D.c. Councilmembers have asked about the failure to collect recordation taxes on purchase money loans. David catania: "your explanation for this state of affairs is disingenuous" catania: your attempt to create "ambiguity" surrounding what is plain and clear is troubling.
D.c. Councilmembers have asked about the failure to collect recordation taxes on purchase money loans. David catania: "your explanation for this state of affairs is disingenuous" catania: your attempt to create "ambiguity" surrounding what is plain and clear is troubling.
D.c. Councilmembers have asked about the failure to collect recordation taxes on purchase money loans. David catania: "your explanation for this state of affairs is disingenuous" catania: your attempt to create "ambiguity" surrounding what is plain and clear is troubling.
D.c. Councilmembers have asked about the failure to collect recordation taxes on purchase money loans. David catania: "your explanation for this state of affairs is disingenuous" catania: your attempt to create "ambiguity" surrounding what is plain and clear is troubling.
1350 PENNSYLVANIA AVENUE, NW WASHINGTON, D.C. 2001[)4 DAVID A. CATANIA Committee Member Council member, At Large Finance and Revenue Chair, Committee on Health Libraries, Parks and Recreation Government Operations and the Environment June 30, 2011 Dr. Natwar Gandhi Chief Financial Officer 1350 Pennsylvania A venue, NW, Ste. 203 Washington, DC 20004 Thank you for your reply to requests from Councilmember Evans and me regarding the Office of Tax and Revenue's (OTR) failure to collect recordation taxes on the refinancing of commercial property purchase money deeds oftrust or mortgages (collectively "purchase money loans") as required by the Tax Clarity Act of 2000 (the "Act"). Your admission that these taxes have not been collected as required by the Act is extremely disconcerting. Further, your explanation for this state of affairs is disingenuous. After reading your responses, I have serious concerns about: 1. The manner in which you downplay official tax guidance issued from your office; 2. Your misrepresentation of the legislative record of the Act; and 3. Your flawed interpretation of a court case to support your position. In short, while your attempt to create "ambiguity" surrounding what is plain and clear may make for a good media strategy, it reveals a troubling inability to be forthcoming with District taxpayers. As you know, under D.C. Law, if a commercial property is purchased using a loan which is secured by a deed of trust or mortgage (Le., a purchase money loan), then a recordation tax is assessed on the recording of the deed but not on the purchase money loan. I When that loan is refinanced, however, this situation is reversed. At a refinance, there is no recordation tax on the deed (because no deed is recorded during a refinance), but there is a recordation tax applied to the loan. Prior to the Act, this tax was only assessed on the amount of new debt over and above the existing debt if the loan being refinanced was a purchase money loan. The Act, however, repealed the recordation tax exemption for the existing debt of purchase money loans. 1 D.C. Official Code 42-1102(5) In addition to your failure to acknowledge the impact of the Act, I am further concerned by your efforts to paper over your misapplication of the law. 1. Official Tax Guidance Issued From Your Office That You Now Dismiss As mentioned in my earlier correspondence, in April and October 2001, your office issued official guidance on how to comply with the newly enacted provisions of the Act. Both clearly stated that previously untaxed portions of purchase money loans were to be subject to recordation tax on the entire amount of the loan being refinanced. Both noted that this was a change from previous practice required by the Act. That you would now downplay these official memos as mere "intervening correspondence" is insincere at best. How should residents and businesses interpret official tax guidance from your office in the future if it will go unenforced or, in this case, simply disregarded when questioned? Additionally, in your response to question number seven (7) posed in my June 10,2011 letter, you state that, "Although during 2001, staff of the Recorder of Deeds issued certain guidance concerning the implementation of the Act, the legal interpretation which precipitated this guidance has since changed. This guidance is no longer effective." However, I am unaware of any subsequent guidance on this matter. As such, I am requesting all documentation that forms the basis of this statement, including all documents that would shed light on the timing and legal basis for this change. Please forward these documents, along with any revised official tax guidance evidencing this change that was issued by your office, to my office by Monday, July 10,2011. 