December 20, 2006

Georgia Governor's Capital Gains Hijinks

From the "Too Incomprehensible to Ever Become a Real Scandal" Department:

Georgia Governor Sonny Perdue is facing criticism over allegations that he avoided paying over $300,000 in federal income taxes by engaging in a shady land deal. On its face, the deal seems legit-- but the Atlanta Journal Constitution is asking questions about whether there's more to the story.

Here's the story, in brief. Governor Perdue inherited a Georgia property from his father. He sold it for about $2 million-- a sale that would have resulted in about $300,000 in federal income taxes under the special low 15 percent capital gains tax rate. But federal income tax laws say that you don't have to pay capital gains taxes on property sales if you reinvest your gains in another property of equal or greater value within 180 days of the sale.

And this is exactly what Perdue did, at least on the surface. He waited 179 days to reinvest the $2 million (that is, one day before the 180-day deadline), but ended up spending a bit over $2 million on a property in Florida. This swap absolutely conforms, on the surface, to the letter of the law.

But the folks at the Journal Constitution did a little poking around and found that in fact, the Florida land Perdue had bought was worth a lot less than the $2 million he paid for it. The property was most recently assessed at $187,000, and is largely swamp land right next to a toll road.

This doesn't make Perdue's transaction seem illegal-- it just makes it seem crazy. Why would he spend $2 million on a property that was worth just a fraction of that?

The county assessor in Osceola County, Florida, where Perdue's new swampland retreat is located, has a theory:

Based on the purchase price, Atlee Mercer, the county tax appraiser for Osceola County, Fla., where Perdue's property is located, said he believes the sale was probably not an arm's-length transaction, meaning that other considerations were part of the deal.
"This was a transaction in preparation for some future transaction," said Mercer, who based his opinion on his experience assessing land values. He was not privy to negotiations between Perdue and Thomas.
In fast-growing central Florida, Mercer noted, land deals for development sometimes involve seemingly unrelated transactions among the parties, where assets are swapped or side-deals are negotiated so that "everyone ends up whole at the back
"I think that's why there is some kind of quid pro quo going on here, to either repair an old harm or establish a future benefit," said Mercer, a former Republican commissioner for Osceola County who was appointed county tax appraiser by Gov. Jeb Bush. "He paid too much money for the land."

In other words, Mercer thinks that Perdue took a $2 million bath on this property either because he expects to get the money back at some point, or because he was repaying a previously incurred debt of some kind. If either explanation it's true, it's a tax dodge, plain and simple.

This is, of course, the uninformed speculation of a guy who has no idea what's in Perdue's head. It's totally conceivable that Perdue is simply gambling that this land will be a good investment in the long run, or that he has purely personal reasons for wanting the land that he doesn't feel like he has to defend publicly. But it doesn't sound good. And, as the AJC notes, if it turns out he intentionally overpaid for a property he knew was less than $2 million, that's illegal.

If this story ever develops beyond mere speculation, you'll read about it right here.


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