In an important ruling earlier today, the Michigan Supreme Court unanimously concluded that a district government often does not confiscate the entire value of a property to raise $ 8.41 in delinquent property taxes. In Rafaeli, LLC v. Oakland County, the court found that such a tax "expires" is deemed to be revenue under the Michigan State Constitution, and the government must therefore compensate owners for any "proceeds from the proceeds Selling the foreclosure in "pay excess delinquent taxes, interest, penalties and fees that are reasonably related to the foreclosure and sale of the property – nothing more and nothing less. "The court's decision is an important victory for constitutional property rights – and for fundamental decency and fairness.
The illustration in the previous paragraph is not a typo. Oakland County really seized an entire rental house, sold it and kept all the money to itself, for only $ 8.41 in unpaid taxes. That's $ 8.41, not $ 841 or $ 8410. The Pacific Legal Foundation, which represented the owners in the case, has a helpful description of the facts:
In 2014, Oakland County, Michigan, foreclosed a home owned by Uri Rafaeli's company – Rafaeli, LLC – for a $ 8.41 tax liability. The county sold the property for $ 24,500 and held profits. The same was true for Andre Ohanessian when the county confiscated his property and sold it for $ 82,000 and pocketed every penny left over from the $ 6,000 tax liability. While most states reimburse the surplus, Michigan is one of a handful of states that allow property theft to fill the treasury. PLF asked the Michigan Supreme Court to quell this bureaucratic theft and restore our clients' constitutional rights.
In 2011, Uri Rafaeli – Rafaeli, LLC – bought a modest rental property in Southfield, Michigan, for $ 60,000. Rafaeli accidentally underpaid the 2011 taxes. He paid his taxes in full in 2012, 2013. After learning that he owed money for 2011, Rafaeli tried in January 2013 to pay all the tax owed for 2011. However, he erroneously ignored the fact that interest rates on the debt increased and were underpaid by $ 8.41. The county closed the property, sold it for $ 24,500, and put up with the massive gust of wind at Rafaeli's expense.
Similarly, Andre Ohanessian owed $ 6,000 in taxes, penalties, interest, and fees when the county foreclosed and sold his property for $ 82,000. As with Rafaeli, the county kept all profits from the sale rather than refunding Ohanessian.
As the PLF summary notes, the Rafaeli case (which related to the $ 8.41 crime) was associated with a less extreme but still outrageous case in which the county valued the entire value of a property Confiscated $ 82,000 to pay off $ 6,000 crime.
The majority opinion, together with six of the seven judges of the Court, concluded that the seizure was an assumption of private property that required fair compensation for the following reasons:
(E) It was common knowledge in Michigan's statehood that the government could neither collect more taxes than it owed, nor sell more land than was necessary to collect unpaid taxes.
Furthermore, in the context of a significant area, it was self-evident that the government did not consider that more property than was necessary for the particular public use for which the takeover was being carried out.
(T) These basic principles – that the government cannot collect more taxes than it owes, take more property than is required by the public – protect taxpayers and owners alike from government overload.
The majority opinion carefully follows these restrictions on the government's ability to confiscate property to pay criminal taxes, right up to the Magna Carta and early English common law. The owner's claim to the residual value of the property is accordingly a property right that is protected by the revenue clause of the state constitution and possibly also by the federal revenue clause of the fifth amendment, although the court has not ruled on the basis of the latter and has carefully pointed out that " we have to remember that Michigan's takings clause has been designed to provide owners with greater protection than their federal counterpart when it comes to the ability of the state to use private property under the power of individuals for public use. " Domain."
People who are not experts in revenue law can be forgiven for thinking that all of this should be obvious. Of course, it is unconstitutional for the government to confiscate the entire value of a home at $ 24,000 to pay $ 8.41 in delinquent taxes. It's just a little less terrible to use the entire value of a $ 82,000 home to pay off a $ 6,000 crime.
To reach these obvious conclusions, a Supreme Court decision with almost a 100-page majority and consensus should not be required! In addition, a sensible local government should never have tried to confiscate a house for only $ 8.41, even if their lawyers advised them that they could possibly get away with it. It's the kind of case that gives lawyers – and taxes – a bad name.
