The Free Lance has learned that the San Benito County Financing
Corp. did not file due tax returns from 1999
–2003.
And a private investigator also claims the agency has been
mismanaged and should change its status from nonprofit to profit
because it generates income from two businesses.
The Financing Corp. is an agency that serves to streamline
financing for the county
– while saving it money in the process. Such mechanisms are
common in county governments, according to officials.
The Free Lance has learned that the San Benito County Financing Corp. did not file due tax returns from 1999–2003.
And a private investigator also claims the agency has been mismanaged and should change its status from nonprofit to profit because it generates income from two businesses.
The Financing Corp. is an agency that serves to streamline financing for the county – while saving it money in the process. Such mechanisms are common in county governments, according to officials.
Investigator Dave Henderson and his lawyer Michael Pekin are questioning the county’s management of its corporation. Henderson has been examining the issue as part of a broader investigation into alleged corruption.
Their allegations of wrongful tax practices are also part of an ongoing civil case against county government officials.
The county Financing Corp. owns a building at 321 San Felipe Road that houses several county departments, along with two private tenants – Miyako Japanese Restaurant and Donuts and Deli.
The Financing Corp. bought the building in 1999 for $895,000, and the county lent the money for that purchase. All its tenants were asked to leave, aside from the two businesses.
Pekin has requested a paper trail of the corporation’s profits, and that the county pay taxes as a “for–profit” agency because it has generated income from those businesses.
Interview requests for this story with current County Administrative Officer Terrence May and Treasurer Mary Lou Andrade were referred to the county’s hired lawyer Nancy Miller.
Miller contended there has been no need to change the status from nonprofit to profit. It is unnecessary, she said, because the Financing Corp. plans to eventually take over the entire building for public use. She was unsure of a timeline for that, though.
If the county did not plan to do that, Miller said, the Financing Corp. would likely have to pay income taxes as a for-profit agency.
“And the county’s intent is to eventually turn it into a public use,” she said.
But the county has known about the tax problems since at least September 2000, according to a memo dated Sept. 28 of that year. It was sent from May, then the finance director, to Andrade and then CAO Lee Williams.
In it – more than two years after inception of the corporation – he explained a property manager was needed to oversee the corporation’s “cash stream,” and an accountant was needed to file tax forms with local, state and federal taxing agencies.
“Now that the SBCFC has assets and income,” he stated in the memo, “tax reporting is no longer a simple matter of putting a lot of zeros on returns and attaching a statement that we have nothing to report.”
As early as 1999, the Financing Corp. was earning much more a month than was needed to pay back a 20-year loan to the county, according to an internal memo obtained by the Free Lance.
In that undated letter from the CAO to Supervisor Richard Scagliotti, he wrote of total rent each month, “It would net us nearly $5,000 over what’s needed to pay off the loan over 20 years, so that could accelerate the payment schedule.”
Miller admitted the county erred in failing to file state and federal taxes. And officials corrected the problem by filing them in October 2003.
Miller acknowledged Thursday there were internal accounting issues that led to the county’s failure to file tax returns. But she said, “to my knowledge,” no laws have been broken. And a lawsuit was not warranted, she said.
“They were given, I don’t want to say bad advice,” Miller said. “As soon as they found out they had to file the returns, they filed them.”
Miller also said all the rental payments from 1999 until now have been accounted. And Henderson’s investigation had nothing to do with the county’s actions, she said.
Pekin doesn’t buy that, though. He said the county filed those tax returns only because of Henderson’s presence – as Henderson had recently requested documents and had begun investigating the issue.
“There just can’t be any doubt about it,” Pekin said of the correlation.
Henderson started examining the Financing Corp. at about the same time the county obtained advice on the issue from local accountant Tom Harlow.
In an Aug. 6, 2003 letter to Andrade, Harlow wrote the Financing Corp. had to file tax returns for 1999-2002. The county then hired him to prepare the statements.
In the letter, Harlow also pointed out the Financing Corp. never applied for “tax exempt” status with the federal Internal Revenue Service.
That is necessary to avert paying levies on income earned for “public benefit.” Such functions include providing financial assistance to the county and improving public facilities.
The Financing Corp. has maintained that tax exempt status with the state Franchise Tax Board since 1998. It is now applying for it with the IRS, according to Miller.
Pekin said Thursday he’s more concerned about management of the corporation than whether it owes taxes.
Several internal memos obtained by the Free Lance show there were problems – at times – tracking whether rental payments had been made, and where to.
A memo dated Sept. 10, 2001 from accounting manager Pamela Beale to then CAO Gil Solorio stated the Financing Corp.’s monthly payments of $7,100 to the county – for a loan to buy the San Felipe Road building – had not been paid.
“To date no repayment has been booked,” Beale wrote.
In an April 2001 memo, Solorio asked Marilyn Coppola, director of Health and Human Services, why the CAO’s Office had not received her department’s $4,125 monthly payments. Solorio wrote he had not received any of those since October 2000.
“There’s no question there are some issues that should have been taken care of, that weren’t,” Miller said.
Other county departments that have occupied the building include Family Support Services and Child Protective Services, according to Miller.
Miller said the county – in hiring Harlow – has corrected past accounting errors. Problems shown in those two memos, which she called “minor issues,” have been fixed, she said.
Plus, she said, “I’m not sure on those memos, whether those memos were accurate or not.”
But Pekin and Henderson are pushing for a more detailed explanation – a paper trail report of some kind.
And Miller is trying to prevent that.
In documents filed in the San Benito County Superior Court, she contended the suit’s plaintiff – resident Juan Monteon – “has no standing to enforce state or federal tax laws.” Regardless, she goes on, the corporation has complied with state and federal laws.
“Does she really mean to tell the county taxpayers,” Pekin said, “they have no business inquiring in the finances of the San Benito County Financing Corporation?”
