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Atherton and itsTax Problem

Original post made by bian foster on Sep 12, 2009

The Santa Clara County employee relations agency values the use of the house at holbrook palmer park by jerry gruber at $50k per year.

Currently gruber pays no taxes on the rent of the house. this could be a big problem for the town and is bound to be a topic of discussion when gruber negotiates his compensation.

Comments (5)

Posted by tax man, a resident of Atherton: Lloyden Park
on Sep 12, 2009 at 6:44 pm

I do taxes for a living.

It is my understanding that the City Manager makes less than the assistant city manager. This constitutes recognition on the part of Atherton that the use of the Town residence is part of the compensation package for the City Manager.

It would appear as though Atherton is going to have to pay some back taxes to the IRS.


Posted by Fiscally responsible, a resident of Atherton: West Atherton
on Sep 12, 2009 at 7:24 pm

Bian Foster: how do you know that Jerry Gruber didn't pay taxes to the IRS and Calif. Franchise Tax Board for the $50K per year rental compensation value of that home? If he didn't, I agree, it looks like he's going to claim Atherton needs to pay the taxes but IN ALL FAIRNESS he should pay the taxes since it's an element of his compensation.


Posted by richard marks, a resident of Atherton: West of Alameda
on Sep 12, 2009 at 8:18 pm

A city manager living rent free and tax free at Holbrook Palmer Park is nothing new.

The Town has always justified the tax treatment by telling the City Manager he had to look after the park. (Never mind that looking after the park is the job of Public Works.)

The old City Attorney how thin this line of reasoning was that he refused to indemnify the former City Manager if ever challenged by the IRS.

By paying the current City Manager less than the 2nd in command, the Town would appear to no longer skating on thin Ice but has fallen through.

As far as who should pay taxes on the $1 million plus in uncompensated income over the past 20 years. I say the buck stops with Atherton.


Posted by Cut to the chase, a resident of Atherton: West Atherton
on Sep 13, 2009 at 8:17 pm

Let's cut to the chase of what's going on here. Employer provided housing is taxable to the employee (based on the fair market value rent; in this case, apparently assessed at $50,000 per year) if and only if, per Internal Revenue Code 119(a), the housing is on the business premises of the employer, and the employee is required to accept the lodging as a condition of his or her employment.

I believe Mr. Gruber was probably "required" to accept the lodging as a condition of his employment (in the sense that this was at least documented as such to attempt to get him the tax exemption). Whether or not that home is on the business premises of the Town of Atherton is a questionable issue. Although the park is owned by Atherton, many would probably consider the "business premises of Atherton" to be 91 Ashfield Road. It's a gray area, plain and simple.

According to the Internal Revenue Code, if the employer is aware that taxes must be paid for taxable income paid to an employee, it is obligated to withhold the taxes. If it does not, the employer – and even the members of the governing body of the employer (board of directors of a corporation; members of the council in the case of Atherton) can be held liable for the taxes.

The simple solution for the Atherton/Gruber housing situation is for Atherton to withhold taxes based on his current income level plus $4166.67 per month (an additional $50,000 per year not being paid as cash, but rather as employer provided housing). At the end of the year, Mr. Gruber can elect to ask the IRS for a refund for those taxes paid if he wishes to take the view that his housing is on Atherton's business premises.

This way, it makes the issue purely one between Gruber and the IRS and ATHERTON CANNOT BE HELD LIABLE FOR THE TAXES.

Now, maybe Mr. Gruber is saying, behind the scenes, that he only accepted the employment with the understanding that that element of his compensation is non-taxable, if taxes will be paid then he needs a raise to "gross up", etc. etc. This is really an employment negotiation between him and the Town Council (my personal opinion is that no income adjustment should be made). No matter what the outcome, if Atherton simply withholds the taxes and leaves it to Mr. Gruber to reclaim from the IRS, they: (1) allow him to take the aggressive tax position if the IRS will let him, and (2) prevent liability to the Town of Atherton and its governing body.

Makes sense? Any reason not to do it? (Perhaps if one views the council as representing Gruber instead of the residents, an argument can be made not to, but only with this very twisted view, in my opinion).


Posted by skeptic, a resident of Atherton: Lloyden Park
on Sep 16, 2009 at 9:29 am

I too am a tax professional.

I do not recall the issue of the City Manager being allowed to live both rent free and tax free. Hence I doubt the authenticity of this story.

I would also caution whomever has posted this note that this is a very serious allegation. If true it could result in severe penalties against the Town and the taxpayer. If false, I would expect the individual who reported this did so knowingly he or she could be subject to significant civil liability.

For these reasons I would strongly suggest that those involved tread deliberately.


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