2. Your Misrepresentation of the Legislative Record of the Act In your letter to Councilmember Evans you state that, "there is nothing in the legislative history of the Tax Clarity Act to indicate that the amendment was intended to otherwise limit the availability of the established exemptions from payment of recordation tax on the original existing debt or to extend the tax to types of existing debt that were previously exempt." (emphasis added) This is simply not true. Attached to this letter you will find testimony presented at the hearing on the Act that clearly reflects the understanding of those industries most affected by the language of the Act that this change would subject the existing debt of purchase money loans to recordation tax during a refinance. Specifically, the Apartment and Office Building Association of Metropolitan Washington (AOBA) argued that: Finally, the proposed language would permit the full recordation tax to be applied to the entire amount refinanced ifthe existing debt was not subject to recordation tax. We would suggest eliminating this "catch-up" provision for old debt that is now being refinanced. (Attachment A) Also, please see the testimony from the District of Columbia Land Title Association (DLTA) who opposed this specific provision ofthe Act, arguing that: At present, the District imposes recordation tax only on new debt when the refinance takes out a purchase money security instrument. Was the omission of the purchase money exemption intentional in Bill J3-586? The loss ofavailability offavorable tax treatment on refinances ofpurchase money mortgages places an onerous tax burden on commercial property owners in the District ofColumbia. (Attachment B) Thus, the legislative history of the Act is clear and is at odds with your unsupported contention. Those directly affected and experts in the field understood precisely what the plain language of the Act meant. 3. Your Flawed Interpretation of Case Law Regarding the Refinance Exemption of Recordation Taxes I am particularly troubled by your misapplication of.1 J37 J9'h Street Associates. LP v. District ofColumbia, 769 A.2d 155 (D.C. 2001). In your June 22, 2011 response to Councilmember Evans, you cite this case to support your belief that both before and after the Act only the new debt over and above the existing debt is subject to recordation tax for commercial property purchase money deeds of trust or mortgages at the time of a refinancing. Your understanding of the court's holding in this case, however, is incomplete and leads you to the wrong conclusion. Contrary to your contention, the court actually held that plaintiffs J J 37 J9'h Street Associates w e r ~ responsible for paying recordation taxes on both the existing debt and the new debt when they refinanced their loan. The court took special care to note that the loan being refinanced by the plaintiffs was neither a purchase money deed of trust nor a purchase money mortgage. The court held that the loan in question had not been subject to recordation tax under 45-923(a)(3) and, therefore, plaintiffs were responsible for paying recordation tax on both the existing debt and the new debt. Far from supporting your contention, the court's reasoning explains why OTR was responsible for collecting recordation taxes on both the existing debt and the new debt of commercial property purchase money loans when they were refinanced after the enactment of the Act. 2 Though the refinance in 1137 19th Street Associates occurred prior the Act, the court's reasoning is directly relevant to the issue raised in my first correspondence. As I noted in that letter and again here, the pre-Act language contained two exemptions for the existing debt at the time of a refinanciJtlg: (1) for purchase money deeds of trust or mortgages or (2) for amounts previously "subject to tax under this paragraph." The first exemption, the one for purchase money deeds oftrust or mortgages, was subsequently repealed by the Act. Because the loan in question in Finally, in your response to my June 10, 2011 letter, you imply that the Act made no substantive changes to District tax law. This is simply a ridiculous contention. A quick reading of the Act's long title reveals that it was replete with changes to District tax policies. In fact, they are too numerous to list out in this letter. It is my opinion that the Council and the public deserve a full explanation of this matter. Thus, I will be requesting opinions on this matter from both the District's Attorney General and the Council's General CounseL In the meantime, as requested earlier, please forward all documents that would evidence a change in the District's interpretation and policy regarding the collection of recordation taxes on refinanced commercial property loans to my office by Monday, July 11,2011. If you have further questions