As if to underscore the innocence of the oversight, Lato adds: "The folks at the register of deeds office also accepted this premise and allowed the transfers to be filed. Neumann Developments, Inc. followed what it believed to be appropriate procedures. Turns out they were wrong."
They were. The stated exemption was for the transfer of property between a corporation and its shareholders. But the transfers at issue were actually between two corporations: current owner Neumann Developments and new owner MN Holdings.
"Corporation to corporation is not normally exempt," says Pharis Horton, a veteran Madison real-estate lawyer who reviewed documents of the transfers at Isthmus' request. He says the statute is "not a model of clarity" and an inadvertent mistake could have been made.
But in reviewing the statute, Horton found an annotation that clearly spells out that for the 77.25(15) exemption to apply, the transfer must be between a corporation and "humans," not other corporate entities. A state official pointed to the same language.
Additionally, some if not all of the properties transferred from Neumann Developments to MN Holdings less than three years after being acquired by Neumann Developments. The statute says the exemption applies only to transfers "if the corporation owned the property for at least 3 years."
"On its face, you hand me the document that says it goes from this corporation to another corporation, and this exemption just doesn't fit," says Horton. "It doesn't look right."
Indeed, Horton says the matter should have been flagged by the state Department of Revenue for further review. But it's not clear whether this occurred.
Contrary to the impression given by Lato, there's nothing significant about the fact that the register of deeds accepted the claimed exemption. Registers of deeds' offices may ask questions, or even suggest that the state take a closer look, but they do not say no.
According to the relevant statute, 77.22, "The register shall have no duty to determine either the correct value of the real estate transferred or the validity of any exemption or exclusion claimed. If the transfer is not subject to a fee as provided in this subchapter, the reason for exemption shall be stated on the face of the conveyance to be recorded by reference to the proper subsection under s. 77.25."
Several sources said the real checking is supposed to be done by the state Department of Revenue, which should have caught the inappropriate exemption claimed by Neumann Developments in these deals.
DOR, says spokesperson Stephanie Marquis, "cannot speak about a specific taxpayer or entity," due to confidentiality rules. But it "continually monitors the real-estate transfer returns that are filed, and the agency conducts thousands of audits each year. Staff takes appropriate action when fees are not paid correctly."
If a real-estate transfer fee exemption is improperly claimed, DOR would make the person pay the full amount, plus 12% interest and 25% penalties.
The amount of fee payments in the Neumann transactions is not insubstantial. DOR records ascribe a market value to properties, even when a transfer fee exemption is claimed.
Isthmus was able to trace the value of four deals that occurred on May 22, 2008, and find the corresponding amounts: Milwaukee Co., $1,038,000; Waukesha Co., $750,000; Jefferson Co., $1,297,500; Kenosha Co., $2,792,500; as well as another transfer that took place between Neumann Developments and MN Holdings in Jefferson County on Sept. 30, 2008, with a listed value of $1,475,000.
Add it all up and these five deals alone total $7,353,000 in property value, meaning the transfer fees on this amount would have come to $22,059, not including interest and penalties.
So did the system work as it should have? Did Neumann get caught making what even he acknowledges was an inappropriate exemption? Lato did not immediately respond to a request for clarification on this point.
Records obtained by Isthmus of DOR payments to counties based on recent audits do not appear to show that these wrongful exclusions ever resulted in fines.
But one document provided to Isthmus seems to show that Neumann Developments was cited in the past, most notably for a November 2006 transfer in Jefferson County of a property valued at $1.4 million. The company had to pay a total of $6,578 -- which it did, on June 29, 2009. This consisted of a $4,200 fee, a $1,050 penalty and $1,328 in interest.
Marquis seems to suggest this could yet happen in the case of these other transfers, saying DOR "conducts thousands of transfer fee audits each year, and we take the appropriate action when fees are not paid correctly. If a real estate transfer fee exemption was improperly claimed for a transfer, the department assesses the real-estate transfer fee, interest and penalties. We have a four-year statutory window to go back and conduct audits, and the department does indeed go back and review exemptions as needed."
