07:17 AM PDT on Friday, August 27, 2010

By DARRELL R. SANTSCHI
The Press-Enterprise

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.

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