State auditors are questioning the sale of a valuable 34-acre parcel of land to St. Mary's College of Maryland by a member of its Board of Trustees and have asked criminal investigators to review whether the trustee received undue tax benefits from the deal.
The audit, released Tuesday, says the college arrived at a purchase value of $1.625 million based on an appraisal ordered by the seller, trustee Michael O'Brien. It says St. Mary's College paid O'Brien $800,000 and, according to a letter from the college, treated another $825,300 as a donation, which was tax-deductible.
St. Mary's reported the purchase price as $800,000 to the state Board of Public Works and told the board that the land was valued at $860,000 and $1.1 million in two independent appraisals ordered by the college.
St. Mary's disputes the findings of the audit, noting that the purchase was negotiated between a real estate lawyer in the attorney general's office and O'Brien's attorney.
"Clearly, the College did not acquire the property based on an appraisal supplied by the seller as asserted in this finding," the college says in its official response. "The acquisition was based on two independent appraisals ... and the asset was booked at a price below the appraised value."
The response also notes that the college conferred with the state ethics commission before purchasing the land because of its relationship with O'Brien.
"This should never have appeared in the audit report," said Tom Botzman, the college's vice president for business and finance. "What we did was the right thing. We did it the right way based on advice from the attorney general's office and the ethics commission. And we're mystified by this finding."
"I do not see any criminal wrongdoing," said Sarah Slaff, a senior counselor in the attorney general's office who is assigned to the college but did not negotiate the deal. "Quite honestly, I'm baffled by the referral to the criminal division."
Bruce Myers, the state's director of legislative audits, called the transaction "very unusual" but said it's possible the college was merely sloppy in the way it reported the deal. "That's why we have the criminal division of the attorney general's office, to figure out if that's the case," Myers said. "We don't get into intent."
The attorney general's office confirmed that it received the referral and is reviewing the matter but declined to comment further.
The trustees approved the purchase of 34.48 acres adjacent to the Southern Maryland campus in February 2008. The college bought the land from O'Brien, who became a trustee in 2005, to prevent it from being developed into residential lots.
In a May 2008 letter to O'Brien, the college wrote, "We are in possession of your appraisal of $1,625,300 for the ... property. The College agreed to a bargain sale price of $800,000, with the remaining $825,300 to be accepted as your gift."
According to the audit, the seller's appraisal shows that the $1.625 million value was based on the assumption that the property could have been developed into nine residential lots when, in fact, the deed for the land prevented it from being subdivided into more than six lots.
By referencing the $825,300 donation, the college could allow O'Brien to take a tax deduction and thus cost the state revenue, the audit says. Myers said it's unclear whether the letter would have helped O'Brien claim a deduction of that amount.
O'Brien, a developer who focuses on Southern Maryland, said the figure in the college's letter had no bearing on his filing for a tax deduction. He said he needed the letter as an acknowledgment of the gift but added that the responsibility for determining a value for tax purposes was his.
"This letter would not be attached to our appraisal for the IRS," he said.
He called the audit "nonsensical."
"The school did not pay too much for the land, according to two independent appraisals," O'Brien said. "The fact that I have an appraisal with a different value, who cares? Nobody can recite what law was violated. I'm mystified."
St. Mary's officials dispute the audit's claim that they relied on O'Brien's appraisal. "The College's acknowledgment of the seller's appraisal was not for valuation purposes and had no bearing on the transaction," the college says in its response.
The college trustees contracted Washington tax attorney Richard E. Timbie to review the transaction independently. Timbie found that St. Mary's acted lawfully but was sloppy when it referenced the seller's appraisal in the May letter acknowledging the sale.
Slaff agreed, saying the college erred by including any reference to the seller's appraisal in the letter acknowledging the gift.
"But the letter has no legal tax significance," Slaff said. "The college had no intention to give anything other than an acknowledgment of the gift."
Slaff said she was frustrated by the audit's "blurring of terminology to make it seem like we were doing something incorrectly before the Board of Public Works when nothing could be further from the truth."
The audit also criticizes the college for lax financial practices, such as creating purchase orders after corresponding invoices were already received and failing to control expenses related to food service and a study program in Italy.