By pleading guilty to tax fraud and possession of stolen property, Samuels avoided jail time, however he must serve five years of probation. In addition, he is banned for life from Citi Field (Mets home field) and the spring-training complex in Port St. Lucie. Even though none of the memorabilia was sold, Samuels still had over $2 million in assets that he should have reported in order to avoid tax fraud. Furthermore, he also failed to pay taxes on approximately $204,000 on tips he received from Mets players. As part of the plea deal, Samuels must pay the Mets $25,000 in restitution and the city and state #34,000 in back taxes.

Moral of the story? When given a dream job, do not take it for granted by capitalizing on illegal opportunities. Charles Samuels was put in a position where one’s financial and legal responsibilities must be upheld everyday, yet he failed spectacularly in both duties.

The attorneys of JDKatz, P.C. have extensive experience in dealing with tax fraud. Do not hesitate to call us at 301-913-2948.

Every year the IRS issues a “dirty dozen” common tax scams that many taxpayers have encountered over time.  When filing tax returns, it is always important to remain cautious and aware of the wide range of schemes that can greatly hinder your financial security. The following list of scams can occur accidentally or purposely, however, the only way to protect yourself is to be aware and conscientious of these situations:

1) Identity Theft –perhaps the most common scam – thieves that use a taxpayer’s identity and personal information to claim a fraudulent refund

2) Phishing – unsolicited e-mail or a fake website that encourages taxpayers to provide their personal information for a “tax return” NOTE: The IRS NEVER E-MAILS taxpayers

3) Return Preparer Fraud – suspecting tax preparers have been known to charge inflated fees by promising inflated refunds, take a portion of the taxpayer’s refund as compensation, and add forms that you have never filed before. Every tax preparer should have a Preparer Tax Identification Number and you should always review your return prior to submitting it to the IRS

4) Hiding Income Offshore – every taxpayer must report financial accounts abroad, regardless of where or how the money is used

5)  “Free Money’ from IRS & Tax Scams involving Social Security – flyers and advertisements saying there is free money from the IRS by filing a return with little to no documentation. These scams prey on the elderly and low-income individuals. Do not trust a flyer or non-professional individual with your finances.

6) False/Inflated Income and Expenses – entering an inflated income to earn more credits is a highly used scam among taxpayers. These intentional mistakes are easily recognized and the taxpayer must pay interest and penalties on those errors.

7) False Form 1099 Refund Claims – sometimes taxpayers knowingly submit a Form 1099 Original Issue Discount to claim a false refund. You could face criminal prosecution if this form is submitted without any justification.

8) Frivolous Arguments – promoters encourage taxpayers to make outrageous and unreasonable claims against paying taxes they owe. Every tax liability can be contested in court, however, you cannot disobey the law.

9) Falsely Claiming Zero Wages – typically a “corrected” Form 1099 or Form 4852 (substitute W-2) are used to improperly reduce income. If you have a W-2, you must submit your exact income, or you could potentially face a $5000 penalty.

10) Abuse of Charitable Organizations and Deductions – taxpayers have been known to exaggerate their charitable contributions for the year. These charities submit their own tax forms as well, so this could be detrimental to the fraudulent taxpayer.

11) Disguised Corporate Ownership – there have been cases where false employer identification numbers have been submitted to claim fictitious deductions, facilitate money laundering, or underreport income.

12) Misuse of Trusts – while some trusts protect a taxpayer’s assets, there has been substantial abuse of private annuity trusts and foreign trusts to alter income and deduct personal expenses. You should always seek the advice of professional before shifting your assets in a trust. 

The attorneys at JDKatz, P.C. understand the comprehensive scamming techniques undertaken by criminals. We can assist you in resolving your financial and legal matters as a result of these unscrupulous methods of tax filing. 

For those who have just entered the “real world” or finished their higher education, student loans could create a large financial burden. Fortunately, the IRS has issued a deduction for those who are forced to pay student loans. Up to $2500 can be deducted from a return, however the individual must qualify based on five standards:

1)   Paid interest on a qualified student loan in 2011

2)   Legally obligated to pay interest on a qualified student loan

3)   Filing status is not “married filing separately”

4)   Modified adjusted gross income is less than a specified amount (this is set annually)

5)   If filing jointly, cannot be claimed as dependents on someone else’s tax returns

If more than $600 was paid in interest towards student loans, then the individual must have received a 1098-E student loan interest statement.

The attorneys at J.D.Katz, P.C. have a strong understanding of deductions and credits on your tax returns. Please call us at 301-913-2948 for further information. 

Issue

Whether, pursuant to D.C. Code Section 42-1903.16, the declarant has a duty to warrant against structural defects in a condominium which arose and were claimed by the unit owners two months after the posted letter of credit had been returned to the declarant by the Condominium and Cooperative Conversion and Sales Branch?

Applicable Rules

D.C. Code Section 42-1903.16(b) states that the “declarant shall warrant against structural defects in each of the units for 2 years from the date each unit is first conveyed to a bona fide purchaser, and all of the common elements for 2 years.”

