Mistakes and Misunderstandings

By Ed Magnuson

Ferraro and her husband disclose taxes, assets and deals

The disclosure last week that her parents were worth nearly $4 million was news even to Laura Zaccaro, 18. "Mom," she asked Geraldine Ferraro, "why do we always have to buy at sales?" The question was meant as a joke. Still, the mass of financial data released on the family's finances showed that the couple are indeed wealthy in terms of their varied real estate holdings, but far less so in cash income. Said Ferraro: "We're not flashy. We buy property and we maintain it, and it appreciates. That's what America is all about."

Together, the couple own residential property valued at $925,000 after deducting mortgages. This includes their large nine-room Tudor home in the Forest Hills section of New York City, a vacation house on New York's Fire Island and a condominium apartment on St. Croix in the U.S. Virgin Islands. Ferraro separately owns four lots next to their Fire Island retreat, and Zaccaro has three similar lots there. The bulk of the family wealth, however, is possessed by Zaccaro, whose holdings were estimated at $2.75 million. He owns another condo in St. Croix and one in New York's Greenwich Village, and has interests in six Lower Manhattan buildings. Apart from real estate, Ferraro lists more cash, bonds, personal property and similar assets ($235,000) than her husband ($180,000). She reports having no outstanding debts, while his liabilities, including loans, amount to $310,000. Their combined net worth was placed at $3.78 million.

Despite that impressive figure, their tax returns for the past six years show that Zaccaro and his wife may not have had much money to spare after maintaining three joint residences, plus her separate apartment in Washington, and putting three children through private schools. Over the past five years, they paid an average of 40% of their gross income annually in taxes, leaving them an average $103,035 in combined yearly income. This varied from a low of $80,188 in 1981 to a high of $150,982 last year.

Except for trips to St. Croix, there is no indication the Zaccaro family traveled widely, except on business, or entertained expensively. They have paid off the mortgages on their Forest Hills and Fire Island houses, purchased in the 1960s.

A more complete picture of the family finances would be available if Zaccaro released the tax returns he filed for his various businesses. On his 1983 individual income tax return, he listed a loss of $8,162 from P. Zaccaro Co., which manages but does not own real estate. Ferraro, who owns one-third of this business, while her husband holds two-thirds, claimed a loss of $4,082. Most of Zaccaro's business dealings, however, were done through partnerships and corporate entities created for specific transactions. In the real estate business, this is a common way of shielding an owner from having property seized by creditors if another property he owns goes bankrupt. There are various tax advantages in this practice, including the chance to shelter legally income derived from these technically separate businesses. Indeed, it is possible that Zaccaro received substantial income from partnership investments that did not have to be shown on his tax returns.

Clearly, the release of the couple's individual tax returns squelched any suspicion that Zaccaro might have been trying to hide embarrassingly small payments to Uncle Sam. Over the past five years, he and his wife paid more than the average person does in their respective tax brackets, according to IRS statistics. This was true of Ferraro in each of the five years in which they filed separately. It was true of Zaccaro, whose income varied more sharply from year to year, in three of the five years. By filing separately, they paid about $6,000 more over the period than if they had filed jointly.

One series of transactions in 1978, however, remains a matter of controversy. When Ferraro decided to run for Congress from her Queens district in 1978, key supporters assured her that they could come up with $300,000 for her campaign. But the cash did not materialize. "We couldn't raise the money," she said last week. "I was not a proven candidate."

Ferraro knew there was no limit on how much a candidate could spend in personal funds to run for Congress. She says she was advised by a volunteer lawyer in her campaign that she could borrow money from her husband and the trust funds of their three children. She chose this course, getting the first of four loans totaling $134,000 from them in May 1978. Once her campaign got rolling, she expected enough donations to repay the loans.

On Sept. 1 Ferraro duly reported these loans to the Federal Election Commission. She was quickly told by the FEC that using a family loan for her campaign was illegal. Like any prospective contributor, each member of her family could give only $1,000. Ferraro was advised that she would face hefty fines if the violation continued, so she scrambled to repay the loans.

Even though she had substantial assets of her own (her net worth at the time was about $500,000), the banks, she says, would not give her a loan unless her husband co-signed it. The FEC, of course, would not permit Zaccaro to do that, since he was one of the family members she was trying to repay. The only option, she says, was to put some of her property on the block. "We've got to sell fast," she told her husband, alluding to her half-ownership of one building and a half-interest in a mortgage on another. "Get whatever you can."

