The Anti-Tax Governor's Tax Haven

Pataki Grabs Bush Bonanza, Makes 'Offshore' Investment

On January 29—the same day George Pataki unveiled the most punishing budget in state history—he also made the biggest purchase of his life, buying a dairy farm off lake champlain in upstate Essex County for $1.2 million. The acquisition was seamlessly consistent with his budgetary no-tax mantra, ostensibly timed to avoid paying capital gains taxes on the simultaneous sale,at a windfall price, of a Florida citrus grove partially owned by his wife Libby.

The governor, who was so broke that he had to take bank loans to meet expenses shortly after his 1994 election, signed closing papers as a "managing member" of a new corporation, South Farm LLC, when he acquired the 369-acre dairy farm that borders the lake. The seller, a local realtor named Donald Duley, took back a $980,000 mortgage, meaning the Patakis only had to put up $220,000. That is $380,000 less than their likely proceeds from the Florida sale, giving them a tax-free nest egg to cover both living costs and mortgage payments.

It is not possible from public documents to determine Libby Pataki's precise earnings on the 1430-acre Florida property. Disclosure forms indicate that she acquired an 8 percent interest in Old Blue LLC, which joined another small investment firm in forming Sunrise Boys LLC and buying the groves. Assuming that Old Blue and the other firm are 50-50 partners in the ownership of Sunrise, the Pataki proceeds on the grove sale would be $600,400. IRS regulations permit taxpayers to pay no taxes on real estate gains if they move to buy a similar investment property within 45 days of a sale, and close within 180 days.

The Florida bonanza has all the earmarks of a politically wired transaction, orchestrated by land preservation officials in Jeb Bush's administration. A week after both Bush and Pataki were re-elected in November, the South Florida Water Management District, a state corporation whose members are appointed by the governor, voted to approve paying $15 million for the Pataki parcel, which Libby and her partners had acquired in 2000 for $4.4 million. The price was three times what the state offered in 1999 and $360 more per acre than it simultaneously paid for pristine wetlands next door, even though the adjacent parcel contained what government documents described as "the bulk of the environmentally sensitive portion of the tract."

The financing was supposed to come primarily from the state's Department of Environmental Protection, but on December 12, the water district decided it could complete the deal quicker if it used its own money. "This is the most fast-tracked environmental land purchase we've ever had," crowed Michael DiTerlizzi, the top official in Martin County, which also participated in the acquisition. The financing switch meant that Bush and his cabinet did not have to personally sign off on the transaction, which they would have had to do if DEP bought it.

That was the second time in the recent history of the deal that the Bush team made a sudden switch. State conservation officials had rejected the site for acquisition after touring it and the adjacent parcel in October 2000, when the Pataki group did not want to sell it. But after canker swept through 150 acres of the groves in the fall of 2001, the group suddenly wanted the state to buy it. Last February the same state officials agreed to re-visit the tract, which borders the Loxahatchee River, partly in Martin and partly in Palm Beach counties. The second visit in April launched the quick-as-a-wink acquisition process.

Skipping final state approvals also allowed the deal to be completed by December 30, 2002, when Richard Hayden, the wealthy Oregon attorney who formed the three-person Pataki partnership, signed the closing papers. A Yale and Columbia Law School classmate of the governor's, Hayden has also paid Mrs. Pataki $285,000 as a consultant to a Long Island-based medical technology firm he owns. By concluding the deal in 2002, the Patakis may derive additional tax benefits, taking a capital loss on the sale last year of another farm they owned in Salem, near Lake George in Washington County. They sold the farm for $199,000—$61,000 less than they bought it for in 1995, though they did retain some of its vacant acreage.

Pataki moved to sell the Salem property in early 2002, just as Florida officials began considering acquisition of the Pataki parcel. The Salem deal closed in June, just as the Bush administration designated the Florida parcel as a top priority for preservation purchase. The governor's spokesman said then that he and Libby "reluctantly decided it was time to sell a portion of the farm" because he "simply hasn't been able to spend much time there," though it is only 40 miles from Albany. The same spokesman said in January that the the Patakis "love it" at the Essex farm and "look forward to spending time there," though it is 135 miles from Albany and 237 miles from Garrison, where the family lives in a 25-room mansion along the Hudson River.

In fact, the Patakis engaged in a very similar Section 1031 tax swap when they bought the Garrison house in 1986. They and two partners sold a vacant investment property in Putnam County on the same day that the Patakis acquired the sprawling Victorian home. Though the Patakis made a $401,666 capital gain on the sale, they paid no taxes at all that year, buying the Garrison home for $700,000. Then an assemblyman whose meager state and law firm earnings for the 14 years before he became governor averaged $64,000 (Libby was unemployed), Pataki was able to live on the untaxed Putnam gain.

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