CARMEN A. TRUTANICH City Attorney

Transcription

1 City Hall East 200 N. Main Street Room 800 Los Angeles, CA (213) Tel (213) Fax CARMEN A. TRUTANICH City Attorney REPORT RE: REPORT NO. R 1 0 "" APR 1-9 ~ PROPOSED BUSINESS TAX LIENS The Honorable City Council Room 395, City Hall 200 North Spring Street Los Angeles, California Honorable Members: Council File No Pursuant to your request, this Office has prepared and now transmits for your consideration a draft Ordinance to create an administrative lien program to secure and collect unpaid tax assessments owed to the City of Los Angeles (City.) The procedures set forth in the draft Ordinance provide for an administrative lien program that will allow for the expedited collection of tax liabilities while complying with applicable law. An administrative lien program must avoid conflicts with California law and comply with the Constitution. Among other things, California law already provides for judgment liens which attach essentially to all assets of ajudgment debtor. Should the City enact an ordinance which allows the City to record a lien that simply acts as a judgment lien without requiring the City to first obtain a judgment, we believe the Ordinance would likely be preempted by California law. Isaac v. City of Los Angeles (1998) 66Cal.App.4 th 586, 598. To avoid such difficulties, the draft Ordinance provides for an administrative tax lien that will attach only to the property that was utilized to generate the tax liability, and to property acquired after the lien is recorded. The Ordinance sets forth a process by which such a recordation can be accomplished in accordance with applicable legal constraints.

2 The Honorable City COUI Page 2 The Operation of the Draft Ordinance The draft Ordinance would authorize the Office of Finance to record administrative tax liens to secure unpaid City tax liabilities. A lien could be recorded against real property or against personal property. Upon determination by the Director of Finance to record an administrative tax lien, the matter would be reviewed by the City Attorney. The City Attorney must concur that a sufficient basis exists for the tax liability. A sufficient basis for the liability does not require certainty, but rather enough evidence and legal support to justify the liability in litigation should it be challenged. Additionally, the City Attorney must concur that assets exist to which the lien could legally attach. After this review, the matter would be referred to the City Council for hearing and notice would be provided to the taxpayer.' After hearing and approval of the lien by a majority vote by the City Council, a lien would be recorded in the appropriate location. The exact location is not specified in the draft Ordinance because the lien must be recorded so as to attach to the taxpayer's property. The proper location will depend on where the taxpayer's property is found, and therefore cannot be predetermined in the draft Ordinance. Under the draft Ordinance, an administrative tax lien could be recorded only against business property, i.e., property used to generate the tax liability. The administrative tax lien could not be recorded against property unrelated to the tax liability. See Isaac, 66 Cal. App. 4th at 598 (State law regarding judgment liens, which attach to all of a debtor's property, preempt similar municipal ordinances.) Thus, the administrative tax lien would attach to a parcel of real property containing a hotel if the real property was owned by a taxpayer and the hotel generated unpaid Transient Occupancy Taxes under Los Angeles Municipal Code Section ; however, the administrative tax lien would not attach to the personal residence of a taxpayer if the personal residence was unrelated to the tax liability. Similarly, an administrative tax lien would attach to the business checking account of a taxpayer, but not to a personal checking account used by the owner of the business into which no business funds were deposited. The draft Ordinance provides that the City's administrative tax liens have the same force and effect as a State tax lien. A State tax lien may be directly enforced by a writ of execution without first being brought to judgment. Revenue and Taxation Code 1 The information provided to the City Council would comply with the City's taxpayer confidentiality requirements under LAMC section 21.17(b)(6}, which allows "the disclosure of such information as may be necessary to the City Council in order to permit it to be fully advised as to the facts... where the existence or amount of business, sales, or use taxes are otherwise relevant to the determination of a matter required to be submitted to the City Council under the City of Los Angeles Charter, the Los Angeles Municipal Code, or the Los Angeles Administrative Code."