D.C. Code Section 42-1903.16(e)(1) states that “Prior to the declarant’s first conveyance of a residential unit to a purchaser, the declarant shall post a bond or letter of credit with the Mayor in the amount of 10% of the estimated construction or conversion costs. The bond, letter of credit, or other security shall be reduced at the declarant’s request in pro rata segments (based on the residential unit’s percentage interest in the residential portion of the condominium) 2 years after the conveyance of each unit; provided, however, that in no event shall the security be reduced below 50% of the original amount of the security until one year after transfer of control of the residential executive board of the condominium association to purchasing residential unit owners other than the declarant. For purposes of this subsection, “transfer of control” shall have occurred when 51% or more of the residential executive board is composed of residential unit owners other than the declarant, or successor declarant, or the declarant’s selections or nominees.”

Brief Statement of the Facts

As required by D.C. Code Section 42-1903.16, the declarant posted a letter of credit with the Mayor, which bore an issuing date of March 3, 2004 and an expiration date of March 3, 2006. The declarant sold the first condominium unit on May 28, 2004 and by June 24, 2004 he had sold the last unit. The Letter of Credit was returned to the declarant by the Condominium and Cooperative Conversion and Sales Branch on March 6, 2006. The claims regarding structural defects arose on or around May 3, 2006.

According to our investigation, the declarant did not request that the letter of credit be returned to him. The Condominium and Cooperative Conversion and Sales Branch returned the letter of credit based on expiration date set forth on the letter by the issuing bank and made no requests of any kind.

Analysis

The sale of the last unit was on June 24, 2004.  Based on D.C. Code Section 42-1903.16(b), the required warranty is to exist until two years after the sale of the last unit, i.e., June 24, 2006.  However, the letter of credit was returned to the declarant on March 6, 2006.

In his letter of March 6, 2006 to the declarant,  Mr. Bradford does not inquire as to the date when the last condominium unit was sold to determine whether the letter of credit should have be returned to the declarant, nor does he request that an alternate letter of credit be obtained by declarant in the event there was a gap between the expiration date on the letter of credit and the date the required warranty was to end – at the conclusion of the two year statutory period following the last sale of a unit.

Conclusion

It is possible that the Condominium and Cooperative Conversion and Sales Branch returned the letter of credit because it was misguided by the expiration date of March 3, 2006 listed on the letter by the issuing bank.  Nevertheless, it is our opinion that based on Section 42-1093.16(e)(1), the Condominium and Cooperative Conversion and Sales Branch should, at a minimum, have inquired as to the date the last unit may have been sold, or direct the declarant to post a new letter of credit in the event there was any gap between the expiration date on the letter of credit and the two year statutory period.

Due to the oversight of the Condominium and Cooperative Conversion and Sales Branch, the declarant reasonably relied on the government’s authority and did not post a second letter of credit. Had the Condominium and Cooperative Conversion and Sales Branch informed the declarant of the need to post a new letter of credit, the declarant would have furnished one immediately.

Accordingly, it is our Client’s position that he should not be responsible for any structural defects which arose two months after the letter of credit was returned to him.  On the other hand, the declarant is amenable to meeting with the Director of the Condominium and Cooperative Conversion and Sales Branch in order to thoroughly discuss the owners’ claims of structural defects.

Last year, TurboTax produced an infographic on filing your taxes that really drove home the importance of filing your taxes online. The most amazing statistic was that 46 million returns in 2008 were still filed on paper. Forty six million. When e-filing is so cheap, sometimes even free, it’s amazing that so many people introduce more hassle into their lives by filling out a paper return, driving to the post office, and paying for registered mail to get the tome in on time.

While I’m sure the number has decreased since then, it’s still in the double digit millions. If you’re one of those people, consider e-filing your tax return this year. Here are just a handful of reasons why it is better than filing on paper.

Easier to Prepare

Let’s be honest, do you really want to tackle all the IRS forms without the help of a real live human being or software? Probably not. Tax preparation packages can walk you through almost every situation and I’d imagine a good percentage of Americans won’t have any problems using it. If you’ve been hesitant to use it because you aren’t sure a “box” can help you, why not give it a try and see if you will run into any problems?

Software packages today are much savvier than they were years ago. They know the audit red flags so they’ll review your return and specifically ask you about something that looks suspicious. Maybe you entered in a number incorrectly? Maybe you forgot to fill out something? They can check that for you.

More Secure

Your tax return has all the information an identity thief needs to ruin your financial life. It has all of your personal information, your employment information, and, based on deductions, a lot of your activity as well. If you opted for direct deposit of your refund, which is the best and fastest option, a potential thief also has your banking information.

While the likelihood you would lose your return is small, especially if you mail it in with registered mail, it’s not zero. E-filing is encrypted and secure. There’s no chance you’ll get a piece of mail wrapped in a small plastic bag with a letter of apology.

Faster Processing

The biggest reason you should e-file is because you’ll get your tax return processed faster and your tax refund, if you’re due one, is sent to you much faster. Last year, the average tax refund was over three thousand dollars. It’s your money, it should be in your pocket as quickly as possible!

When you mail in your return, the data needs to be processed and entered into the system. Whether it’s by OCR or by hand, it’s not instantaneous and so there will be a few days between when they receive the return and when they start processing it. It’s also not foolproof and errors do happen. The last thing you want to deal with is an audit because someone keyed in the wrong data or misread your numbers!

