Suit Accuses Builders Group Of Devising Ploy to Cut Taxesby Sandra Fleishman, Washington Post |
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The trade association that represents the nation's home builders wanted to use questionable transactions to attempt to minimize taxes, the former top executive of its research subsidiary claims in a recent lawsuit. Liza K. Bowles, who ran the National Association of Home Builders Research Center for 10 years and worked there for 19 filed suit in Prince George's County Circuit Court this month against the center, alleging that she was forced out of her job in September because she wouldn't go along with what legal and financial advisers told her was a possibly illegal financial arrangement between the center and its parent, the National Association of Home Builders.
Bowles has filed a similar suit against the association in the District. Both suits ask for $9 million in compensatory and punitive damages. Representatives of the association and the center reused to comment on pending litigation but disputed some of the accusations. The center, in Upper Marlboro, was created in 1964 as a wholly owned taxable subsidiary of the District-based association. Builders, government agencies and manufacturers contract with the center for specific studies. It was set up to be independent of the construction industry, and last (year generated $13 million in research work. The Department of Housing and Urban Development and the Defense Department, with its huge, aging military housing inventory, are major customers.
The NAHB, the parent group, is a major tax-exempt political force, representing more than 205,000 residential building and remodeling industry members. According to Bowles's lawsuits, beginning in 2001 the NAHB "experienced significant economic stresses, placing it out of compliance with covenants in its bank loans." Bowles's lawyer, Debra S. Katz, said the "stresses" were the result of the NAHB's expansion of its downtown headquarters. The NAHB began to seek ways to reduce the research center's tax bills while "maximizing its ability to generate revenue for itself," according to the suits. The parent group decided in November 2001, according to the suits, that it wanted to charge the research center a $639,000 royalty fee for the use of its name. The NAHB also decided that it wanted to charge the center for other expenses, which the suits characterized as "fictitious" or "fraudulent."
Together, the royalty fee and expenses would come to about $1 million a year. The NAHB could shelter that money from taxes that the research center would otherwise have to pay on it, according to the suits.
Bowles alleges that the NAHB forced the center to accept the royalty fee agreement for trademark rights the center already owned. The suits quote members of the center's board of directors as saying the royalty agreement was "ridiculous on its face," "a tax gimmick" and "phony."
Bowles says that she was advised by the center's lawyer and accountants that she should not sign the royalty agreement and that the IRS was likely to view the deal "as a fraudulent attempt to evade taxes."
That's the whole issue," Katz said. "You can't just do whatever you want-different entities have different tax treatments."
Royalty agreements between for-profit and nonprofit groups exist, but IRS rules say the charges have to be ordinary and necessary business expenses. "It has to be reasonable," said Milton Cerny, a former IRS staffer who is now a tax lawyer and is not involved with the NAHB case.
Bowles claims the center, "at NAHB's behest," refused to pay her a year's severance of $225,000, vacation pay and other compensation that it had agreed to pay her. Originally, the center's board had approved that payment, and then stopped payment on the check, according to the suits. Three of Bowles's vice presidents who lost their jobs around the same time are suing in a separate action. In addition, board Chairman J. Roger Glunt, as well as the vice chairman and the past chairman of the center's executive committee, were removed from the executive committee after the dispute, according to Glunt, a Pittsburgh developer. He declined to comment on the situation other than to say that "there was a difference of opinion" over the NAHB's financial plans.
The NAHB's chief executive, Gerald M. Howard, said the association does not comment on pending litigation. Peter W. Segal, a lawyer at Powell, Goldstein, Frazier & Murphy LLP who took over as the research center's lawyer just before Bowles left, said the center also could not comment. His law firm drafted the royalty agreement for the NAHB, according to the complaints.
Howard denied in an interview that the association has money problems. "It's ludicrous for anybody to say that we're in financial trouble," he said. "You can go out and look at the building we just renovated - It's worth between $50 million and $70 million."
He also said the group's tax returns "show we are very solid." He disputed the contention in the suit that the NAHB was "out of compliance with covenants in its bank loans that required it to maintain minimum levels of reserves."
The NAHB, he said, chose an unsecured loan rather than take a mortgage when it financed the construction and "has never been late" on repaying. But because "most of our reserves are invested in the stock market," reserves have fallen.
"The Bank of America has never called the loan, "and has been negotiating with us oil the terms" to develop an agreement "that we can live with and that they can live with," he said. Michael Luzier, the NAHB's senior staff vice president for regulatory affairs, was named president of the research center in early December. Robert Arquilla, a builder from Hazel Crest, M., replaced Glunt as head of the research center's board.
Luzier said the center has signed the name-licensing agreement.
