Tuesday, October 17, 2006

Legal Entities and Land Deals

I don’t know why, but I rarely actually blog about CPA stuff or use my tax knowledge for any blogging purpose.  But I thought I would step into this Harry Reid – LLC business and give some of my personal opinion on the matter (though nothing in this post should be considered my professional opinion).  And if you don’t already know what I’m talking about, I’m not going to repeat it here; so you’ll have to go elsewhere and read up on the basic facts.  I’ll wait.

First off: Yes, Reid shouldn’t have reported that he personally owned land that he had transferred to an LLC.  But that’s really not such a big deal.  I’ve been dealing with small businesses and whatnot for a long enough time to know that most business people really don’t care about this stuff.  They don’t know why they have to use LLC’s and S-Corporations and whatnot to do business, and see it as a sort of scam by the legal and accounting cabal to get their money.  

It all makes sense, and they do it because it helps them for tax purposes, as well as shielding them from personal liability, but they don’t know why they’re doing it and get bugged by all the details and questions I have to ask when they’re doing this stuff.  There’s nothing scammy about it, but they consider the business to be theirs, and everything the business owns, they own.  And that just makes sense.

And the real problem here is that the AP reporter and the conservatives bitching about Reid don’t understand what the hell they’re talking about.  They’re trying to pin-point some sort of scandal, as if Reid sold land to a company for nothing and then somehow benefited because people didn’t know that he was really owning the land.  And if there was some reason why he needed to pretend to not own land that he really did, that would make sense.  Like if he was passing legislation that benefited the land deal and didn’t want anyone to know about it.  But that’s not the case.  People set-up LLC’s all the time and transfer assets to them, and it’s not a big deal.

And the fact that Reid was continuing to report himself as the owner of the land totally puts the lie to that.  Again, this would be scandalous if he was pretending to not own something that he really did own.  But this is the opposite.  That he was pretending to own land that he technically didn’t own…but he really sort of did.  Perhaps this is shocking to some, but when a person transfers property to a company they own, they often consider the property to still be theirs.  As I said, they see LLC’s and whatnot as mere formalities that CPA’s and lawyers force them to go through, and that really is what they are.  

Because Reid really did own that land.  And for tax purposes, he’s personally liable for paying the taxes on that land sale, even if he didn’t see any of the money.  The money could have been kept in the business for further land purchases.  Or it could have been eaten up by expenses.  But for tax purposes, that sale was his sale; not the company’s.  The LLC wasn’t going to be taxed on it, Reid would be.  And so would his partner.  And the fact that he took his money out of the company isn’t a big deal.  Again, this kind of stuff happens all the time, and is the way that non-accounting people do it.

And then there’s the issue of the AP reporter referring to Reid’s transfer of assets as a “sale” to the LLC.  That is entirely wrong, even by technical standards.  It was a contribution to the company in exchange for membership into the LLC.  And that’s how it’s done.  As someone on Glenn Greenwald’s commentboard mentioned, had Reid given $400k to the LLC so that it could purchase the land itself, no one would consider him to be selling the cash.  That would be called a contribution, and transferring the land to the LLC is no different.  And that is the technical and legal understanding of that transaction, which the AP reporter ignored in order to make this seem scandalous.

And again, he should have reported it differently.  But the fact that he was actually claiming stronger ownership then he really had is really a huge difference.  And as I said, all of my clients consider their corporations, partnerships, and LLC’s to be personally owned by them anyway; and everything the business owns, they consider to be owned by them personally (though that’s not to say that they use the assets for non-business purposes).  This isn’t the same as owning stock in Exxon, and if they could get the same benefits without setting up these legal entities, they would.  But the business world insists on forming these entities and laymen do the best they can to keep track of it.

And as a final note, all of this is totally a sham anyway.  That AP reporter has shown that he’s out to pin something on Reid, even if he has to manufacture it himself; and the Republicans are just desperate to find Dems to smear for the corruption that is clearly endemic in their system.  I only posted this long defense of the transaction because I haven’t been posting frequently enough and needed something to say.  

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