It May Be Free

You can use IRS’s freefile program and file your taxes for free if your income is under $58,000. They’ve partnered with 20 different tax preparers to give you free federal tax return processing and free e-filing.

When this option is free and faster, there’s very little reason why you should do it by hand! So, if you’re one of the many millions of Americans who file on paper, consider jumping over to the good guys and e-filing.

In our practice, we are often asked what formalities need to be followed to ensure that corporate liability doesn’t pass to individual shareholders or officers. Maintenance of corporate formalities is essential to maintain the limit’s of liability, By way of example, in the District of Columbia, a Court will consider piercing a corporation’s veil when any or all of the following factors are present:

1- Unity of interest and ownership.

1. Whether corporate formalities have been disregarded, like issuance or subscription of stock.
2. Whether there has been intermingling of funds, staff and property.
3. Domination and control of a Corporation (ex: Parent – subsidiary).
4. Extensive commingling of personal funds with corporate funds.
5. Substantial disregard for corporate formalities, like keeping the minutes and records of the corporation.
6. Inadequate initial capitalization.
7. Whether corporate funds and assets were diverted to non-corporate used, such as personal use.

2- Fraudulent use of a Corporation formed to protect business from claims of creditors.

1. a. The Courts have modified this part of the test as follows: It is no longer necessary to prove fraud. Instead of fraud, the Court may consider justice and equity in their determination.

3- Control and breach of duty set forth in the first two elements is what caused the injury or unjust loss complained of.

1. This element is rarely ever used by the DC Courts. However, it has been mentioned in some D.C. cases which deal with piercing the corporate veil.

NOTES:

1- Because piercing the veil is a doctrine of equity, the factor that predominates will vary in each case and the decision to pierce will be influenced by considerations of who should bear the risk of loss and what degree of legitimacy exists for those claiming the limited liability protection of a corporation.

2- Before a Corporate entity can be disregarded and acts of a corporation can be legally recognized as a particular person, it must appear that the corporation is not only controlled by the persons, but also that the separateness of the persons and corporation has ceased and facts must be such that adherence to fiction of separate existence of the corporation would sanction fraud or promote injustice.

3- Piercing the corporate veil is an equitable doctrine, but the issue of whether the corporate veil should be pierced is properly submitted to a jury.

Sources:

1- Simon v. Circle Associates, Inc. 753 A.2d 1006, (2000)

2- Vuitch v. Furr 482 A.2d 811, (1984)

3- Camacho v. 1440 Rhode Island Avenue Corporation and Arven Plumley 620 A.2d 242, (1993)

Peter Antonoplos is a Partner at the law firm, JDKatz, P.C.. He specializes in corporate, tax, and real-estate law and frequently lectures in the Washington D.C. metro area.

Thinking of developing or redeveloping that rental property? The DC Code sets forth the requirements for tenants who wish to exercise their rights to purchase pursuant to the Tenant Opportunity to Purchase Act (TOPA). DC ST § 42-3404.11 with respect to rentals with five or more unit. Recently, a client posed the following issue related to the TOPA rights on their building.

What effect does the loss of members have on a tenant association that is statutorily required to represent at least a majority of the tenants?

Summary

In an accommodation with five or more units, only the tenant organization has the right to purchase when the Owner of that accommodation intends to sell. Additionally, if the Owner violates the rights of the tenant organization, the DC Code permits only the tenant organization to bring a civil action against the Owner. A tenant organization which wishes to purchase the accommodations must represent at least a majority of the occupied rental units as of the time of registering its interest to purchase. Accordingly, if the tenant organization looses members and ceases to conform to the statutory requirements, it will lack the capacity to exercise its rights to purchase and to assert any legal claims against the Owner.

Answer

The DC Code sets forth the requirements for tenants who wish to exercise their rights to purchase pursuant to the Tenant Opportunity to Purchase Act (TOPA). DC ST § 42-3404.11 states that the following applies to accommodations with five or more units:

In order to make a contract of sale with an owner, the tenants shall: (A) form a tenant organization with the legal capacity to hold real property, elect officers, and adopt bylaws, unless such a tenant organization exists in a form desired by the tenants; (B) file articles of incorporation; and (C) deliver an application for registration to the Mayor and the owner by hand or by first class mail within 45 days of receipt of a valid offer.

At the time of registering, the tenant organization must represent at least a majority of the occupied rental units. Once registered, the tenant organization becomes the sole representative of the tenants and the Owner is required to negotiate only with the organization in good faith. Importantly, it is the tenant organization, as opposed to the individual tenant, that has the right to make a contract for purchase pursuant to TOPA, and only the tenant organization “may seek enforcement of any right or provision under this chapter through a civil action in law or equity…” that has been violated. DC ST § 42-3405.03.