Thus began a financial transaction that continues to attract scrutiny (see chart). The property in which Ferraro held a half-interest was a two-story brick commercial building at 231 Centre Street in Lower Manhattan. She and Manny Lerman, a longtime business associate of her husband's, had bought the building on May 1, 1978, at what Ferraro says was a bargain price: $175,500. Each put up $25,450 in cash. The balance of $124,605 was met by a mortgage, an obligation that they split at $62,300 each.

When Zaccaro sought a buyer for her interest in this building, he went to Lerman. They decided a fair market price was $325,000, nearly twice what Lerman and Ferraro had paid for the property five months earlier. (This value estimate was not unreasonable, it turned out, since the building was resold two years later for $375,000.) If they sold the building for $325,000 and paid off the $124,605 mortgage, Ferraro and Lerman would get roughly $200,000. Lerman agreed to pay Ferraro $100,000 in cash for her share. In purchasing her interest, Lerman took over Ferraro's share of the mortgage, relieving her of a $62,300 liability. Thus Lerman had in effect paid $162,300 for Ferraro's holding, meaning that she realized a profit of $74,550, or 85%, in just five months.

Zaccaro promised Lerman he would buy back Ferraro's share for $100,000. Thus Lerman knew he would get back his cash payment of $100,000. In buying the half-share, Zaccaro would acquire half the mortgage obligation.

The buy-back meant that Zaccaro was indirectly subsidizing his wife's campaign. In effect, she was selling her share of the property to him, with Lerman acting as an intermediary, and then using the proceeds to repay her husband and children. This would not be considered a gift and therefore a violation of election laws unless the value of the property was inflated, exceeding a fair market price at the time she sold her share.

The Ferraro campaign staff points out that Zaccaro could have simply bought his wife's property directly without going through Lerman, but "because of the recent FEC experience it did not occur to him." Again, for such a transaction to be legal it would have to be an arm's-length, market-value deal. In view of Ferraro's whopping profit after just five months, it is not entirely certain that the sale and repurchase met this standard.

Ferraro repaid the illegal campaign loans in October 1978 with the proceeds from 231 Centre Street and $30,000 from the sale of her interest in an unrelated mortgage. The FEC eventually fined her campaign $750. Zaccaro bought back the interest in 231 Centre Street in January 1979, after his wife's election to Congress. Ferraro says she only learned of the buy-back early in 1984. "Why did you do it?" she said she had asked Zaccaro. "He said it was legal and I said, 'Sure it was, but it doesn't look so hot.' "

When Ferraro and Zaccaro filed their last joint tax return in April 1979 (they have since filed separately), they substantially underestimated the profit on the building sale. They listed the original purchase price as $90,311, which was accurate enough ($87,750 plus $2,561 in closing costs). But they said the building was sold for $96,500, for a capital gain of only $6,189. This ignored the fact that Lerman had assumed her $62,300 mortgage. Accountants from Arthur Young & Co., recently hired by Ferraro to review her finances, discovered the omission almost at once. It meant that Ferraro had to pay an additional tax of $29,709, plus $23,750 for ive years' interest. She wrote out the $53,459 check last week, adding wryly, "It's hard to write a check for that amount." She covered it by selling bonds with a face value of $70,000. The couple will have to pay additional New York State and City taxes on the deal.

Ferraro contended that the mistake had been unintentional, made by her husband's accountant of some 40 years, Jack Selger, 75. Selger told TIME: "This was an error of omission on my part in not including the assumption of the mortgage liability." A Manhattan real estate lawyer was skeptical. "To make that kind of mistake is almost impossible," he argued, "especially for an accountant used to calculating capital gains from real estate investments." Assuming Selger's mistake was innocent, it is the sort of thing that an experienced real estate man like Zaccaro should have picked up when reviewing his returns. Indeed, the tax implications of any real estate deal are of paramount importance.

An Arthur Young accountant claims to have found a similar failure by Selger on a capital-gains computation for a Zaccaro transaction starting in 1981. In that case, however, the error meant that Zaccaro had overpaid his taxes for 1981, 1982 and 1983 by about the same amount as the 1978 underpayment. In general, contend the newly hired accountants, Selger did not take advantage of many tax shelters that were readily available.

The consensus of experts in the often cutthroat world of Manhattan real estate seemed to be that Zaccaro was a highly informal operator who could have done much better, in both deals and taxes, with shrewder advice. His wife, who made it a point to stay out of Zaccaro's business affairs, has learned the hard way that such marital privacies are not possible for a member of Congress, much less a candidate for Vice President. --By Ed Magnuson.

Reported by John F. Stacks and Frederick Ungeheuer/New York

With reporting by John F. Stacks, Frederick Ungeheuer/New York