about this request, please contact my office at (202) 724-7772. Sincerely, & . & ~ David A. Catania Councilmember, At-Large Chair, Committee on Health cc: Mayor Vincent Gray All Councilmembers 1137 19'h Street Associates was neither a purchase money deed of trust or mortgage, the court's analysis focused on the meaning of "subject to taxation under this paragraph," (language still in 45-923(a)(3) [now 42-1103(a)(3)]). Plaintiffs argued that the D.C. Council intended for the term "under this paragraph" to encompass both the section and subsection. The court disagreed and held that the recordation tax exemptions for a refmance of a commercial property loan were contained in a distinct paragraph (i.e. 45-923(a)(3)), and therefore the loan in question had not been previously "subject to taxation under this paragraph." Since the loan was not a purchase money deed oftrust or mortgage it was not eligible for either of the exemptions provided in the pre-Act language. Thus, the plaintiffs were required to pay recordation tax on both the existing debt and the new debt when the loan was refinanced. The case is relevant today because, as previously mentioned, the exemption for purchase money deeds of trust or mortgages was repealed by the Act, leaving only the exemption for amounts not previously taxed under 45-923(a)(3). As we all agree, the existing debt ofthe loan is exempt from recordation tax when it is first recorded according to 42-1102(5) [formerly 45-922(5)]. But it is not exempt from recordation tax during a refinance because, as the court held in 1137 19th Street Associates, it has not been previously subject to recordation tax under "this paragraph" or, more specifically, 45-923(a)(3). Attachment A . ( *OffiCE BUILDING * > ..... .... o .n > -0 o = o - *. METROPOlITAN WASHINGTON * APARTMENT AND OFFICE BUILDING ASSOCIATION of METROPOUTAN WASHINGTON TESTIMONY BEFORE THE COMMITTEE ON FINANCE AND REVENUE COUNCIL OF THE DISTRICT OF COLUMBIA ON
;0, !;" .. ,_ Jr(:>1] C. r., 7 BILL 13-586, THE "TAX CLARITY ACT OF 2000 11 MARCH 6, 2000 Presented By: David J. Chitlik j , CAE Director, Lodging, Sales and Property Tax Marriott Lodging . Co-Chairman, AOSA Tax Policy Committee Michael A. Cain, Esq. Hamilton & Hamilton, LLP W. Shaun Pharr, Esq. AOBA Vice President of Government Affairs District of Columbia 1050 17th Street .. .NW. Washington, DC 20036 . Phone: (202) 296-3390 III Fax: (202) 296-3399 II E-Mail: webmaster@aoba-metro.org I IRI . GOOD MORNING,. CHAIRMAN EVANS AND MEMBERS OF THE COMMITTEE. I AM DAVID l. CHITLIK, DIRECTOR, LODGING, SALES AND PROPERTY TAX FOR MARRIOTT LODGING, AND I AM CO CHAIRMAN OF THE TAX .POLICY COMMITTEE OF THE APARTMENT AND OFFICE BUILDING AS.SOCIATION OF "METROPOLITAN WASHINGTON (AOBA). AS YOU KNOW, AOBA' IS A NON-PROFIT TRADE ASSOCIATION REPRESENTING OWNERS AND' MANAGERS OF . ' ' MORE THAN 35,000 APARTMENT UNITS AND OVER 60 MILLION SQUARE FEET OF OFFICE SPACE THE DISTRICT. I AM ACCOMPANIED TODAY BY ATTORNEY MICHAEL A. CAIN,. OF THE LAW FIRM OF HAMILTON &. HAMILTON, WHO IS A MEMBER OF OUR COMMITTEE, AND SHAUN PHARR, AOBA'S VICE PRESIDENT OF ' GOVERNMENT AFFAIRS FOR THE DISTRICT. WE APPRECIATE THE OPPORTUNITY. TO BE HERE TODAY TO SPEAK TO BILL 13-586, THE "TAX CLARITY ACT OF 2000." THE NEED FOR GREATER CLARITY THROUGHOUT THE DISTRICT'S TAX CODE IS EVIDENT BY THE SIZE OF THE BILL ITSELF. AOBA COMMENDS THE OFFICE OF TAX AND REVENUE. (OTR) FOR THE INITIATIVE AND DEVELOPING THE EARLY DRAFTS OF THE ACT; OUR COMMITTEE, WAS PLEASED TO HAVE HAD EXTENSIVE DISCUSSIONS WITH . . STAFF ABOUT MANY OF THE REAL PROPERTY TAX PROVISIONS, AND A NUMBER OF REVISIONS AND RESULTED FROM THOSE DISCUSSIONS.' WE MUST ALSO, HOWEVER, COMMEND YOU AND YOUR MANY CHAIRMAN' EVANS, FOR NOT ALLOWING THOSE EFFORTS TO LANGUISH BY INTRODUCING. TH E LEGISLATION YOURSELF TO' ENSURE THAT IT RECEIVES TIMELY CONSIDERATION. EVEN THE MOST REASONABLE MINDS WILL DIFFER, MR. CHAIRMAN, ABOUT WHETHER THIS PROVISION OR THAT ONE IS TRULY AN' IMPROVEMENT OVER WHAT IS IN THE EXISTING CODE, OR IS'A CONCISE REFLECTION 'OF AN ACTUAL PRACTICE WHICH HAS NEVER BEEN, BUT PERHAPS SHOULD BE, CODIFIED. OTHER OFFERED IN THE NAME OF CLARITY, MAY BE SEEN, BY OTHERS AS AN , EXPANSION, OR CONTRACTION, OF THE RIGHTS OF TAXPAYERS, O'R OF THE GOVERNMENT. THIS BILL IS NO EXCEPTION. RATHER THAN TAKE TIME TODAY TO ENUMERATE AND EXPLAIN ALL OF THE WHICH WE THINK MIGHT STILL BE IMPROVED,UPO'N,' AOBA Pll.OPOSES TO SUBMIT, FOR THECOMMITrEE'S . . CONSIDERATION, ITS OWN REDRAFT OF THE SAME REAL PROPERTY TAX SECTIONS OF THE CODE WHICH ARE CONTAINED IN THE BILL. WE REGRET THAT WE COULD NOT DO SO TODAY, BUT ASSURE YOU WE WILL DO SO BEFORE THE RECORD CLOSES. THIS MORNING, THJ:N,' OUR TESTIMONY WILL SPEAK MAINL.Y TO SOME OF THE MAJOR CONCERNS WE HAVE ABOUT CERTAIN PROVISIONS IN BILL