While the question presented has not been directly addressed to date, in Stanton v. Gerstenfeld, 582 A. 2d 242 (D.C. 1990), the D.C. Court of Appeals recognized the tension between the tenant organization and individual tenants regarding the right to negotiate with the Owner in accommodations with five or more units. The court recognized that so long as the tenant organization existed, individual tenants, who were either a part of the organization or independent of it, had no rights to exercise with respect to the contemplated sale by the Owner. In this particular case, Stanton was a tenant who was a member of his tenant organization and who was opposed to the conversion that the organization had approved. Stanton brought a civil action on his own behalf on the grounds that the Owner had not been bargaining with the tenant organization in good faith. The Court refused to permit Stanton to proceed with his claims on the grounds that the statute was clear that it was only the tenant organization that held the right and could bring suit if the rights were violated. Arguably, the Court’s premise was that the tenant association continued to meet the required qualifications during the negotiations.

The court explained that the reason why the organization must be the sole negotiator is to prevent confusion throughout the process.

The statutory scheme would become unworkable if dissenting tenants, who disagreed with positions taken by their tenant organization, could attempt collaterally to undo an agreement, or disrupt negotiations between the tenant organization and the owner, by bargaining separately with the owner. Stanton v. Gerstenfeld, 582 A. 2d 242, 245 (D.C. 1990).

Recently, DC Superior Court Judge Melvin Wright, guided by the precedent established by Stanton v. Gerstenfeld and a later case which relied in part upon its reasoning, West End Tenants Assc v. George Washington University,[1] 640 A. 2d 718 (D.C. 1994), granted an order to dismiss a tenants’ association’s claims against an Owner who allegedly violated its TOPA rights because the organization was improperly formed and lacked standing to bring suit. (See Twin Towers Plaza Tenants Assc. v. Capital Park Assc., Order Granting Defendant’s Motion to Dismiss, July 19, 2004, Case No. 03CA3376). In the Twin Towers case, the tenant organization was determined to be in violation of the D.C. Code because it had not established and could not establish that it “represented a majority of the tenants in the two buildings at issue.” Judge Wright determined by reviewing the discovery evidence produced that the organization as it existed was in no position to allege any violation of the statute or exercise any of the rights afforded to tenant associations by the law. Moreover, Judge Wright pointed out that the tenant organization had admitted that it had not complied with the D.C. Code because it had not registered with the Mayor and filed its Articles of Incorporation. While the issue was the validity of the organization’s contention that it represented at least a majority of occupied rental units, it is clear that Judge Wright recognized that an organization that does not represent such majority has no right to act on behalf of the tenants.

The rationale behind the rulings of both Judge Wright in the Twin Towers case and the D.C. Court of Appeals in Stanton echoes the concerns expressed by the City Council nearly twenty six years ago when a bill providing a the tenants’ right to purchase was debated. A review of the legislative history of The Rental Housing Conversion and Sales Act of 1980, of which Tenant Opportunity to Purchase Act (TOPA) is part, reveals that the Council was primarily interested in preventing the displacement of low and moderate income tenants who are most affected by the conversion of their accommodations by developers. The legislation was designed to give the tenants a voice in whether their apartment homes would be converted into condominiums or cooperatives. In accommodations with five or more units, the legislation was designed to give the majority of the tenants, by virtue of the tenant organization, in a given accommodation that voice and that right to determine the fate of their homes. No owner could make a decision absent tenant majority support and no single tenant had the authority in accommodations with five units or more could thwart the will of the majority of tenants who had formed an organization and expressed their views. While there is nothing in the legislative history that directly discusses why the Council insisted upon the tenant organization representing a majority as opposed to simply some of the tenants in an accommodation, it is clear that the organization was made the sole negotiator in certain cases because it represented the majority and was determined to be best situated to advance the views of its members.

Because there is also no applicable case law on point regarding the narrow question, it may be instructive to look at how the courts have treated other organizations statutorily designated as the sole negotiator on behalf of its members. For example, the relationships between an employer and a labor union and an owner and a tenant association are similar. In both cases, the organization is deemed to be the sole representative of its individual members. Additionally, the employer and owner are required to recognize and bargain with the respective organizations in good faith.

There are several reasons why the standards regarding labor unions that lose their majority status can be applied to tenant associations that lose their majority status. The statutes that establish and regulate the relationships between the employer and the labor union and the owner and the tenant association are similar in design and intent. Section 8(a)(5) of the National Labor Relations Act, 29 U.S.C.S. § 158(a)(5), imposes upon an employer, the duty to bargain collectively with the representative of his employees. This is analogous to the effect of DC ST § 42-3404.11. The rationale behind these concepts is simple: the organization is better situated to advance the interests that bring its membership together.

Accordingly, it could be argued that when an owner who is in negotiations with a tenant association that seeks to purchase a building questions the association’s majority status, the burden is on the owner to rebut the presumption of continued majority status by showing that (1) either the association has in fact lost majority status or (2) that there are objective considerations sufficient to support a reasonable good faith doubt that the association still enjoys majority support. This was the rule applicable to employers negotiating with labor unions that was articulated by the Third Circuit in NLRB v. Wallkill Valley General Hospital, 866 F.2d 632 (3d. Cir. 1989), a case in which the National Labor Relations Board (NLRB) had found that the Wallkill Valley hospital failed to bargain collectively with the union and ordered the hospital to cease and desist from unfair labor practices it had been engaging in. The hospital contended that it no longer was required to negotiate with the Union because it had a good faith doubt that the union still represented a majority of its members. The Court held that the NLRB was correct in determining that hospital failed to establish it had a good faith reasonable doubt as to the union’s majority status. The Court determined that the hospital failed to rebut the union’s presumption of continued majority support and had negotiated in bad faith with the union members directly.

