Sunday, August 13, 2006


IRC Section 1033 allows a taxpayer two years to reinvest the proceeds of a sale of property sold under "condemnation or threat or imminence thereof" without having to recognize any gain on the initial sale. However, there has to be an actual threat of condemnation. As the Tax Court said in Rainer Co., Inc. v. Commissioner, 61 T.C. 68 (1973):
It is a well-known fact that local governments possess the power to condemn property for use in public projects. Accordingly, if mere knowledge that a local government entity possessed the power to condemn an owner's property was sufficient evidence of a threat of condemnation, then few sales of land to the public would fail to qualify under section 1033.
This is a lesson that seems to have been lost on U.S. Rep. Gary Miller (R. CA). As reported today in the LAT (free registration required), Rep. Miller rolled over the profits from real estate sales not once, but twice, even though he faced no actual threat of condemnation of any of the properties involved.

In 2002, he "sold 165 acres to the city of Monrovia [and] made a profit of more than $10 million." But "Monrovia officials say that Miller sold the land willingly and that they didn't threaten to force him to sell." While Miller claims that the sale was made under threat of condemnation, that was simply not possible since "the city could not have used eminent domain to purchase Miller's property, because it was acquiring the undeveloped hillside land for a wilderness preserve using state funding that specifically prohibited forced sales." Indeed, it appears quite clear that Miller was chasing the city to purchase the property, not the other way around:
A videotape of a February 2000 City Council meeting, packed with people pushing the city to protect the hillside, shows Miller pleading with city officials four times to buy his land.

"Why don't you buy my property? I've asked you repeatedly," Miller said.
Apparently, Miller is a bit of a one-trick pony, since:
[T]wo years after the Monrovia sale, [Miller] raced to beat his extended deadline of Dec. 31, 2004, for reinvesting the profits. On Dec. 28, he reinvested some of the profits by purchasing 10 lots for about $5 million near the expanded 210 Freeway in Fontana, a building in Fontana for $1.3 million and five acres in Rancho Cucamonga worth about $2 million. He bought the properties from Lewis Operating Corp., a major Inland Empire developer and one of Miller's largest campaign contributors.

Miller took an exemption again when he sold the 10 lots to the city of Fontana in 2005 and again when he sold the building to Fontana this year, claiming both were compulsory sales.

But records and interviews in Fontana show that those sales were not compulsory.
It appears that Miller worked hard, but unsuccessfully, to "paper" the second set of transactions to make it appear as if he was selling under threat of condemnation:
To bolster his case that the sale was forced, Miller also asked the city for "a letter that talked about eminent domain," said Ray Bragg, the city's redevelopment director.
Ultimately, Miller received a letter signed by City Manager Kenneth R. Hunt, that notes that the "redevelopment plan for this project area does not currently authorize the use of eminent domain."

Clark Alsop, the lead attorney representing the jurisdiction, stated that:
"It's pretty clear to me that the city cannot make a representation to the IRS that this is property being taken under the threat of eminent domain and therefore this person deserves a tax break."
And, of course, the taxpayer involved should not make a representation, under penalties of perjury, that income from the proceeds of a sale is subject to Section 1033 when that's not the case. Congressman Miller apparently did this not once, but twice.


I subsequently did some further research on Rep. Miller. It appears that I was unfair to him when I labeled him a "one-trick pony." According to The Hill, Rep. Miller is currently being investigated for violations of House ethics rules for borrowing $7.5 Million from "a campaign contributor and business partner . . . which he used to purchase real estate from" the business partner's company.

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