1. USE OF CONFIDENTIAL OR PROPRIETARY TAXPAYER INFORMATION TO SUPPORT A CHA'LLENGED ASSESSMENT SHOULD NOT BE PERMITTED O'N PAGE 93 OF THE BILL,OTR SEEKS THE RIGHT-iTO SUBMIT CONFIDENTIAL RECORDS OF OTHER PROPERTIES TO THE BOARD OF REAL PROPERTY ASSESSMENT APPEALS (BRPAA) CHAIRMAN, 0i=t IN SUPERIOR COURT, AS EVIDENCE SUPPORTING THE CHALLENGED ASSESSMENT. THE AMENDMENTS WOULD PERMIT OTR TO SUBMIT CONFIDENTIAL, THIRD-PARTY TAXPAYER INCOME/EXPENSE AND PROPRIETARY INFORMATION (e.g., TENANT LEASING INFORMATION), FROM WHAT IT CONSIDERS COMPARABLE PROPERTIES, TO SUPPORT AN ASSESSMENT. FAIRNESS WOULD REQUIRE THAr SUCH INFORMATION ALSO BE PROVIDED TO THE TAXPAYER CHALLENGING THE ASSESSMENT. DOING SO, HOWEVER, 2 WOULD THEN BREACH THE VERY PROMISE OF STRICT CONFIDENTIALITY WHICH THI.S GOVERNMENT DE.CADES AGO, WHEN IT BEGAN REQUIRING PROPERTY OWNERS TO PROVIDE THEIR MOST SENSITIVE BUSINESS INFORMATION TO DISTRICT ASSESSORS. OTR CAN, AND DOES, EFFECTIVELY SUPPORT ITS ASSESSMENTS THROUGH THE USE OF COMPARABLE SALES INfORMATION, INCOME/EXPENSE STUDIES IN NON-IDENTIFIABLE TAXPAYER FORMAT, AND THROUGH CONSTRUCTION COST INFORMATION. THERE IS SIMPLY NO' COMPELLING NEED FOR IT TO RELEASE TAXPAYER SPECIFIC INCOME/EXPENSE AND PROPRIETARY INFORMATION. MOREOVER, IN LIGHT OF THE INFORMATION INVOLVED, THE COUNCIL HAS FELT THAT -rHE PRINCIPLE OF ENSURING STRICT CONFIDENTIALITY PENALTY Of LAW IS WORTHY OF EMPHASIS THROUGH REPETITION; THE BILL, HOWEVER, WOULD' ELIMINATE IT SEC. 47-820 (d). WE THIS, AND ALSO SUGGEST THAT THE FINE FOR DISCLOSING CONFIDENTIAL . . INfORMATION BE INCREASED TO $10,000. 2. DISTRICT POLICY REGARDING PHASE-IN. OFINCREASES RESULTING fROM SUPPLEMENTAL ASSESSMENTS SHOULD BE EXPLICIT THE PROPOSED LEGISLATION StiOULD EXPLICITLY PROVIDE THAT INCREASES IN ASSESSED VALUE, LIKE INCREASES AS A RESULT OF REGULARLY TIMED REASSESSMENTS, WILL BE PHASED IN. WHILE SOME OTR OFFICIALS HAVE INDICATED THAT THIS IS ITS POLICY, IT IS'NOT CLEARTHATTHIS PRACTICE IS CONSISTENTLY FOLLOWED BY ALL ASSESSORS, AND THERE IS UNCERTAINTY ABOUT IT AMONG PROPERTY OWNERS AND TAX PRACTITIONERS. THE POINT COULD, AND SHOULD, BE CLARIFIED. 3
3. CURRENT POLICY ADOP"rED BY THE COUNCIL REGA'RDING SUPPLEMENTAL ASSESSMENTS SHOULD NOT BE CHANGED THE BILL WOULD AMEND SEC. 47-829 (p. 96) SO THAT ANY AMOUNT OF CONSTRUCTION (i.e., MERE ISSUANCE OF A BUILDING PERMIT) COULD BE GROUNDS FORA REASSESSMENT. THE EXISTING RULE ADOPTED BY THE COUNCIL-65 0 /o OF WORK COMPLETION AND CHANGE OF $100,000 OR MORE IN MARKET VALUE-SHOULD BE MAINTAINED. 4. CURRENT POLICY REGARDING A TAXPAYER'S RIGHT TO OUT OF- CYCLE APPEAL SHOULD BE MAINTAINED; PROVISIONS IN THE BILL ARE AWKWARDLY WORDED SUBSECTION (u) OF THE PROPOSED LEGISL,A.TION (p. 91) SEEKS TO AD.o A PARAGRAPH (E) WHICH PROVIDES TAXPAYERS WITH THE RIGHT TO BRING AN APPEAL OF A PROPERTY'S ASSESSMENT EACH YEAR. WHILE THIS PROVISION WOULD APPEAR INTENDED TO PERMIT APPEALS eVEN IN THOSE YEARS IN WHICH A PROPERTY IS NOT DUE FOR REASSESSMENT UNDER THE TRIENNIAL SYSTEM, IT IS AWKWARDLY WORDED AND NOT SUFFICIENTLY CLEAR. THE LAW SHOULD BE. CLEAR AS TO THE RIGHT, AND THAT ANY CHANGE IN ASSESSMENT REALIZED AS A RESULT OF AN OUT- OF- CYCLE APPEAL SHOULD ONLY APPLY TO THE YEAR AT ISSUE, AND CARRY OVER TO ANY REMAINING YEARS LEFT IN THE PROPERTY'S TRIENNIAL CYCLE. 5. "EQUALIZATION" AND "VALUATION" SHOULD BE. MAINTAINED AS INDEPENDENT BASES FOR APPEALING AN ASSESSMENT . THE BILL CONSlSTENTLY ELIMINATES THESE TWO GROUNDS FOR APPEAL, EVEN THOUGH THEY HAVE BEEN IN tHE DISTRICT'S CODe 4 FOR DECADES, AND ARE COMMON IN VIRTUAI.LY EVERY OTHER U.S. JURISDICTION. 6. REFUND OR CREDIT SHOULD BE AT THE TAXPAYER'S OPTION, WITH INTEREST FROM DATE OF OVERPAYMENT . THE BILL CREATES A NEW SECTION AUTHORIZING THE MAYOR TO EITHER REFUND OR CRED1T AN OVERPAYMENT AGAINST ANY OTHER REAL PROPERTY TAX LIABILITY OF THE SAME PROPERTY, AND WOULD NOT OBLIGE THE DISTRICT TO PAY INTEREST UNTIL NINETY (90) DAYS AFTER RECEIPT OF A CLAIM FOR CREDIT OR. REFUND. AOBA BELIEVES THE CREDIT OPTION SHOULD BE THE TAXPAYER'S, AND THAT REFUNDS AND CREUITS SHOULD BEAR INTEREST FROM . . THE DATE OF THE OVERPAYMENT-- JUST AS THE DISTRICT CHARGES TAXPAYERS WITH PENALTIES AND INTEREST FROM THE PAYMeNT DUE DATE. THERE IS NO REASON WHY THE DISTRICT SHOULD GET FREE USE OF A TAXPAYER'S MONEY FOR THIS PERIOD, IF IT HAP NO RIGHT TO IT IN THE FIRST PLACE. 7. THE PROPOSED AMENDMENT TO THE RECORDATION TAX ON SECURITY INSTRUMENTS SHOULD BE REVISED WE BELIEVE THREE PARTICLILAR CHANGES SHOULD BE MADE TO THE PROPOSED STATUTORY LANGUAGE (po 113, SEC. 4S-923(A){3 RELATING TO THE TAX ON REFINANCINGS. FIRST, THE PROPOSED LANGUAGE ONLY APPLIES A REFINANCING CREDIT TO THE REFINANCING OF A DEBT "FOR THE FIRST TIME." THUS, WHILE TAXES PAID TOWARD INITIAL REFINANCING WOULD BE CREDITED, SUBSEQUENT REFINANCINGS WOULD NOT BE SUBJECT TO CREDIT FOR TAXES PREVIOUSLY PAID. YET, MULTIPLE REfINANCINGS ARE COMMONPLACE, AND SHOULD NOT BE SUBJECT TO LOSS OF TAX 5 CREDITS. ACCORDINGLY, THE PHRASE "FOR THE FIRST TIME" SHOULD BE DELEtED. 