It is about time that Mr. Schwab is subjected to the audit he has brought upon each and every City Council Member. Stipends that are not consumed by legitimate expenses for the performance of the duties related to the stipend is called "Taxable Earnings". At a minimum the city should have been issuing a 1090 to the Council Members and telling them to keep records of their expenses related to being a City Council Member. This would be considered ah... professional guidance one would expect from the City Manager, and or the City Attorney or the Finance Director, IF they were competent "Professionals".
The Pandora's Box that has been built and fed by Mr. Schwab now puts the city at risk for not paying payroll taxes on the employer contribution, but also the individual City Council Members who will no doubt be audited by both State and Federal Revenue Agencies.
Why, well as seen over and over in Mr. Schwab's history as City Manager, he has a distaste for records, and contracts and doing things according to Standard Management and Accounting Practices.
The City of Grand Terrace has an obligation to pay taxes and payroll taxes, but also the Individual has the responsibility to report income on their private returns. Like Mr. Stanckiewitz they should have asked their tax preparer how to account for the payments received from the City of Grand Terrace. Of course Mr. Schwab did not provide an audit trail for the IRS or the State. How many Council Members past and present relied on Mr. Schwab and Mr. Harper's Professional Answer... regarding the tax ability of the payments?
This matter should tie back to the House Mr. Schwab was provided. At his hire, he was not required to live in Grand Terrace. He and his then wife did purchase a house in Grand Terrace. When his wife filed for a legal separation, and eventually a divorce, Mr. Schwab approached the City Council Members to discuss his housing problem. He presented the idea of the City Providing a house. Why, was he not able to move in to the "going through a divorce apartment like most any other man in that situation". Was that too much of a blow to his social status? Or was he wanting to buy a house but wanted to make sure it was not part of the divorce settlement. He could have purchased a home in say Redlands where Betsy Adams lives, or in Riverside where Steve Berry lives, or dare it be said Colton, or San Bernardino. The fact is that the revised contract does not "REQUIRE" him to live in Grand Terrace, it says it is "Preferred he lives in Grand Terrace". He received a monthly stipend to pay for his house as long as he 1) Worked as the City Manager, and 2) Resided in the house. He was not forced or required to live there. There were more aspects of the deal all to Mr. Schwab's advantage. However, if the IRS and State look into the deal during the early part of the agreement they may find Mr. Schwab did not report the house payments made by the city as a stipend as part of his INCOME. That would be a tax violation.
In addition if the house was for sale as surplus city property it should have been put on the open market for anyone to bid on the property. His deal making or horse trade he made with the City Council may be an illegal disposal of City Owned Property. The transfer of the house from the RDA to the City may also be questioned as there apparently are no records that prove the City actually Paid the RDA for the property. Perhaps this was part of the RDA funds transferred to the City he said he had no intention of paying back.
If that is the case, Mr. Schwab has crossed a conflict of interest, if not fraud line in his accounting practices and acquisition of the house, regardless of the price 130,000 or 140,000.
The management or mismanagement of Mr. Schwab and Mr. Berry continues to be like that proverbial Ice Burg. No doubt we have yet to see all of the ice... there is still a lot hiding under the surface. With the past conduct of Mr. Berry, citizens also must ask the question did Mr. Schwab or Mr. Berry use this "Income Reporting and Tax Problem" as a threat to coerce individual Council Members to keep them in line with "Staff Recommendations". This was the modus operandi of Berry, regarding the payments made to the Millers for the adds in Mrs. Miller's Paper. Steve Berry was of course trained by Tom Schwab. Is this how he got his way in regards to the provision of a house for himself, and the purchase of the Dotson Property that Mr. Hilkey said the City didn't need the property, and the amount paid after a closed door meeting was in excess of the value of the property. More insider deals for friends, and the employer of Council Members, Terra Loma Realty. Makes you think doesn't it.
Richard Loder's statement, what is in the past is past is reminiscent of the Lion King, however, there are real issues that need to be discovered, repaired, and resolved before the City of Grand Terrace can be proud about its governance.