3 The Honorable City Cou, Page 3 section Thus, the City would not need to file a lawsuit against a taxpayer and obtain a judgment lien before starting to collect the business assets of the taxpayer. The ability to avoid bringing a lawsuit to judgment before seeking a writ of execution is the primary benefit of the administrative tax lien program. We believe the City has the power as a charter city to provide its tax liens with the same force and effect as State tax liens; however, there is not strong support for this position. California law states that a '''state tax lien' means a lien created pursuant to Section 8048 of the Fish and Game Code, section 3423 or 3772 of the Public Resources Code, Section 6757, 7872, 8996, 13610, 16063, 16810, 19221, 30322, 32363, or of the Revenue and taxation Code, or Section 1703 of the Unemployment Insurance Code.,,2 Government Code section None of those liens refer to taxes collected by the City. Government Code section 7162 does not appear ambiguous, and defines most tax liens recorded by the State of California. However, it can be argued that the statute is not all inclusive and does not preclude attempts by a municipality to provide its tax liens with the same force and effect as a "state tax lien." On balance, we believe that the City has the power to take this step. Nevertheless, a writ of attachment based on the administrative lien would still have to be attached in order to seize the property in question. Summary of Tax Collection Procedures Under the Draft Ordinance Once a lien attaches to a taxpayer's property, the Office of Finance will need to take action to collect the outstanding liabilities. A recorded lien, by itself, merely secures the rights of the City with respect to the taxpayer's assets. With certain exceptions, an involuntary creditor such as the City must then take action to foreclose on a lien, usually through litigation. After obtaining a judgment through litigation, a creditor generally must then obtain a writ of execution or writ of possession or sale to enforce the judgment and collect a debtor's assets. A writ of execution generally can only enforce a money judgment. Code of Civil Procedure section A state tax lien is one exception to the requirement for a judgment prior to obtaining a writ of execution. Revenue and Tax Code section Therefore, by defining the City's administrative tax lien as a "state tax lien," we believe that the City will not need to obtain a judgment before seeking a writ of execution to enforce the City's lien. As noted above, in an action for a writ of execution to enforce an administrative tax lien without first obtaining a judgment, a Court could find the City is pre-empted and hold that the definitions of a "state tax lien" set forth in Government Code section 7162 preempts all attempts by the City to provide its tax liens with the force and effect of a 2 Those sections refer to, respectively, taxes relating to fish and game, geological rights, real property, fuel use, inheritance, gift, generation skipping, franchise and income, Cigarette, alcoholic beverage, timber, motor fuel, and unemployment insurance contributions,

4 The Honorable City COUI, Page 4 state tax lien. If so, the City's administrative tax liens would not have the force and effect of state tax liens. Instead, the City's administrative tax liens would still protect the City's interest in the taxpayer's assets, but provide no special rights to collect those assets." In order to collect on those liens, the City would first need to obtain a judgment through a lawsuit. See Code of Civil Procedure section A summary of the collection steps that the City currently takes, compared to the steps that will be taken under the draft ordinance, are set forth in the following table: Office of Finance Completes Assessment City Files Lawsuit to Collect Assessment City Obtains Judgment Lien Office of Finance Completes Assessment (Step Not Taken) Office of Finance Obtains Tax Lien City Records Judgment Lien City Records Tax Lien City Obtains Writ of Execution Writ of Execution Used to Collect Assets City Obtains Writ of Execution Writ of Execution Used to Collect Assets It currently takes four months to file a lawsuit and obtain a judgment lien through a default judgment. Except for that four month period, we do not believe that significant time will be saved by collecting taxes through an administrative lien program. Conclusion An administrative tax lien program to secure municipal taxes could allow the City to more quickly attach liens to some of a taxpayer's assets, but fewer assets than a judgment lien already allows. Although an administrative tax lien program may not allow for the City to expedite collection, it should allow the City to protect its interests in business assets more quickly and prevent fraudulent or deceptive attempts to avoid payment. The City would have a greater ability to prevent a taxpayer from transferring assets to avoid collection actions. The City would also have more ability to negotiate payment terms from taxpayers. 3 The City would have a secured interest in the taxpayer's business assets attaching as of the date of recordation of the lien. This interest would have priority over general creditors with subsequent interests in the assets. 4 The City may need to obtain a judgment to collect taxes even with its administrative tax liens, depending on the outcome of litigation.