'SECOND, THE PROPOSI:D LANGUAGE APPEARS TO PROVIDE, THAT ~ FOR REFINANCING.S, THE,AMOUNT TAXED IS THE NEW DEBT OVER THE UNPAID PRINCIPAL AMOUNT THEN DUE. THE TAX LEVY SHOULD, BE BASED ONLY ON INCREASES OVER THE ORIGINAL DEBT, NOT ON THE UNPAID PRINCIPAL AMOUNT THEN DUE, SINCE THE INITIAL, . TAX PAID WAS BASED UPON THE FULL AMOUNT OF THE, ORIGINAL DEBT. FINALLY, THE PROPOSED LANGUAGE WOULD PERMIT THE ,---- .. FULL RECORDATION TAX TO BE APPLIED TO THE ENTIRE AMOUNT' R ~ T H E EXISTING DEBT WAS NOt SUBJECT TO -.. ,,-.----------'---.. ~ - - , ~ - RECORDATION TAX. WE WOULD SUGGEST ELIMINATING THIS' ..,... ~ n."" C _'. _.--,"'" "CATCH-UP" PROVISION FOR OLD DEBT THAT IS NOW BEING REFINANCED. FINALLY, CHAIRMAN EVANS, I WANT TO BRIEFLY RETURN TO A FEW POINTS WHICH AOBA AND D.C. BIA MADE IN THEIR JOINT TESTIMONY BEFORE THIS COMMITTEE'S OVERSIGHT HEARING ON FEBRUARY 25: " EX PARTE COMM,UNICATIONS WITH MEMBERS OF THE BRPAA: THIS IS A SERIOUS PROBLEM WHICH CONTINUES TO OCCUR IN PART, WE BELIEVE, BECAUSE IT is NOT CURRENTLY ADDRESSED BY STATUTE. AOBA BELIEVES THAT A STATUTORY PROHIBITION OF EX PARTE CONTACTS, WHICH INCLUDES PENALTIES FOR BOARD MEMBERS, TAXPAYERS AND GOVERNMENT eMPLOYEES FOUND TO HAVE ENGAGED IN THEM, SHOULD' BE INCLUDED IN THE TAX CLARITY ACT. 6 BRPAA RULES AND OTR RULES: IT WILL HAVE 'BEEN THREE YEARS THIS JULY SINCE THE' COUNCIL ADOPTED LAW 12-40, WHICH CREATED THE TRIENNIAL ASSESSMENT SYSTEM, ASSESSOR-LEVEL ,REVIEW, AND MADE OTHER SIGNIFlCANT REVISIONS IN THE DISTRICT'S ASSESSMENT SCHEME. Y.ET NEITHER THE BRPAA, OR OTR, HAS ADOPTED 'RULES WHICH INFORM AND GUIDE TAXPAYERS IN ANY DETAIL AS TO HOW THEIR P,ROPERTV TAX A ~ S E S S M E N T S ARE BEING PERFORMED, OR HOW THEIR 'RIGHTS TO SCRUTINIZE, AND/OR APPEAL, THEIR ASSESSMENTS ARE BEING. IMPLEMENTED. IT IS CRITICAL THAT .SUCH REGULATIONS BE ADOP"rED;THEY A ~ E OVERDUE,: AND A'OBA BELIEVES THE COUNCIL, IN THE TAX CLARITY ACT, SHOULD MANDATE THEIR ADOPTION 'BY A TIME CERTAIN. - . THAT CONCLUDES OUR TESTIMONY; ASI INDICATED, THIS IS NOT AN EXHAUSTIVE LIST OF OUR VIEWS ON THE BILL, AND WE WILL BE I SUBMITTING ADDITIONAL INFORMATION. THANK,YOU .FOR THE OPPORTUNITY TO BE HERE THIS MORNING. WE WILL BE HAPPY TO ANSWER ANY QUESTIONS. 7 Attachment B DISTRICT OF COLUMBIA LAND TITLE ASSOCIATION Dedicated to the Public interest in Maintaining the Highest Standards of Integrity and Stability of Title Insurance Praetices 2000 Officen .PresIcI'eat laniDc 1. Andricl .. FU3I Amcri.... Till. lasunnce Compa.ay 99510 Lee lIIpway, Sulle 550 FIlidIX, VA 22030 (703) 383-9400 Dl4lfln "'" PnIsIdeJJt StcoVeD M. Buctman Bucbnau a: LoIsteiD Tid .. Company 2 WiSCOllM Circlo #800 Chevy Chase, MD 20815 . (l0l) 986-1200. 1st Vb hesideat Vivie M. Smi1b COJ!IlDIJIIIOa1Ih Land Tid .. lns_ COIIIplIflY 146O!1 MsiIl. Sttoet Upper Marlbom. MD 2077l (301) 627.@OO ilfIl Vb PraIdtmt B. SIanIey ltoos NaIIoDaI Sdd_. Inc. 122 CSlnet, N.W 1f16O WaslllDpJa. D.C. 20001 "202} ,347-3894 ..il Vb PraIdtmt Dorothy M. lo1msoD Iolmson a: JIanb, Inc. 122 C Street. N. W . 1f16O WashingIoo, D.C. 20001 (202) 347-74S6 " '.' 7W&mrer D. II<mdatoff First American Tide JnIlUtllllCe Company tlll5 CoDDOCticut AvCJlUc, N.W., 11700 WasbillgIOIi, D.C. 20036 (202) 330-1457
Elisabeth C . Zajic: Fint AmericaIl Tid .. Insurance Company 102S CormecIiax A_. N.W Il7OO WasbillgIoJI. D.C. 20036 (l0l) 530-1450 BoaftI MalJb(S') Larry Blasslogame Pint Titl.. Insurance Co. Addie Bowlet CoDgressiDnal TItle a: Escrow Co. Ai.drea" FU3I A.mcrican Title Insurance Co. Rici:.r.J C.Eiscn E!sen'" Rome, P.e. John GJr.ml Gilbert, S;. Nalional TIde IllsuraDCe Co. ;:. -,' ; I Post Office Box 65075, Washington Square, Washington. D.C. 20035 Testimony of the D.C. Land Title Association before the D.C. Council Committee on Finance and Revenue on Bill 13-586, the Tax Clarity Act of 2000 March 6, 2000 .. :;, . ) L Chainnan Evans, members of the Committee on Finance and Revenue: My name is Elizabeth Zajic. I am the chairman of the legislative committee for the District of Columbia Land Title Association. The members of the D.C. Land Title Association appreciate the opportunity of presenting our views on certain aspects ofBil113-586, the Tax Clarity Act of2000. We would like to emphasize that our purpose here today is not to criticize, but rather to suggest certain measures which, ifimplemented, could improve the mutually beneficial relationship between the D.C. Land Title Association and the Office of Tax and Revenue in the collection of real property tltXes and assessments owed to the District. We believe that the amendments to the real property tax laws and procedures as contemplated in Bill 13-586 need to be considered in the context of these measures. WE ARE TAX COLLECTORS The members of the D. C. Land Title Association include title insurers, settlement agents and attorneys, real estate