
After the experts analyze the appropriate information, they'll tell us if Senator Reid abided by the rules.
JP, you also speculated the following:
"However, I imagine that Reid first reported the ownership as "100% in Blackacre" and merely continued it without thought."
Sir, last week, the QB for my favorite college football team threw an ill-advised pass and it was intercepted at a key moment in the game.
I attempted to explain away my QB's possible motivation for throwing that pass.
I concluded, 'the QB just threw that pass without thought.'
Nonetheless, it still 'counted' as an interception.
Additionally, many taxpaying Americans become concerned when they hear that a U.S. Senator willfully enters into a business deal with an individual who has ties to organized crime.
Who knows, it may turn out that the Senator's business partner is a model citizen and the reports of 'mob ties' are unfounded.
We just don't know all the facts at this point.
So, let's find out all the facts.
Respectfully yours.
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LT, you raise credible concerns, and I hope that Reid had professional counsel guiding him him in this transaction. As you know, there is a difference between "fraud" and a transaction being considered a taxable event. The former leads to jailtime, but the latter leads to taxes and a penalty. Reid claims to have properly paid all taxes, and i am sure that is easily verifiable. As for the value of the property in 2001 when he made the contribution, I think there may be a minor issue there as the property would have appreciated in value. However, the $300K is probably too high, IMO. The dramatic increase in value of this parcel came from the change in zoning for these 2 parcels. So, I don't think that you can consider the appreciation to be a straightline between 2001 and 2004, but more a step-up after the upzone was improved.
OHM - I didn't overlook the Senate reporting rules..I did mention it was the the second category in my first post bove. In my practice, I have noticed that people can get sloppy with corporate formalities when it comes to LLCs. I am not familiar with Senate reporting rules in the slightest. However, I imagine that Reid first reported the ownership as "100% in Blackacre" and merely continued it without thought. He seems to be a very sophisticated real estate businessmen who conducts many transactions. Later, he contributed the parcel to the LLC (which the reporter characterized as Reid purchasing a portion of Brown's company, which was another incorrect conclusion and a phrasing that made it seem like Reid was doing something nefarious.) So, Reid probably should have said that he owned "75% of Patrick Lane LLC" instead of saying that he owned "100" of Blackacre." (I have no idea if he has to name the other members in the LLC.) You are right that Reid failed to make the proper disclosure. However, the "tone" and "insinuations" in the article itself were inappropriate because the reporter concluded that (1) Reid sold the proper in 2001 and did not report it, and (2) in 2004, an alleged mob-related businessman sold a property that Reid claimed that he still owned (but did not because he had sold it in 2001) and then was given a windfall of $1.1 million in 2004. Now, I am not claiming that the reporter has a motive to get Reid, but if he had come with these facts to me or LT or the CPA above, we would have corrected his incorrect conclusions and pointed him in the correct direction to investigate. Right now, the blogosphere believes that the transaction itself was "dirty," and that Reid is trying to hide some "sleazy" transaction by failing to dislcose it. I am trying to explain how the transaction itself, based upon the facts in the article and the information that i was able to find in less than 10 minutes on the Clark County website, does not seem to be "dirty." The failure to disclose the transaction correctly I will leave to others to discuss. However, if the underlying deal was not "fishy," I am not sure how an incorrect disclosure of it is anything more than a technical defect that can be corrected with an amendment. |
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JP,
We're all very respectful of your successful career as a real estate attorney.
You exhibit a lot of pride about your expertise, and I'm sure it is warranted.
However, I do believe you're overlooking key concerns.
One of the concerns with Reid's real estate transaction is that the Senate minority leader's business partner has suspected ties to the mob.
We all remember the storyline about the Senator from Nevada in "The Godfather," right ?
Ha, ha, ha.
Additionally,people want to know why the Senator chose not to report, as a Senator is required.
Also, what (if any) influence did the Senator use to facillitate the change in the zoning law for the development ?
There are specific ethics laws which pertain to members of the Senate regarding personal business deals, personal ties to lobbyists, etc.
The fact that he failed to report is a violation of Senate ethics---there's no way to circumvent that aspect of it.
As far as any other wrongdoing or impropriety, we don't know, and that's why we're merely asking questions.
If the Senator is free & clear, then he has nothing to worry about it, and should be happy to cooperate with answering questions about his innocuous real estate deal.
Respectfully yours.
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By the way, the CPA above mentions the disguised sale rules. Unfortunately, there is a presumption that there is not a disguised sale if there is more than two years between the contribution of the property to the LLC and the distribution of the proceeds to Reid. This would seem to protect him from this problem.