Regular readers of this blog know these issues have been disclosed here for years. The documents have been posted in prior posts. I am shocked that Herman Hilkey took the stance he did defending Mr. Schwab's accounting methods and tax advise. Is Mr. Hilkey hopping he will not be held accountable to pay his portion of the payroll and income taxes on the income he received from the City? We can assume that even if it is only a few thousand dollars in taxes and fines, no one has extra money laying around in this economy. Hilkey may not have the cash flow to make up for Schwab's lack of professionalism.
Grand Terrace has not withheld federal taxes on council, commissioners
10:22 PM PDT on Thursday, August 26, 2010
Grand Terrace has not paid federal payroll taxes on City Council and planning commissioners' monthly stipends since the city was incorporated 32 years ago.
The city's failure to pay was disclosed this week when the council approved $14,000 in payments to the United States Treasury to cover three years of the unpaid payroll taxes in hopes the Internal Revenue Service will not demand more.
Tom Schwab, Grand Terrace's top administrator for 20 years, contends that stipends paid to elected and appointed officials are not salary and not subject to payroll taxes. Schwab is now a City Council candidate.
An Internal Revenue Service document defines elected and appointed officials as city employees and subject to federal payroll taxes.
It is not clear whether any current or former officials could face criminal charges.
City Manager Betsy Adams said city staff members are not sure how much money Grand Terrace would have to pay for all 32 years of back taxes, because council members' pay has changed.
"We're coming to the IRS and saying, 'Mea culpa, mea culpa. We've just discovered something, and we are trying to make it right,' " Councilman Walt Stanckiewitz said by phone.
In response to questions posed at Tuesday's council meeting by Stanckiewitz, Adams said it appears the city has not paid federal payroll taxes since its incorporation in 1978.
Schwab, who was city manager until taking a medical retirement last year, contended at the meeting that council pay "is considered a reimbursement for expenses. Council stipends are not wages."
"Mr. Schwab, you should look at a dictionary under the word stipend," Stanckiewitz responded. "It is not an expense. It is pay."
Schwab said later by phone that he considers a stipend "a periodic payment for some set type of expense."
Asked what expenses the payments were for, he said, "If you drive your car, if you have Internet access, if you have a cell phone, just any expenditures you have as a result of being a council member."
Grand Terrace council members are paid $250 a month for their service on the council. They also have received about $150 a month for serving on the city's redevelopment agency board, and they receive a $200-a-month car allowance and up to $600 a month for travel and expenses related to conferences.
Planning commissioners receive $50 a month each.
Schwab said the city "never reported it as wages and I don't know any city that reported it as wages. If the person decided they wished to report it as income, they would offset income with their expenses and it would zero itself out," he said.
Officials in neighboring San Bernardino and Loma Linda each said their cities pay taxes on council members' pay, as did officials in Riverside and Moreno Valley.
IRS spokesman Raphael Tulino said by phone Thursday that Internal Revenue officials do not comment on specific cases, but he did provide a copy of an IRS guide published last year that advises local governments on the tax code.
"Elected and most appointed officials are defined by statute as employees of the public entity they serve," the guide says. "An elected or appointed official who is an employee is subject to rules for mandatory social security and Medicare" unless covered under a special agreement as a participant in a public retirement system.
The guide also says, "All officials elected or appointed to their positions after March 31, 1986, are subject to Medicare withholding."
Stanckiewitz said he discovered the problem when he was doing his taxes.
"I went to my tax accountant. He brought the IRS code up on his computer, and we went through it paragraph by paragraph," Stanckiewitz said. "He said, 'You should have received a W-2.' "
Stanckiewitz said he asked Adams about it.
"Her eyes got as big as saucers," he said.
By the end of March, Stanckiewitz said, an accounting firm had looked at the city's books and determined that the city needed to pay payroll taxes and had not been doing so.
Schwab said he believes Stanckiewitz -- a candidate for mayor -- "is doing what he can to criticize the administration so he can get elected. I understand that. It is just politics."
Stanckiewitz said, "I'm hoping it awakens people to the fact that Tom Schwab doesn't know everything, as he professes to."
Reach Darrell R. Santschi at 951-368-9484 or dsantschi@PE.com
