[Note: This article first appeared on September 21, 2005. This and yesterday's encore article should serve as a good reminder that nothing has been changed since this looting of Butterworth Hospital to protect our public institutions from further self-dealing by those whom we trust to run them.]
A perceptive reader had an interesting observation to make about last week's article on the looting of Butterworth Hospital's reserves to fund a flip of the Autodie Fitness Center. He noted that by having a closely-held corporate entity, like Joe Rathbun's Rathbun Engineering Inc., receive the proceeds of the sale of the fitness center and then dissolving it immediately afterwards, the transaction is effectively hidden from the I.R.S. That's because the corporation no longer exists to file a return, and the lack of return from a defunct corporation is not something that shows up on the I.R.S.'s radar screen.
We don't know if either Rathbun or REI filed a return with the I.R.S. declaring the gain from the fitness center sale (the I.R.S. refuses to say), but we do know there was a big gain. That's because REI was paid $3.6 million for the Autodie Fitness Center by Charlevoix Club III Inc. (Butterworth's shill), but REI had no basis in the property -- i.e., money invested in its purchase or improvement. According to county records, Rathbun quitclaimed his interest in the fitness center to his company REI in exchange for nominal consideration. So that means the entire $3.6 million was a net gain to REI. Worse yet, because REI flipped the property to CCIII within a few days of Rathbun's quitclaim, the $3.6 million profit had to be taxed at the higher rate for ordinary income instead of the lower rate for a capital gain.
Even if Rathbun had in some manner transferred his basis in the fitness to REI, that doesn't help much. All Rathbun had in that property was his original $50,000 for purchasing one of the buildings that later became the Autodie fitness center and the additional $300,000 he ponied up to provide a kitty for Autodie's creditors to persuade them to release the property from Autodie's bankruptcy estate. Crediting those sums as REI's basis in the fitness center property means that the company still received a taxable gain in excess of $3.2 million.
Regardless of whether or not the defunct REI ever reported this huge taxable gain to the I.R.S., there still remains the question of how REI -- in actuality, Rathbun -- received the benefit of the millions that Autodie invested into the redevelopment of an old garage and boiler room into a modern fitness center. It doesn't add up. Autodie's creditors took it in the shorts, while Joe Rathbun, an old friend and business associate of Autodie's nearly bankrupt owner, acquired for a few pennies on the dollar a valuable Autodie property which he then flipped for almost four million bucks. How is it Rathbun received that gain and Autodie's workers, suppliers, and shareholders got nothing? And is it even credible that Rathbun kept the gain, or is it more likely he acted as a shill like CCIII did?
Just another reason why the fitness center sale stinks as we reported last week. It goes to show how much you can get away with in River City when you have the pull to get your crime "lawyered" -- that is, get one of the bigshot attorneys in town to vet your shady transaction and the authorities will look away. Better yet, get that attorney to help plan the crime so that the authorities don't even look in the first place. It is incredible how many dirty deals certain lawyers in this town, like Charlie McCallum, Robert Wardrop, Dick Wendt, Gary Schenk, etc., can rationalize as legit for the right fee.