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. <a href="http://www.cityethics.org/node/230" target="”_blank”">I wrote about him and ethics
recidivism</a>, 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.<br>
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Now I'd like to look at a way in which municipal officials, feeling
they're helping out, enable unethical conduct.<br>
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One thing that Rep. Miller has allegedly done, according to <a href="http://www.latimes.com/news/local/la-me-miller13aug13,0,2223572.story&q…; target="”_blank”">an
article</a> 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.<br>
<br>
<a href="http://www.cityethics.org/node/448">Click here to read the rest of this blog entry.</a>
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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.<br>
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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.<br>
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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.<br>
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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."<br>
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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).<br>
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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.<br>
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It's easy to dump on Rep. Miller, as the Los Angeles Times did in <a href="http://www.latimes.com/news/printedition/opinion/la-ed-miller13dec13,1,…; target="”_blank”">an
editorial</a>, and as the California Democratic Party did in a narrowly focused <a href="http://www.youtube.com/watch?v=23gzzARwUsQ" target="”_blank”">You Tube video</a>.
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.<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>