With respect to a couple of other points I have seen raised elsewhere: (1) For tax purposes it will not really matter if he reported it as gain from the LLC or gain from his own sale of property. As long as he recognized the correct amount of income and paid the correct taxes, he will not owe any penalties for not reporting it as coming from the LLC. (2) The AMT would not be a factor here either, since the capital gains rates for regular tax and alternative maximum taxable income are the same 15%. |
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What interests me about this is reports that he "sold" (surely meaning transferred) the land to the LLC for $400,000. Of course, if the $400,000 number has any truth to it (I mean at the time of the transfer - it was obviously his basis in the land all along), what could have actually happened is that Reid valued the land at $400,000 when he contributed it to the LLC, when its value was almost certainly much higher (maybe $300,000 higher?). By doing this, he could have his "partner" in the LLC recognize for tax purposes a share of the appreciation Reid realized from 1998 to 2001. Under Code Section 704(c), Reid should recognize all of that appreciation, plus approx. 75% of the appreciation from 2001 to 2004. If he didn't, he is guilty of underreporting taxable income. |
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Dane, Reid's transaction, at least as outlined in the article, does not appear to be a hinky deal. This type of transaction happens often and is commonplace. You can boil it down as follows: (1) Individual buys Parcel Blackacre in his individual capacity, (2) Individual forms a LLC for reasons of liability and anonymity and "contributes" Blackacre to the LLC in exchange for LLC membership interest. A LLC is a hybrid form of partnership and a corporation, where members enjoy a shield from liability like shareholders in a corporation, but the IRS considers it a "pass-through" entity for taxation purposes. That means that the IRS does not tax the profits of the LLC, but rather, the members of the LLC declare the profits/losses of the LLC on their individual tax returns. In that way, it is like a partnership. None of this is out of the ordinary, and it is the reason why LLCs are the predominant business entity form for small, private entities. In this case, Reid formed a LLC with another member, Brown (the alleged mob-tied investor), (3) the LLC is now the owner of the property, and Reid owns a % of the LLC; and (4) the LLC sells the property, and pursuant to the operating agreement or articles of formation of the LLC, the proceeds of the sale are distributed to the members per their share, and the members declare the profit on their personal returns. It is a very simple transaction, quite honestly, and nothing in it is inappropriate.
Note that the "contribution" in step 2 is NOT a sale, but rather, an non-taxable event that is called a "contribution." (A "contribution" is a defined term in the NV LLC statute, and can be loosely defined as contributing assets to the LLC in exchange for an equity interest in the LLC.) However, because Reid did not own 100% of the LLC, he was not exempt from the Nevada transfer tax, which was paid when he made the contribution. Most probably, the reporter mistook this particular factoid of information as indicative of a sale. |
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I'm no Accountant nor thank god a lawyer but the spirit of this transaction sounds a lot like the Balance Sheet Gymnastics the Tribune Company instituted that resulted in the IRS laying down a One Billion Dollar tax bill that was upheld on Appeal.'
If I'm right, that would be one big Elephant of a precedent to be standing in the corner blocking that barnical on the puplic teetm, Reid, from getting away with fraud. |
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Sorry, One Hot Minute.., I just meant that I expected a "conservative" site to have more business savvy/experienced folks hanging aound, like the CPA who commented above. I did not mean to slander anyone who posts/reads here. As for the article, I am just somewhat shocked by how the ignorance of the reporter with regard to commonplace real estate business transactions. Now, with regard to this Brown guy, the facts are, as far as I have them from the article, is that he has "alleged" mob ties. Maybe Brown is tied to the mob, but that wasn't the focus of the story. First of all, the reporter makes a glaring mistake in characterizing the 2001 contribution as a "sale." And then the reporter compounds his mistake by concluding that Reid earned a 1.1 million dollar windfall for the sale of property 3 years later that he didn't own. Those are just incorrect conclusions. That reporting is very sloppy, and he could have consulted with any real estate/estate planning/tax/corproate attorney having 2 or 3 years of experience and we could have pointed out the incorrect conclusions he had reached, or at least what further questions to ask. Or, he could have asked any wealthy individual who regularly engages in real estate transactions, and the same counsel would have been given.
As for why Reid hung up, this is the same reporter who did very sloppy reporting regarding some boxing events that Reid attendded with free tickets. so, Reid has an issue with this particular reporter. Finally, I have represented many clients, and none of them want to talk about their private business transactions. To some extent, Reid has given up that privielege of privacy, but if I was him, I would disclose only what I have to, and no more. |
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JP --
Maybe you missed it, but this website (and Hugh Hewitt's radio show) are sponsored by a guy currently urging poeple to use option ARMs to use all of the equity in their current house to buy residential investment property. In a market where real estate prices are going down and interest rates are going up. That's business savvy for you.
Hugh Hewitt says, "Trust Roger Schlesinger. I do and thousands of my listeners over the past five years have as well."