Central to the Court’s holding was the fact that the hospital’s good faith doubt about the union’s majority status was based upon speculative reasoning. The hospital never found out the actual number of the employees who supported the decertification of the union, and relied upon the representation of a single union member who had filed a petition for decertification and stated she felt there were a majority who did not want the union. Additionally, the hospital took note of the fact that only a very small number of employees had authorized that union dues be deducted from their salaries, and decided that this indicated that only a small number actually supported the union. But, as the Court stated, the issue was “not how many employees belonged to the union or paid dues, but rather whether the majority desired union representation,” Wallkill Valley 866 F.2d. at 637 quoting Retired Persons Pharmacy v. NLRB, 519 F.2d. 486,491 (2d. Cir. 1975).

Applying the union analogy to the tenant association issue presented, it becomes clear that if the owner wishes to cease negotiating with the tenants, he must do so only when he knows in fact that the association no longer represents the majority or when he has a good faith belief that such is the case. That good faith belief must be based upon more than speculation or it will simply not justify the act. The burden is a difficult, but not impossible, one to surmount when it is the owner who wishes to prove the association no longer represents the majority. Far easier is it to prove that the association has lost majority status when the tenants manifest this by vote than when they are silent and it is left up to the owner to discern their true intentions.

This brings up the question of how one tenant can force an accounting. Ideally, a member of a tenant association who believes that his association no longer represents the interests of a majority of the occupied rental units should call for an accounting of the numbers that are still members of the tenant association. Both the Whittier Gardens and the Butternut Project tenant associations’ bylaws give each tenant one vote and a simple majority could halt the negotiations with the owner if that is what the tenants wanted. If, in fact, a majority of the tenants did not wish to proceed with the purchase of the accommodations, having them force the issue to a vote would be effective in relieving the Owner of his obligation to continue to negotiate with the organization and restore the legitimacy of the third party contract.

We are often asked in our practice, when to use a letter of intent. A Letter of Intent (“LOI”) is a document used between two parties to a transaction to summarize the main terms and conditions that two parties have discussed as part of a transaction. A LOI can either be legally binding an enforceable agreement or a non-binding recap of the negotiated terms so far discussed by the parties. The decision to have the LOI be binding or not is largely based on agreement between the parties based on how serious they are about consummating the transaction. As such, a LOI can be a valuable tool to determine the relative seriousness of the parties in developing a transaction and can be invaluable to assist moving the parties closer to entering into a contract for whatever type of transaction is being consummated.

While the terms which are typically included in a LOI will vary from transaction to transaction there are a few general categories of terms that are typically included as a matter of course. Typically these terms are broken down into two categories: Substantive; and, Procedural. Substantive terms are terms that are specific to the subject matter of the underlying transaction; Procedural terms by contrast are terms that are focused on the who, what, when and where of the transaction.

Some substantive terms that should be included in a LOI are:

1. The sale price for any goods, services, or assets and the methodology of how the price for these items will be determined between the parties.
2. If the transaction is for the sale of a business, whether it will be a stock or asset sale.
3. How payment will be made, including any payment schedule, price adjustment and financing terms that may affect sale price.
4. Any provisions to protect the Seller in an installment sale, i.e. security interest in the assets being sold, for instance the requirement for the Buyer to sign a personal guarantee or the imposition of a lien on the Buyers home to secure the transaction.
5. A list of any assets that specifically will not be included in the contemplated transaction.
6. A list of any liability that will be satisfied as part of the transaction.
7. A list of any liabilities that will not be satisfied as part of the transaction and the Buyer will be assuming as part of the transaction.
8. How inventory of the business will be transferred between the parties.
9. How real estate, including leases, physical plants and storage facilities will be handled.
10. Provisions detailing any covenants the Buyer will require of the Seller, including if appropriate covenant not to compete.
11. Any agreement for the Seller to do future work for the Buyer as part of the contemplated transaction: for instance as a consultant or independent contractor. Such provisions should include language regarding

In addition to substantive items there are a number of procedure items which should also be included in the letter of intent

1. Whether the Buyer or Seller reserves the right to negotiate with other parties or in the alternative whether the parties agree to negotiate exclusively with each other.
2. A schedule for completing negotiations and a signing date of a finalized contract between the parties.
3. A list of issues that remain to be negotiated between the parties
4. A list of any other due diligence items that need to be completed
5. Where the LOI is binding or non-binding on the parties
6. Whether the parties will enter into any negative covenants such as non disclosure agreement, non-competes or non-solicitation agreements.

Peter Antonoplos is a Partner at the law firm, JDKatz P.C. He specializes in corporate, tax, and real estate law and frequently lectures in the Washington D.C. metro area.

In our practice, we are often asked when a tenant has a RIGHT to purchase the unit they are renting. In the District of Columbia, city law permits tenants the opportunity to purchase their units, under certain circumstances. Recently we were presented with a coop, which had subleased/rented out its coop unit to a nonmember tenant.