abstractors, surveyors and appraisers. The constituent members ofthe association handle virtually all D.C. real property transfers made for consideration, as well as most real estate loans transactions. As part of any real estate settlement, a search is undertaken to determine what, if any, real property taxes are due and owing to the District of Columbia. In connection with the real estate settlement, the taxes are collected from the responsible parties, and paid to the District of Columbia; hence the role of our members as tax collectors. However, the'ability of members of the District of Columbia Land Title Association to act 1 as an effective tax collection agent for real property taxes and assessments is totally dependent on their ability to obtain accurate and timely real property tax and assessment information from the D.C. Office ofTax and Revenue. Historically, we have encountered many problems in gaining the information that we require. Although tl:1e Office ofTax and Revenue is not responsible for all of the problems, it stands squarely in the middle of a flawed information process. II. LEGAL CONSEQUENCES OF FAILING TO PAY TAXES: TAX SALES The District of Columbia has a continuing lien for real property taxes for all property located in the District. Ifreal property taxes are delinquent forca given property, the Mayor, acting through the Office ofTax and Revenue, may sell the property at tax sale to collect the taxes. The tax sale remedy, however, is not limited exclusively toreal property taxes. Other liens which may be collected via the tax sale mechanism include, without limitation, water and Sewer service charges, special assessments, nuisance or "clean it or lien it" assessments, vault taxes, public space rental, and charges for failure to file and Income and Expense report for rental property. Although the Office of Tax and Revenue may not administer the routine billing and collecting ofthese taxes and charges, it is responsible for enforcing them through the tax sale process, once they have become delinquent. The tax sale, if not timely redeemed, will result in a total failure oftitle of an owner, or loss of total security for the mortgage lien of a lender. lithe taxes or assessments giving rise to the tax sale predate the recordation of a deed or deed of trust, insured by a title insurer, they must be paid by the insurer to prevent the total failure of title. 2 m. REVISED REAL PROPERTY TAX SALE PROVISIONS OF THE TAX CLARITY ACT OF 2000 Section 506 ofBill 13-586 would amend Title 47 of the D.C. Code by adding a new Chapter 13A entitled "Revised Real Property Tax Sale" [pages 113- 160]. These proposed new D.C. Code Sections 47-1330 through 47-1386 involve drastic revisions to the tax sale and tax deed procedures in the District of Columbia. Section 506 would also repeal any inconsistent provisions ofcurrent law as they affect tax sales occurring after December 31, 1999 and would instead subject, in some cases apparently retroactively, any sales after December 31, 1999 to the new law. The proposed revised statutory provisions are in general strikingly similar to the tax sale procedures in effect in Maryland. At present in the District of Columbia a tax sale certificate holder (Le., the person who has "bought" the righfto a property at tax sale unless redeemed by the owner) may request a tax deed from the Mayor six months after the'sale, and must do so within a year of the sale to preserve his rights. Under current D.C. law, the burden of notice to property owners and holders of security interests falls on the District of Columbia government. The tax deed itself, when issued, is "prima facie evidence ofgood and perfect title in fee simple" (current D.C. Code Section 47-1303.3). However, in practice, the tax deed grantee must file and bring to a successful conclusion a quiet action to extinguish the interest ofthe proprietary owners and all lienholders before the property will be deemed insurable for title insurance. Many ofthese quiet title actions are vigorously defended, alleging errors and irregularities in the District's real property tax billing and collection process. A number ofjudicial decisions have also addressed the'sufficiency of notice provided by the District government. 3 InMaryland, and under the proposed provisions of the Tax Clarity Act, the process is reversed, to the extent that no tax: deed would be issued until. such time as the tax sale certificate holder has successfully foreclosed the proprietary owner's equity of redemption (i.e., the right of the property owner to pay the delinquencies and retain the property). IfBill 13-586 is enacted, the primary burden of proper due diligence in locating those persons entitled to notice, as well as publication and legal. costs, wouldbecome the responsibility ofthe tax: sale certificate holder . . Although the proposed tax sale provisions of the Tax Clarity Act are closely modeled on Maryland law, there are some significant difference, some ofwhich may be briefly stated as follows: 1. Section 47-1340 Notice to agencies; certification of taxes due agencies; general fund [page 118] Taxes which are not certified for tax: sale by other agencies would still be able to be collected. In Maryland, if a taxing agency omits certifYing delinquencies for tax sale, the taxes are not a lien on real property-- Le., the government's failure to certifY acts as a bar to collection. 