Investors in court to recover cash
Lack of safeguards cited in tax-deferral strategy
JOHN STARK
THE BELLINGHAM HERALD
Investors have gone to court hoping to recover hundreds of thousands of dollars from a local man whose firm provided intermediary services aimed at deferring taxes in real estate deals.
In a Whatcom County Superior Court lawsuit and in a bankruptcy filing in U.S. Bankruptcy Court, two investors contend that Carl N. Zaremba and his firm, 1031 Inc., have failed to relinquish thousands of dollars of their money that he was holding as part of a financial service he provided to them for tax purposes. The court records also contain copies of letters that the investors got from Zaremba, in which he expresses regrets but provides no clue about what happened to investors’ money. In the letter, Zaremba promises to pay back an unspecified portion eventually with proceeds from the sale of his home.
“I deeply regret what has happened and there is no one to blame but myself,” Zaremba’s letter said.
His home on Northridge Way is now listed for sale at $395,000. Zaremba purchased it in January 2005, according to Whatcom County Assessor’s records.
Steven Hathaway, Zaremba’s attorney, did not return phone calls or an e-mail seeking comment on the case. Zaremba’s Bellinghambased company is no longer in business, and
there was no answer at his home phone.
At the center of the litigation is a complex real estate transaction system often used for investment properties, based on a longstanding provision in U.S. income tax law: Section 1031.
Section 1031 allows real estate investors to defer the capital gains taxes they would otherwise pay when they sell their investment properties at a profit.
To take advantage of Section 1031, an investor must reinvest the proceeds from the property sale in a different property within six months. Many real estate investors pay for the services of someone known as a “qualified intermediary,” who takes control of the proceeds from the first property until those proceeds are reinvested in a new one, to make sure they are not found to have realized a capital gain that would be taxed.
Some attorneys and certified public accountants specialize in providing 1031 exchange services, holding real estate sales proceeds for their customers in exchange for a fee, and paying out those proceeds when the customer is ready to buy a new investment property.
Zaremba is not an attorney or CPA, but there is no law requiring those qualifications for serving as an intermediary in 1031 exchanges.
In a sworn statement filed as part of his effort to force 1031 Inc. into bankruptcy and freeze any assets, Renton investor Scott Ronk said he paid Zaremba a $750 fee in September 2006 for intermediary services. In return, Zaremba was to hold about $240,000 in proceeds from the sale of a Blaine fourplex that Ronk had owned.
Ronk had planned to reinvest the proceeds in a different property, using Zaremba’s services to defer taxes on his gains.
But on Nov. 1, he got Zaremba’s letter, which stated that “the company does not have sufficient funds on deposit” to enable Ronk to complete his next real estate transaction.
In her lawsuit against Zaremba in Whatcom County Superior Court, Whatcom County resident Glenda Underwood said she had entrusted Zaremba with the $119,000 proceeds of the sale of property on Mission Road, but Zaremba had been unable to come up with $36,000 of the money.
She got the same letter that Zaremba had sent to Ronk.
Both Underwood and Ronk told the court that their subsequent efforts to contact Zaremba had not been successful.
Donald Hacker, Ronk’s attorney, said the episode points out some potential risks with 1031 transfers and qualified intermediaries.
“I don’t think there’s any necessary qualifications,” Hacker said. “I think you or I could do it. It seems to be unregulated.”
Dennis Helmick, past president of a trade association for 1031 qualified intermediaries, acknowledged that was true.
Helmick said investors should require proof that the intermediary they rely on is bonded and insured. Despite the lack of regulation, Helmick said problems have been rare in the industry. He said he could recall only one Washington state case similar to 1031 Inc., and that was more than 10 years ago.
Bellingham Police Lt. Flo Simon said a Bellingham detective is investigating what she termed “an active case” involving three individuals with complaints against Zaremba.
“We hope to have this resolved pretty quickly,” Simon said.
