D.C. Attorney General Irvin Nathan says the city’s chief financial officer changed how the District was collecting a commercial real estate tax six years after if it was passed, potentially leaving millions of dollars in revenue uncollected. And in addition to missing out on tax dollars, the AG’s findings could leave the city facing multi-million dollar lawsuits from businesses that paid the tax before the rules were changed, a real estate attorney said.
Questions around how the city implemented a 2001 tax law change to collect new revenue from refinanced commercial real estate mortgages were first raised earlier this year by a group of attorneys who said the city had missed out on hundreds of millions of dollars.
Nathan’s strongly worded letter was aimed at Councilmembers David Catania and Mary Cheh, telling them to back off with their questions about the tax collections. But he also said Chief Financial Officer Natwar Gandhi changed how the city collected the tax in 2007. Companies that paid the tax before that date would have paid more than companies after it, according to Nathan’s letter.
“This opens the city up to millions of dollars in liability,” said Jeffrey Mitchell, one of the attorneys who first raised questions about the city’s collecting of the tax. He added, “If this is the official position of the District of Columbia, I absolutely think you will see real estate lawyers seeking clients to try and recoup the money that was paid.”
Nathan’s office did not respond to a request for comment. A spokesman for the Gandhi declined to comment.
When Mitchell first approached the city in January, he was looking for a contract to audit the tax office to see if the city had missed out on hundreds of millions of tax dollars on refinanced commercial mortgages. According to Micthell, a 2001 law required the city to tax the entire amount of the original mortgage. His initial belief was that the city had only taxed the refinanced portion of the mortgage for more than a decade. In his letter on Friday, though, Nathan said Gandhi had taxed the entire mortgage from 2001-2007, and then reinterpreted the law and only taxed the refinanced portion thereafter.
Nathan said Gandhi’s application of the law is legal.
“Whichever way this issue is conceptualized,” Nathan wrote, “I continue to believe there is not sufficient basis to conclude that the CFO’s current policy and practice of applying the recordation tax in this way are unreasonable or unlawful.