As a result, the following questions were triggered:

1–Does the sale of a cooperative member’s ownership interest in the cooperative and the consequent transfer to the purchaser of the residential unit that appertains to that ownership interest, trigger the tenant’s overriding right to purchase the ownership interest under DC Code Section 42-3404.02 (the Tenants Opportunity to Purchase Act or “TOPA”)?

2– Does the sale of an LLC, which is a member of the coop and owns several ownership interests related to 15 out of 18 residential units in the cooperative, trigger TOPA giving the tenants the opportunity to purchase the LLC?

Answer:

After review of the DC Code and relevant case law, we concluded that the scenario described in Question 1 the sale of the cooperative member’s ownership interest in the coop is not a “sale by the owner of the housing accommodation.” Therefore, under the scenario described in Question 1, the sale does not trigger TOPA. Ironically, the scenario described in Question 2, would arguably be considered a “sale” triggering TOPA, as amended in 2006, if the percentage of the shares of the coop that are owned by the LLC is as high as the percentage of its ownership interest in the coop’s 18 residential units, i.e., 15/18 or 83.3 percent. [I d

Whether or not the sale of the ownership interests in either of the two scenarios is a “sale” for purposes of TOPA,under the 2006 amendments to Section 42-3404.02, the coop owner is required to provide each tenant and the Mayor a “Notice of Transfer” when transferring an ownership interest in the coop. The “Notice of Transfer” gives a tenant or tenant association the opportunity to challenge the owner’s determination that the transfer was not a “sale” under the Section.

Background:

Ownership Interest in a Coop:

The following elements and attributes of cooperative form of housing ownership have long been established by statute and case law. Typically, the Corporate and Governing Documents and Plan of Corporate Organization for a district of columbia cooperative expressly incorporate these elements and attributes and apply to the proposed sale of the LLC or sale of individual ownership interests associated with a coop rental unit.

The cooperative corporation owns the title to the building and land and, therefore, owns all the residential units within the building.

The ownership interest of a cooperative member is ownership in the cooperative corporation, not ownership in the residential unit that he/she occupies or has subleased to a tenant. That ownership interest in the cooperative is evidenced by shares issued by the coop. The shareholder/coop member is entitled to lease and occupy a cooperative unit to which the shares have been allocated under a proprietary lease. The lessor is the coop and the lessee is the shareholder.

A shareholder is provided one vote for each share it owns that can be exercised in electing members of the Board of Directors and by participating in some of its decision making regarding operation of the coop. The share also imposes on the shareholder the obligation to pay a monthly assessment which is its proportionate share of the coop’s debt and cost of operation. However, the shareholder is not personally liable for the mortgage, real estate taxes and other financial obligations of the coop.

Tenant Right to Purchase and Become Member of a New Coop

Upon conversion of a housing accommodation to a coop, the owner is to give each existing tenant an opportunity to purchase an ownership interest in the cooperative. If the tenant does not so purchase within the statutory period, the owner may force the tenant to vacate the unit upon 90 days notice (DC Code Section 42-4302.06). In the alternative, the owner may allow the tenant to remain a renter of the unit, in which case a landlord-tenant relationship arises providing the tenant the rights and protections provided by DC’s landlord-tenant laws. If the owner forces the existing tenant to vacate, the vacant unit may be rented out by the cooperative to another person, creating a landlord-tenant relationship, or the unit may be occupied by a person who purchases an ownership interest in the coop at the price set by the Board.

New Tenant Right to Purchase in an Established Coop

In an established cooperative, by virtue of the coop’s control of any transfer or lease of a coop unit, when a shareholder subleases his cooperative unit with approval of the Board of Directors, the sublessee arguably becomes a tenant of the cooperative. If the shareholder wants to sell his ownership interest in the coop, the question presented is whether the coop as owner of the coop unit is required to offer the tenant an opportunity to purchase that ownership interest. (The same question arises if the coop rented a coop unit directly to a nonmember and the coop decides to sell the ownership interest associated with the unit to a third party.)

Applicable Statutory Language:

Definitions

Section 42-3401.03 defines “cooperative”, “owner”, “housing accommodation” or “accommodation”, “rental unit” and “tenant” as follows:

“ ‘Cooperative’ means a cooperative legally incorporated pursuant to the District of Columbia Cooperative Association Act (§ 29-901 et seq.) or a cooperative corporation incorporated in another jurisdiction for the primary purpose of owning and operating real property in which its members reside."

“ ‘Owner’ means an individual, corporation, association, joint venture, business entity and its respective agents, who hold title to the housing accommodation unit or cooperative share.”

“ ‘Housing accommodation’ or ‘accommodation’ means a structure in the District of Columbia containing 1 or more rental units and the appurtenant land...”

“ ‘Rental unit’ or ‘unit’ means only that part of a housing accommodation which is rented or offered for rent for residential occupancy and includes an apartment, efficiency apartment, room, suite of rooms, and single-family home or duplex, and the appurtenant land to such rental unit.”

