Local Government Officials' Obligations with Respect to Federal Laws

The land deals of Congressman Gary Miller (R-Diamond Bar, CA) could provide fodder for numerous blog entries on various topics. I wrote about him and ethics recidivism, to show how important it is to deal with a local politician's unethical actions so that they don't turn into much bigger ones as he rises through the ranks.

Now I'd like to look at a way in which municipal officials, feeling they're helping out, enable unethical conduct.

One thing that Rep. Miller has allegedly done, according to an article in the Los Angeles Times, is to employ IRS Code Section 1033 to postpone paying capital gains taxes on land deals with municipalities.  Section 1033 (usually referred to as the forced-sale exemption) is limited to situations where land has been condemned by government agencies or destroyed in natural disasters.  It gives a landowner 180 days to reinvest the money in other property.

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The first time Miller took the forced-sale exemption was with respect to a 2002 sale to Monrovia, Ca.  When it came out that Miller had taken the exemption, Monrovia insisted that there was no forced sale, that state law required that the land not be taken by eminent domain.  However, throughout the transaction, the phrase "friendly condemnation" was included in the sales contract.  Only at the very last moment was this phrase taken out for contract.

The then assistant city manager of Monrovia said that the city always discusses the possibility of a friendly condemnation when it is negotiating a purchase, in case the seller wants to claim the forced-sale exemption. It's good to take into account the seller's needs, but such language should never be used when there is not an actual condemnation.

Miller invested the money in land in Fontana, which he knew would soon be purchased by the city.  Again Miller took the forced-sales exemption, but Fontana insists that there was no condemnation.

Miller uses as evidence a letter signed by the city manager.  Although the letter says that the plan is not currently authorized to use eminent domain, it says that the Redevelopment Agency "is in the process of amending the redevelopment plan to authorize the use of eminent domain."  The city's redevelopment director said that Miller asked for "a letter that talked about eminent domain."  The director called it a "courtesy letter.  Agencies do it when asked."

And there's the problem: giving someone a courtesy letter that can be used to get around paying taxes.  Of course, these are not municipal taxes, so municipal officials do not have any specific obligation with respect to these taxes. But there are interests conflicting here: (i) officials' desire to make their transactions go smoothly (both a personal interest, in making life easier, and a public interest in making it pleasant to work with government), (ii) officials' obligation to make their documents and statements fully truthful, and (iii) officials' obligation to be fair, that is, under these circumstances, to take into account not only the fairness reflected in the municipal government's laws, but also the fairness reflected by other levels of governments' laws (and here the federal government's concept of fairness in no way conflicts with the municipality's: having everyone pay the full amount of taxes owing, so that others are not required to effectively overpay for government services).

The officials in Monrovia and especially in Fontana chose the first interest, the most personal interest and, in terms of the public interest, the least important public interest. It's virtuous to help out people you work with, but not at the expense of truthfulness and fair tax collection. The winner in this matter was not the municipal government or the federal government, but a landowner who made a couple of large profits and could easily have afforded to pay capital gains taxes on what he earned. The fact that this landowner was a member of congress makes the whole thing that much uglier, on both sides.

It's easy to dump on Rep. Miller, as the Los Angeles Times did in an editorial, and as the California Democratic Party did in a narrowly focused You Tube video. But the lesson for local government officials is more difficult to appreciate: that officials have an obligation not only to their particular board, agency, or level of government, but to other levels of government, especially where fairness is at issue and where there is no dispute between the levels. In addition, officials should go out of their way to be truthful and fair when another government official is involved.

Robert Wechsler
Director of Research-Retired, City Ethics