2. Section 47-1341 Notice of delinquency [page 119]: The Notice of Delinquency and Final Bill required to be sent to the taxpayer would not need to include all taxes in arrears. In Maryland, the Final Bill and Legal Notice sets forth the total tax indebtedness. 3. Section 47-1342 Public notice; costs [page 120]: Bill 13-586 provides that a property may be sold more than once at the same sale for different taxes. In Maryland, there is one sale for all tax indebtedness, seemingly a far less complicated procedure. The above-cited proposed D.C. Code sections seem to create the possibility of a very complicated scenario whereby multiple tax sale purchasers of the same property may be competing for ownership rights. This seems at odds with the overall purpose of Bill 13-586, 4 which is to simplify and clarifY tax law and procedure. These proposed provisions also allow for the continuation ofa present problem, namely, the virtual impossibility of obtaining easily or timely from the D.C. government a single dollar amouIit representing all assessment and real property tax liability for any given property. But more importantly, there is a fundamental difference in the very philosophy of the District ofColumbia and Maryland in the tax sale process. In Maryland, the goal of most persons who purchase at tax sale is to earn the hefty interest rate of 18% on their tax sale investment. Since the right to earn the interest is deemed extremely valuable, the bid prices in Maryland tax sales are very high, frequently far more than the value of the property, much less the amount of delinquent taxes. Since the full amount of the bid would take effect in any action to foreclose the equity of redemption:, the instances of loss of the property by the taxpayer are very rare. In the District ofColumbia, on the other hand, tax sale bidders seek to actually acquire title to real property sold at tax sale. In the case ofMalone v. Robinson, c!ecided by the D.C. Court ofAppeals before the redemption period was shortened by previous Council action from two years to six months, the court bent over backwards to protect the rights ofproperty owners, responding to inequities of the tax sale process in the District of Columbia under which the right ofredemption may have expired without the taxpayer ever knowing of the delinquency. The court found that the District cannot deprive a taxpayer oftheir property without due process, including a duty to try give adequate notice to the delinquent taxpayer. Briefly stated, in the District of Columbia tax sale purchasers seek a windfall, i.e. acquisition of real property at a fraction of its fair market value, realizing almost all of the taxpayer's equity for a nominal investment. In Maryland, tax sale purchasers seek primarily to 5 acquire a short-term (2 year) investment at a very high interest rate. Even so, the members of the D.C. Land Title Association have no objection per se to the overall restructuring of the tax sale statutes as proposed by Bill 13-586, which would shift most of the burden and expense ofthe process to the tax sale purchaser, and which would mandate a final court decree foreclosing the taxpayer's equity of redemption before a tax deed may issue. But we . note that a fundamental flaw in the tax collection process will taint the operation of any tax collection law, no matter how fairly and artfully drafted: namely, the accuracy and timely production ofdefinitive statement of delinquency for real property taxes and assessments on which taxpayers may rely. In some other jurisdictions, notably Maryland, deeds transferring title to real property will not be accepted for reco.rding until they have been certified and stamped to reflect that all taxes and assessments are paid and current. The applicable office is located in close proximity to the appropriate recording office and providing the necessary ceItification regarding taxes is a ministerial process, which can be accomplished virtually immediately. With this system, taxes are collected promptly and economically, and the title insurance companies may confidentially insure purchasers of real property and their lenders that their real property interests will not be jeopardized in the future by liens for property taxes and assessments incurred by former owners. Tax. sales become the exception, not the rule. \ A similar law have been on the books for some time in the District of Columbia, requiring j / the payment of all taxes and assessments prior to recordation. It has neVer been enforced, however, because the Office of Tax and Revenue is unable to provide a definitive statement of all amounts owed for real property taxes and assessments within any kind of appropriate time frame. 