A Closer Look at Congressman Rangel’s Tax Problems

Still to follow: Part II, Timothy Geitner. Part III, Tom Daschle. Part IV, Nancy Killifer. Part V, Sarah Palin.

Congressman Charles Rangel has served continuously in the House of Representatives since 1971. He has been a member of the House Committee on Ways and Means for over 30 years. In January 2007 he ascended to the chair of the House Committee on Ways and Means.In August of 2008, the New York Post, acting on a tip from one of the Congressman’s political enemies, reported on its investigation of the Congressman’s ownership of Caribbean rental property. The report noted the Congressman’s ownership of a beach villa in the Dominican Republic and his failure to report rental income on the property.

Speaking publicly on September 10, 2008, the Congressman admitted he failed to report rental income from the property for a period of 20 years. A lawyer representing him at the time, Lanny Davis, told the New York Times that the amount of unreported income was $75,000. Rangel himself said the amount was less than $5000 per year over a period of 20 years.

Both the Congressman and Mr. Davis portrayed the non-reporting of income as an error in understanding the tax laws, and made statements minimizing the potential liability. The Congressman at first said that “there was no income” because rental proceeds were used to offset interest on his mortgage payments, so that he received no cash until 2008. As the Congressman later explained, “While I now know is that although I had not personally received proceeds in the cash, the fact that in the reduction to the mortgage actually counted as income and should have been reported as such (sic).”

It’s not credible that a senior architect of US tax laws could have been unaware that reinvesting rental proceeds “counts as income” even though he received no cash.

While the US taxes its citizens and residents on their worldwide income, the Congressman would have been aware that the overseas rental income would not have been subject to 3rd party reporting to the IRS, that IRS could not discover the transactions through an audit of the company’s records, and that a federal audit of his own returns may not have discovered the income, since no cash entered his bank accounts. It’s appropriate to view Congressman Rangel’s non-reporting of income in light of these facts. While this doesn’t imply that the Congressman deliberately structured his foreign investment to avoid US tax, it may partly explain his nonchalance about reporting the income and paying his liabilities.

Mr. Davis told the New York Times that the Congressman’s accountant believed that Congressman Rangel would not owe federal taxes on the unreported income because the income would be offset by a deduction for depreciation and a credit for the taxes the resort owner paid to the Dominican government on the rental income. This is not a credible explanation for failing to report income.

Real property used for rental is depreciated over 39 years. Congressman Rangel bought the Caribbean realty in 1988 for $82,750. Depreciating his cost basis would yield annual deductions of about $2100. His depreciation deductions would be higher if he spent money to improve the property. He would also have incurred expenses of maintaining and managing the property. It’s possible these deductions could have offset any rental income on the property but for two problems.

First, while the Congressman says there is less than $5000 of unreported income per year over 20 years, the Post reported that a reservations manager at the property said that the Congressman’s villa rents for $1100/night in the busy season and is “always booked solid… between December 15 and April 15.” If true, that would be more than $130,000 of rental income per year, excluding income from the off-season, where the property reportedly rents for only $500/night and may not be booked solid. Depreciation and other deductions are not likely to offset this kind of income.

Second, even if there is not a lot of income from the property, to obtain the benefit of depreciation and other deductions, the income from the property would have to be reported on federal income tax returns, and the deductions would have to be claimed on those returns.

Similarly, to get the benefit of U.S. tax credit for taxes paid to the Dominican Republic, the income would have to be reported on U.S. income tax returns and credit claimed on the returns. Assuming Congressman Rangel is taxed as a resident in New York state, he is liable for New York state tax on his worldwide income. New York does not provide a tax credit for taxes paid to foreign jurisdictions (except provinces of Canada).

The Congressman’s public statements about the matter on September 10, 2008 shed little light on the facts and have been astonishingly insincere both in their tone and content. His apology for not reporting income went like this: “I regret any embarrassment to my fellow members of Congress and colleagues on the Ways and Means Committee that may have been caused by unfair and inaccurate reports… concerning my handling of details of my personal finances related to my interest in the vacation home in the Dominican Republic” (emphasis added). He later explained that his love of his country, his own personal morals, and his devotion to the Congress of the United States prevent him from doing anything that would damage the reputation of Congress. Judge his demeanor for yourself. The video can be seen here: http://www.youtube.com/watch?v=C3qjP4UHRz8&feature=player_embedded

Taxes are a legal, not a moral, obligation. Handling them correctly is part of good business practice. To survive as a high-profile, seasoned political warrior, you need to handle your taxes as accurately as possible. To handle them badly, especially when you’re in high command of U.S. tax laws, demonstrates arrogance and bad judgment.Every career politician should work with a competent tax preparer and consider engaging a tax attorney to exercise full authority over the preparation process. That level of professional oversight assures the most accurate returns possible. In the event of errors, it demonstrates seriousness about getting things right.

On the other hand, we should separate ourselves from attacks on the Congressman that are unfair. For example, the Congressman has been “accused” of occupying one or more rent-stabilized apartments in Harlem. New York law may subject his apartment to deregulation if the legal regulated rent and the Congressman’s income meet certain legal thresholds. The law may also allow his landlord to bring eviction proceedings against him for non-primary residence. But there is nothing unlawful or wrong about occupying the apartment and getting a great deal on rent. The apartment doesn’t belong to the public, it belongs to his landlord. His landlord doesn’t have to evict him or raise his rent if he doesn’t want to.

Moreover, any difference between the rent the Congressman pays and the fair market rent that is not part of a business deal is not taxable as income under our laws. And without a personal relationship with the landlord, it’s not obvious that the landlord’s forbearance would be a gift that would violate House rules against accepting gifts excess of $100, much less that the occupation of the apartments was dishonorable and “brought discredit to the House,” as a proposed resolution submitted by Congressman John Boehner put it. The Congressman has also been attacked because the congressional car he uses at Taxpayers’ expense is a Cadillac, apparently because a Cadillac is a big expensive car and “Americans are suffering.” We should all reject this sort of partisan and populist nonsense.

The tax and gift questions are being investigated by the House Ethics Committee, as well as other matters.

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Notes:

A draft of this article was first submitted to Lanny Davis, Esq., the attorney who represented Congressman Rangel after the New York Post article broke the news that there might be unreported income. The full text of the email we sent to Mr. Davis follows:

re: Congressman Charles Rangel

Dear Mr. Davis:

I intend to publish the attached article on my blog. Please let me know if you have any corrections or comments. If I do not hear from you by close of business Thursday August 13, I will publish the article as it is without your corrections or comments. I will consider publishing any opinion or comment you or your client may wish to make.

Thank you.

Yours,

Ronny Buni

–
The Law Offices of Ronny Buni,
A Professional Corporation
817 Broadway, 5th Floor
New York, NY 10003

www.bunilaw.com

telno. 212-257-6109
fax 866-704-9136

Mr. Davis responded almost instantly, saying, “I will not read your article nor do I respond to threatening emails such as this.” He went on to say that he no longer represents the Congressman.

A draft of the article was also submitted to Congressman Rangel’s offices. Changes were made based on comments from his spokesman.

Despite our views expressed above, Congressman Rangel has more than 30 years of distinguished public service. On a personal level we wish him well in handling this and other controversies.