“ ‘Tenant’ means a tenant, subtenant, lessee, sublessee, or other person entitled to the possession, occupancy or benefits of a rental unit within a housing accommodation. If the names of 2 or more persons appear on a rental agreement, those persons shall determine which person may exercise a vote under this chapter. The singular term ‘tenant’ includes the plural.”

Tenant Opportunity to Purchase

Section 42-3404.02(a) states that:

“Before an owner of a housing accommodation may sell the accommodation…the owner shall give the tenant an opportunity to purchase the accommodation...

The relevant provisions in Section 42-3404.02(b) and (c) that define “sell” or “sale” were amended in 2006 and are as follows:

“(b) … the terms "sell" or "sale" include, but are not limited to, the execution of any agreement pursuant to which the owner of the housing accommodation agrees to some, but not all, of the following:

(1) Relinquishes possession of the property;

(2) Extends an option to purchase the property for a sum certain at the end of the assignment, lease, or encumbrance and provides that a portion of the payments received pursuant to the agreement is to be applied to the purchase price;

(3) Assigns all rights and interests in all contracts that relate to the property;

(4) Requires that the costs of all taxes and other government charges assessed and levied against the property during the term of the agreement are to be paid by the lessee either directly or through a surcharge paid to the owner;

(5) Extends an option to purchase an ownership interest in the property, which may be exercised at any time after execution of the agreement but shall be exercised before the expiration of the agreement; and

(6) Requires the assignee or lessee to maintain personal injury and property damage liability insurance on the property that names the owner as the additional insured.

(c)(1) … the term "sell" or "sale" shall include:

(A) A master lease which meets some, but not all, of the factors described in subsection (b) of this section or which is similar in effect; and

(B) (i) The transfer of an ownership interest in a corporation, partnership, limited liability company, association, trust, or other entity which owns an accommodation as its sole or principal asset, which, in effect, results in the transfer of the accommodation pursuant to subsection (a) of this section.

(ii) For the purposes of sub-subparagraph (i) of this subparagraph, the term "principal asset" means the value of the accommodation relative to the entity's other holdings.

(2) For the purposes of subchapters IV and V, and notwithstanding anything to the contrary herein, the term "sell" or "sale" shall not include:

(H) The transfer of interests in a partnership or limited liability company that owns an accommodation as its sole or principal asset; provided, that the sole purpose of the transfer is to admit one or more limited partners or investor members who will make capital contributions and receive tax benefits pursuant to 26 U.S.C.S. § 42 [Low-income housing credit] or a comparable District program;

(I) A transfer of title to the housing accommodation to a limited liability company pursuant to § 29-1013 [under this Section, “a general partnership organized in the District or any state and a domestic or foreign limited partnership may be converted to a limited liability company”];”

Analysis:

Application of Subsection 42-3404.02 (a)

Under Subsection 42-3404.02 (a), the sale of an ownership interest in the coop would not be a sale of the “housing accommodation” as the term “housing accommodation” is currently defined. The statutory definitions make a clear distinction between a “housing accommodation” and “rental unit”. Arguably, only a rental unit (along with the coop share) would be the object of a sale of an “ownership interest” in the coop.

Application of Subsection 42-3404.02 (b)

For purely argument sake, even if it assumed that the sale of an ownership interest in the coop is a sale by the “owner of a housing accommodation”, it would not be a “sale” triggering TOPA as defined under Subsection 42-3404.02 (b). Clearly, paragraphs (b)(1) and (b)(3) do not apply to the sale of an ownership interest in the coop since the coop does not relinquish possession of the housing accommodation and the appurtenant land (collectively, the “property”), nor assigns all contract rights and interest in the property. Paragraph (b)(2) and (b)(5) do not apply since the transactions described in the scenarios of Questions 1 and 2, above, do not provide an “option” to purchase the property or an ownership interest”. The transaction is a purchase of the ownership interest.

Application of Subsection 42-3404.02(c)

Subsection 42-3404.02(c) makes clear that transfer of merely an ownership interest in a corporation may be considered a “sale” that would trigger TOPA and give the tenants the right to purchase the ownership interest.

Sale “In Effect” Analysis

Under Paragraph (1)(B) of Subsection 42-3404.02(c), sale of the ownership interest in the cooperative is considered a “sale” for purposes of TOPA if the sale of the ownership interest has “in effect result[ed] in the transfer of the accommodation” pursuant to Subsection 42-3404.02 (a). As previously discussed, by definition, sale of a single ownership interest in the coop is not in fact or “in effect” a sale by the coop owner of the housing accommodation. Again, even if it is considered a sale of the housing accommodation by the coop for sake of argument, the sale of an ownership interest does not fall into any of the six paragraphs of Subsection 42-3404.02 (b) defining a “sale”. This is true for the sale of the single ownership interest scenario described in Question 1.

The scenario in Question 2 is the sale of the LLC which holds a collective number of coop shares. If those shares represent a majority or more of the total shares of the coop, the coop by permitting the sale of the LLC arguably would “in effect” be allowing a transfer of the ownership in the housing accommodation to the purchaser. In that case, the sale of the LLC would be a “sale of the housing accommodation” under Paragraph (1)(B) of Subsection 42-3404.02(c) and trigger TOPA.

