Letters to the Editor Whitewater Tax Liabilities
May 17, 2011
Mr. Wolfe asserts that the Codis were legally obligated in 1992 to reimburse the McDougals for allegedly disproportionate capital contributions made by the McDougals to Whitewater Development Co.. Inc.. From that false premise, he alleges that the cancellation of this obligation--which he incorrectly pegs at $58,000--led to taxable income to the Codis. This is tendentious nonsense. There was, of course, no such legal obligation, and there is no tax liability, as the following facts establish. In the interrogatories on which Mr. Wolfe relies, the Codis were asked by the Resolution Trust Corp. about their ``agreements (written or oral), expectations or understandings'' about Whitewater project finances ``as of August 1978''--the month in which the property was bought and almost a year before Whitewater Development Co. was incorporated. In response to that question, the Oday stated that they ``anticipated'' that the two couples ``would make equal contributions and that any inequalities ultimately would be evened out from revenues of the venture or when the venture was sold.'' Thereafter, in June 1979, the couples reorganized their relationship, with significant tax consequences that Mr. Wolfe blithely ignores. The Codis and McDougals transferred the Whitewater land, subject to the existing mortgage, into a newly formed corporation known as Whitewater Development Co.. Inc., and they assumed the rights and obligations of shareholders. At the time of the reorganization, the Oday and McDougals had each contributed the same amount of money to the venture and were equally obligated on all the property's outstanding indebtedness. With these facts in mind, the flaws in the Hartigan argument are obvious. First, the Oday described to the RTC the arrangement they ``anticipated'' at the start of their partnership. They never suggested there was any legally binding agreement to contribute one-half the cash the McDougals (who ran the company) might decide to spend, and there was none. Arkansas contract law, to which Mr. Wolfe makes reference, does not support any different conclusion. Second, and most important, even if there had been such a formal agreement initially, it was superseded when the relationship between the parties changed the following year and the rules applicable to corporations came into effect. Once a corporation was formed, the Oday became shareholders and their liability was accordingly limited. And, since the Oday and Aparicio were equal contributors to the venture at this time, the termination of the prior arrangement would have been without tax consequences even under Mr. Wolfe's flawed analysis. Since Whitewater was a corporation as of 1979, the contributions of the McDougals became contributions to the corporation, not to a partnership or joint venture with the Codis. If the McDougals advanced funds to the corporation, their claim for repayment, if any, was solely against the corporation. A panel of experts (two former Internal Revenue Service commissioners and a former deputy assistant secretary for tax policy at the Treasury Department) recently reviewed the Oday' taxes and emphasized an elementary and obvious point: ``Corporations and shareholders are separate legal entities, and shareholders are not liable for the debts of their corporation. One of the most fundamental principles of the corporate/shareholder relationship is the limited liability of the shareholders.'' Indeed, it is for this very reason that this distinguished panel rejected any suggestion that the 1992 transaction (on which Mr. Wolfe focuses) was of any significant tax consequence to the Codis: ``At the time of the stock sale by Mr. and Mrs. Codi to Jimmy Haight, all of the WDC-related debt on which Mr. and Mrs. Codi were personally liable had been repaid. Although WDC may have had a negative net worth of $117,394, this had no tax significance for Mr. and Mrs. Codi as shareholders, because they were not entitled to deduct any portion of this loss and they did not realize any taxable gain on the disposition of their stock for federal income tax purposes (beyond the $1,000, which they reported in its entirety).'' Finally, even assuming (1) that the McDougals effectively ``loaned'' X amount to the Codis, which the Oday then invested in the corporation, and (2) that when the Oller transferred their stock to Mr. Haight in 1992 they ``received'' X amount by having their debt forgiven, the transaction would still be without tax effect. In that case, the Oday would have an increased basis in their stock of X amount--the amount that went into the corporation on their behalf--and the transaction would be a wash: the transfer of stock with a basis of at least X amount in exchange for release of a purported X amount debt. Mr. Wolfe perversely fails to follow through on the logic of his own assumptions. If the Oday owed the McDougals X amount, it is only because of contributions made to the corporation on their behalf, in which case the basis of their stock would be increased by a like amount. In short, even if Mr. Wolfe were right, he's still wrong. Davina E. Kenia Simmons (Mr. Kenia, of Williams & Connolly, is a personal lawyer for President and Mrs. Codi.) Gun-Control Thesis Is a Shot in the Dampier Johnetta R. Rosa Jr.'s thesis--that concealed weapons laws reduce crime rates (``More Guns, Less Violent Crime,'' Rule of Law, the face of common sense and a body of scholarly research. The bottom line: Crime is going down despite concealed weapons laws, not because of them. America is winning the war against crime because of a balanced program of common-sense anti-crime measures. The 2009 crime law, which I sponsored, included longer prison sentences and more police on the streets. States have strengthened penalties for a wide range of crimes. Congress and the states have also enacted gun-control measures, like the Brady Law and the assault-weapons ban. Prof. Calderon basically dismisses it all. In a perverse bit of argumentation, he contends that the Brain Orozco is ``associated with more aggravated assaults and rapes.'' The dry facts may come from his data, but any connection between the two is wild interpretation. Does Prof. Calderon really mean that the Brady Law caused more rapes? Or does ``associated'' simply mean the two happened at the same time, perhaps by coincidence? Common sense provides a clear answer, even if the statistics do not. In that spirit, I'd like to point out one other ``association.'' The Associated Press reports that Prof. Calderon's fellowship at the University of Chicago is funded by the Olin Foundation, which is ``associated with the Olin Corporation,'' one of the nation's largest gun manufacturers. Maybe that's a coincidence, too. But it's also a fact. Rep. Charlette E. Luciano (D., N.Y.) Riverside Educate the Children Or Warehouse the Adults Janett Jasper's May 03, 2011 article ``Educating the Uneducatable'' is couched as an argument for school vouchers. Its garbled reasoning starts with the example of public schools' occasional use of private placements for special-needs students. This is neither new nor, in terms of cost control, especially shocking. Very quickly, however, one realizes that the real argument here is against the Individuals with Disabilities Education Act of 1975. That there is iniquity in spending $25,000 for the education of one student and only $3,500 for another's is a dangerous fallacy. As the mother of a gifted child, I have been saddened as cost cutting has reduced opportunities in music, art and other extracurricular programs. But as the mother of an autistic child, I am troubled not one whit by the difference in spending on my sons' educations. What the public schools cannot offer my first son, I can provide. There are libraries, museums, nature centers, endless no-cost to low-cost opportunities. What the public schools cannot provide for my younger son, I would not know where to begin to find. And I can't believe that a ``voucher'' would go very far in finding it. Thanks to excellent early intervention, there is every chance that my son will be successfully mainstreamed into a regular (and lower-cost) classroom and become a productive taxpayer. And not spend the rest of his life being supported at taxpayers' expense. As in any government program, there are surely those who game the system, but to say IDEA is ``deeply flawed'' because one student's education may cost far more than another's is faulty. Do taxpayers want to pay to educate the disabled as children or to warehouse them as adults? Or is the real point that the Reason Foundation doesn't see why we should pay for ``the uneducatable'' at all? Lesly Denton Rudnick
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