5 The Honorable City COUI Page 5 Council Rule 38 Referral The draft Ordinance has been sent to the Office of Finance pursuant to Council Rule 38 for review and comment directly to Council. If you have any questions regarding this matter, please contact Deputy City Attorney Daniel M. Whitley at (213) He or another member of this Office will be present to answer any questions you may have when you consider this matter. Very truly yours, CARMEN A. TRUTANICH, City Attorney PEDRO B. ECHEVERRIA Chief Assistant City Attorney PBE:DMW:vw Transmittal M:\Econ Oev_Pub Finance\Public Finance\Oan Whitley\Reports\Rpt re Business Tax Liens-3 Fina1.doc

6 ORDINANCE NO. _ An ordinance add ing Subsection (0) to Section of Article 1, Chapter 11 of the Los Angeles Municipal Code to provide for an administrative lien process by which the Director of Finance may collect taxes owed to the City of Los Angeles. THE PEOPLE OF THE CITY OF LOS ANGELES DO ORDAIN AS FOLLOWS: Section 1. Subsection (0) of Section of Article 1, Chapter 11 of the Los Angeles Municipal Code is hereby added to read as follows: (0) Liens for Unpaid Taxes. (i) The amount of any tax, interest and penalty imposed by this Chapter shall be deemed a debt to the city. If the tax is not paid when due, such tax, penalty and interest shall be a lien against the taxpayer's property for the amount thereof, which lien shall continue until the amount thereof including all penalties and interest are paid, or until it is discharged of record. (ii) The Director of Finance may record liens against property to collect unpaid taxes, interest, and penalties upon the exhaustion of the administrative process to determine the amount of such liabilities under this Chapter. Such liens may be recorded against real property used in connection with activities that generated the tax liability or against personal property used in connection with activities that generated the tax liability. Such liens shall be recorded according to applicable law in the jurisdiction in which the property is located. (iii) Prior to recording a lien for unpaid taxes, interest, and penalties, the Director of Finance shall provide a report requesting approval of the lien to the City Council with the taxpayer's name, amount of tax, interest, and penalties owed, and the tax periods for which taxes will be collected. The matter shall be duly placed upon the City Council agenda for hearing. No request for approval of a lien shall be made to the City Council unless the City Attorney has determined that a sufficient basis exists to support the liability and that assets exist to which the liability could attach. The Director of Finance shall provide at least 15 days notice of the hearing to the taxpayer by mailing a copy of the report to the address listed in the most recent property ownership records provided to the City by the County Assessor. Notice shall be deemed complete at the time of deposit in the United States mail. (iv) Upon a majority vote by the City Council to approve the recordation of lien(s), the Director of Finance or his designate may record in the proper office a certificate which specifies the amount of tax, interest and penalties due, the name and last known address of the person liable for the same, a statement that the Director of Finance has determined the correct amount to be paid and a legal 1

7 description of the property owned by the taxpayer to which to which the lien applies. From the time of the recording of the certificate, the amount required to be paid together with interest and penalties constitutes a lien upon all property to which the lien can attach and to property owed by the taxpayer used in connection with activities subject to taxation under this Chapter. The lien has the force, effect and priority of a state tax lien and shall continue for ten (10) years from the filing of the certificate unless sooner released or otherwise discharged, or unless a term is otherwise provided by applicable law. 2

8 Sec. 2. The City Clerk shall certify to the passage of this ordinance and have it published in accordance with Council policy, either in a daily newspaper circulated in the City of Los Angeles or by posting for ten days in three public places in the City of Los Angeles: one copy on the bulletin board located at the Main Street entrance to the Los Angeles City Hall; one copy on the bulletin board located at the Main Street entrance to the Los Angeles City Hall East; and one copy on the bulletin board located at the Temple Street entrance to the Los Angeles County Hall of Records. I hereby certify that this ordinance was passed by the Council of the City of Los Angeles, at its meeting of _ JUNE LAGMAY, City Clerk By _ Deputy Approved _ Mayor Approved as to Form and Legality CARMEN A. TRUTANICH, City Attorney BY~ Deputy City Attorney Date 0'lP File No M:\Econ Dev_Pub Finance\Public Finance\Dan Whitley\Ordinances\LAMC doc 3