The “Master Lease” Analysis

The sale of the LLC could also arguably be a “sale” triggering TOPA under Paragraph (1)(A) of Subsection 42-3404.02(c). Specifically, by permitting the LLC to sell its collective ownership interest, and therefore transfer its collective proprietary leases, to a third party, it may be argued that the coop has agreed to transfer a “Master Lease” to the third party. Under Paragraph (1)(A), a “Master Lease” which meets some, but not all, of the factors described in the six paragraphs of Subsection 42-3404.02 (b), “or which is similar in effect”, is considered to be a sufficient transfer of ownership interest in the housing accommodation to constitute a “sale” for purposes of TOPA

A “Master Lease” is not defined in the DC Code. However, Paragraph (1)(A) was adopted in response to the District Court of Appeals decision in West End Tenant Association v. George Washington University, 640 A2d. 718 (D.C. 1994) in which the tenant association argued that a lease agreement between the owner of the building and GWU gave GWU so much control over the housing accommodation that it constituted a “sale” under the factors set forth in the six paragraphs of Subsection 42-3404.02 (b). The lease at issue granted GWU the right to use any voluntarily vacated units for student tenancy for period of 10 years, an “exclusive right to purchase” the apartment building at the end of the ten-year period at its option but subject and subordinate to the tenants’ rights to purchase, and gave a large measure of control over the premises. The lease contained typical “triple-net” terms and obligated GWU to pay all real property taxes and utilities, to perform all maintenance and repairs, and to purchase liability insurance. Because the lease predated the adoption of Subsection 42-3404.02(b), the Court refused to apply the factors in the six paragraphs and ruled the lease was not a “sale.”

By the time the Court made its ruling in West End, it was clear to the tenant association that even if the Court had applied the factors in the six paragraphs of the Subsection 42-3404.02(b), it would likely have found the lease not to be a “sale” because it did not include all of factors. Consequently, they convinced the DC City Counsel to adopt the language in Paragraph (1)(A) of Subsection 42-3404.02(c) so that a lease need merely meet some, but not all, of the factors described in the six paragraphs, or be “similar in effect,” to be considered a Master Lease.

The consequence of the language in Paragraph (1)(A), is that the sale of the LLC conveys to the purchaser a collective proprietary lease over 15 of the 18 coop’s residential units in the building and, depending on the number of shares of the coop that appertain to those 15 proprietary leases, the purchaser may acquire control of the housing accommodation. Such control would arguably make the sale of collective proprietary lease a transfer of a Master Lease triggering TOPA.

Limitation on Tenant’s Purchase of the Ownership Interest

If by the above analysis the sale of the LLC is a “sale” triggering TOPA, a factor which might prevent the exercise of TOPA rights by the tenants in the coop is the size of the housing accommodation. In a housing accommodation which contains 5 or more units, under Section 42- 3404.11 the opportunity to purchase is only available to a tenant association properly formed within the housing accommodation. (See Stanton v. Gerstenfeld, 582 A.2d 242, 245 (D.C. 1990). Accordingly, the tenants in the example above., would arguably have to first create a qualified tenant association before they could purchase the LLC.

The Notice of Transfer Requirement:

Under Subsection 42-3404.02(d), a transfer of an interest in a housing accommodation or of any ownership interest in a corporation, partnership, limited liability company, association, trust, or other entity which owns a housing accommodation, whether or not it is considered a “sale” for purposes of TOPA, requires the owner to provide each tenant in the housing accommodation and the Mayor a written Notice of Transfer. No Notice of Transfer is required for a transfer of title to the housing accommodation to a limited liability company pursuant to § 29-1013 [under this Section, “a general partnership organized in the District or any state and a domestic or foreign limited partnership may be converted to a limited liability company”];”

The Notice of Transfer is to be substantially in the form prescribed by the Mayor and is to provide, at a minimum, a statement of the tenant or tenant association’s rights, an accurate description of the transfer containing all material facts, the date of the proposed transfer, and the reason, if any, why the owner asserts the transfer may not constitute a sale. The owner’s failure to provide the Notice of Transfer, or the provision of a notice that is fraudulent or contains material misrepresentations or material omissions, creates a rebuttable presumption that the transfer constitutes a “sale” for purposes of TOPA.

An aggrieved tenant or tenant association duly organized and meeting pursuant to its bylaws, may, within 45 days of the Mayor’s receipt of the Notice of Transfer, file a Notice of Intent to File a Petition for relief pursuant to Section 42-3505.03 or Section 42-3505.03a, and within 30 days of the receipt by the Mayor of the Notice of Intent to File, a tenant or tenant association is given 30 days to file a petition for relief. Section 42-3505.03 provides that an aggrieved tenant or tenant association may seek enforcement of any right or provision under the Rental Housing Conversion and Sale Act (which includes TOPA) through the filing of a civil action. Section 42-3505.03a provides that a tenant or tenant association may petition the Mayor for declaratory relief, and upon a showing of reasonable grounds, the Mayor is required to grant a hearing and may issue findings of fact, conclusions of law, and declaratory orders and take other enforcement actions.

Peter Antonoplos is a Partner at the JDKatz, P.C. law firm. He specializes in corporate, tax, and real estate matters and routinely lectures in the Washington D.C. metro area.