MortgageMinuteGuy.com
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JP,
I'm sorry you feel this is an 'odd' site, as you characterized it.
If Senator Reid were innocuously caught up in a simple misunderstanding about a real estate partnership with a guy who has mob ties, then, do tell, good man, why did the Senator immediately hang up the phone on the AP reporter when he asked a simple question about the deal ?
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For a conservative site with a rpesumably business-class readership, this is odd. I am practicing real estate attorney with over 8+ years of practice. There are two categories to divide this "story," as far as I can see. On the legal side, Reid entered into a fairly innocuous business transaction that is carried out an innumerable number of times daily. Sophisticated businessmen often will transfer their individual holdings to a LLC for various reasons, the most common of which is to limit liability and for anonymity. There is nothing wrong with either reason. Next, Reid purchased the properties in 1998, paying the respective sellers a profit of $40,000 (after the seller had owned it for only 1.5 months) and $65,000 to the other seller (after approx 1.5+ years of ownership). Just check the information over the internet for the 2 parcels with the Clark County, NV website. In 2001, Reid first transferred the property to a family trust and then turned around and MOST LIKELY "contributed" it to the LLC for an equity interest in the LLC, as the tax attorney notes on the front page. A "contribution" is a defined term in the LLC statute, and is NOT a sale. However, under the transfer tax regulations of NV, a contribution to an entity in which the Grantor owns less than 100% is NOT Exempt from the transfer tax. (same helpful county website). I cannot know the last item for sure, but a check of the operating agreement for Patrick Lane LLC would confirm it. (Reid will need to disclose that agreement as they are private and not filed with the state). Next, this Brown guy was the manager, and managed to convince the local zoning board to upzone the property. Hey guys....sorry to tell you this, but there is nothing wrong with this scenario so far. Now, I am not saying that there isn't the possibility of corruption here, but the obvious lack of any real estate business savvy on the part of the reporter and these various commentators is really appalling. if there is a story, it is if there was any undue influence to "upzone" the parcels to include commercial. However, that is a public process and it is unlikely. Furthermore, it happens everyday. Anyone else notice the real estate market in the country the past decade or so? Now, there are special tax considerations here, but basically, Reid needs to pay taxes on the gain the property, as well as void some of the special situations mentioned again by the tax attorney on the front page. Too bad the reporter didn't investigate that. As for the other category, disclosure to the Senate...well, I suppose that he may not complied with the rules of the game. To me, the udnerlying sale is not fishy (at least with the current disclosed fact), and so, the disclosure form can be amended to reflect the technical aspects of the deal. |
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Sad to say, this will be like Whitewater. Too boring and complicated for anyone to care. And, of course the media will play it down and not try to explain it or cover it in breathless soundbites that make him sound awful as they would if he were a Republican. It will disappear and have no effect, just like all the other Democrat scandals. Reid will keep his job and no one will care. The hypocrisy makes me angry, as does the sense of helplessness to do anything about it or the double standard. |
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1. The economy is good
2. Jobless rate is at it's lowest
3. Tax revenues are at an all time high
4. Deficit is cut in half
5. Dow is at all time high
6. Gas prices are dropping below $2
7. Bush's approval is above 40%
8. MSM is chirping that the dems will gain 5-50 seats in the mid-terms
9. Harry Reid!
Looks like the REpublicans are against the ropes to me!
IRS needs to open an investigation on Reid. |
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Reid owened the property, and transferred it to an LLC. According to IRS rules, he still owned the property. |
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Harry Reid gave a press conference and claimed that there is no scandal. It was an ordinary land deal. As to the failure to report it on his ethics statement, he stated that it could be amnended and there is no "real" violation as the public kenw about it anyway.
If Harry Reid claims there is no scandal, there must not be a scandal.
Gee, Foley should have taken a play out of Harry Reid's book. |
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There's a scandal that could end Harry Reid's career, and it's a bit of a secret, but only because few people want to discuss it: just two weeks after Katrina, Harry Reid supported the workers who were doing the clean-up on the Gulf Coast.
Just one problem: instead of supporting American hurricane victims, he threw his support behind the illegal aliens from Mexico who'd been brought in to take jobs from those American hurricane victims:
http://katrinacoverage.com/2005/10/08/new-orleans-jobs-and-federal-funding-scandal.html
Rather than supporting his fellow citizens in their time of need, Reid supported the Mexican citizens who took their jobs.
Whatever his possible shady dealings, for that reason alone Harry Reid should step down. He is simply not qualified to represent U.S. citizens. |
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Just One Minute posters have been doing a major analysis over the last 12 days of all the amazing tie ins of all the expages involved in the Foley scandal with a lot of documented detail and doing a good job of connecting the dots.
Recommed reading of all the posts at JOM related to the investigation. |
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The public wants to know... |
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