6 Until such time as the Office of Tax and Revenue has the resources to integrate all the tax and assessment information which it generates itself and which it receives from other branches of the D.C. government, and make that information quickly available to interested parties, serious problems will remain. The members ofthe D.C. Land Title Association are willing, even eager, tax collectors t but we cannot collect taxes and assessments from sellers of real property unless we know about them. Title insurance and settlement companies could be the most effective collection agents for these taxes owed to the District ofColumbia ifthe tax and assessment information could be quickly and accurately provided prior to transfers ofreal property, and obviate the proliferation oftax sales. In any event, no tax sale law or procedure will be effective ifbased on inaccurate tax information. IV. RECORDATION AND TRANSFER TAX ISSUES A. Leases and Life Estates: Section 504 ofBiU 13-586 [page 109] would amend D. C. Code Section 47-901(3) and Section 505(a) of Bill 13-586 [page 112J would amend current law (D.C. Code 47-901(3) and 45-921(3)(B), respectively) to impose transfer and recordation taxes on leases in excess ofthirty years and on ~ e estates. The proposed new provisions seem to parallel to some degteethe formulas for valuation bfthe leasehold estate found in Maryland law. The proposed revisions,. however, lack clarity and appear to require some technical corrections. For example, proposed language for Section 47-903(a)(1) [page 110] probably was meant to refer to "annual", not "actual" average rental. The phrase "Additional actual consideration" in the same subsection needs specific definition and defined parameters. Clarity and specificity in the fonnulas employed in calculating the consideration on which transfer and recordation taxes are 7 ----------------------------------------- --------------------------- based serve the best interest of both the public and private sectors. B. Refinances Section 505(c) ofBill 13-586 would amend the Residential Real Property Transfer Excise Act of 1978 (D.C. Code 45-923(a)(3)) [page 113] to require that the recordation tax be paid on the full amount of a security instmment except for the "first only" refinance of existing debt which was subject to recordation tax and for which the recordation tax was paid. At present, the District imposes recordation tax only on new debt when the refinance takes oui a purchase money security instrument. Was the omission ofthe purchase money exemption intentional in Bill 13-586? The loss of availability offavorable tax treatment on refinances of purchase money mortgages places an onerous tax burden on commercial property owners in the District of Columbia. c. Transfer and Recordation Tax Liability: Section 405 ofBill 13-586 would amend D.C. Code Title 47 by adding a new chapter 44 concerning tax collections. Proposed new Section 47-4401.3, Taxes related to real property recordation and transfer [page 52], seems to impose liability for recordation and transfer taxes on the owner of the property. Does this mean that a seller responsible for paying transfer taxes gets away scot-free? Is the lien ofthe delinquent taxes intended to be in personam only, or is it intended to b e ~ an in rem lien? . V. SUPERPRIORITY LIENS Proposed new D.C. Code sections 47-4402.1 and 47-4402.3 [page 56J as drafted lead to the conclusion that only withholding taxes are a super priority lien (other than in rem liens such as real property taxes). Is this reading correct? Should Section 47 ..A402.3(c) include nonjudicial foreclosure sales? The whole area of so-called "superpriority" liens is in desperate need of 8 clarification. VI. CONCLUSION The Tax Clarity Act of2000 includes some improvements to the existing tax collection scheme, specifically in requiring the foreclosure ofthe equity of redemption prior to the issuance of a tax deed. However, many of the proposed provisions create ambiguities, which require clarification prior to final enactment of the Bill. Moreover, until such time as the Office of Tax and Revenue has the resources to integrate all the tax and assessment information which it generates itself and which it receives from other branches of the D.C. government, and make that information quickly available to interested parties, serious problems will remain. Mr. Chairman, that concludes our testimony. I would be happy to answer any questions. 9