I sympathize with such reactions. In fairness, however, the legal question in the present case is not as simple as it should be, since the confiscation of property was legally classified as a tax "forfeiture". In its ill-advised 1996 Bennis v Michigan ruling, the US Supreme Court ruled that the loss of civilian assets is not considered revenue and therefore does not require compensation under the fifth revision's timing clause. There are similar decisions under the revenue clauses of many state constitutions. The lower court's ruling in favor of the government relied heavily on Bennis.
The Michigan Supreme Court distinguishes Bennis and other similar decisions for the following reasons:
(D) The majority of the panel made a mistake by relying on Bennis v. Michigan, a case involving the loss of civil assets to conclude that there was no revenue in this case.
First, the (State Property Tax Law) makes it clear that "forfeiture" only allows the accused to obtain a judgment on enforcement. The forfeiture has no influence on the property and does not give the district treasurer any rights, titles or interests in the forfeited property. We therefore reject the premise that the plaintiffs have "forfeited" all of the rights, titles, and interests they had in their properties by not paying their property taxes.
Second, Bennis is distinguishable because the purpose of expiring civil assets is to do so
other than the purpose of the GPTA provisions at issue here. Bennis recognized that
The forfeiture of assets under civil law "serves at least in part to punish the owner"
GPTA is not punishable. The aim is to promote the timely payment of property
Restoring taxes and taxable property to its tax-generating status, not necessarily to punish property owners for not paying their property taxes …
We conclude that tennis is distinguishable and gives us little guidance as to the applicants' claim to income. The court's involvement in Bennis focused closely on forfeited property used as a tool for criminal activity and the government's interest in preventing illegal activity. In this case, the plaintiffs have not used their properties for illegal purposes. They simply failed to pay their property taxes, which is not a crime.
These are reasonable distinctions. However, it should be noted that in many states the government is not required to prove that the owner actually committed a crime, or even to accuse them of one. They often allow law enforcement agencies to confiscate property without compensation, even if the owner has done nothing wrong and has no idea that their property could have been used for an illegal purpose. Like excessive tax losses, wealth losses disproportionately affect the poor, small businesses, ethnic minorities and others who may lack the knowledge and resources to conduct a long litigation against difficult opportunities.
While the majority rightly emphasizes the distinction between foreclosure laws to deter and punish "criminal activities" and those whose sole purpose is to secure the payment of delinquent taxes, the difference between the two may not seem as large as possible at first. In fact, in the event of a tax lapse, the government must at least demonstrate that the owner is actually in default with his taxes before confiscating property. In contrast, the loss of civil property can be used to confiscate property, even if the owner has never been shown to have violated any law.
In my opinion, this all underscores Bennis' inaccuracy and the need for stricter enforcement of constitutional restrictions on the loss of civilian assets. Important progress has been made in this area in recent years, but it is not enough. The Michigan Supreme Court ruled that Bennis' interpretation of the federal takings clause does not regulate the Michigan state takings clause, which they found provides greater protection for property rights. I can understand, however, that they may have preferred not to make such a far-reaching decision if a tighter regulation that was limited to tax lapse was possible.
In a consensus statement, Judge David Viviano agreed that the drug had been taken, but questioned the majority's reasoning and also the analysis of the compensation owed. I disagree with some of his considerations. However, I agree on the basic point that the majority overestimated the extent of the property rights of the owners:
(D) The focus of the majority on the surplus as a relevant property and thus the post-sale commitment as income leads to puzzling results. Because "a real estate owner is entitled to a violation of the takings clause as soon as a government takes its property for public use without paying for it," according to the majority theory, there are no constitutional problems until the excess proceeds is withheld. It doesn't matter that the taxpayer's property – his or her own equity – has been taken over as soon as the title is held by the government without redemption. As a result, the majority seem to believe that taxpayers are out of luck if the property is not auctioned and simply transferred to a government entity: no proceeds, let alone a surplus, have been produced by or withheld by the government … Perhaps worse, government units have numerous options for real estate for the minimum bid, i.e. H. For the debt (and cost) to buy and thus receive it for an amount that is usually much below market value. But even in these cases, the majority leaves the taxpayer without remedial measures, since no surplus would arise. According to the law described above, the better view is that the assets taken are taxpayers' equity and that this happens when ownership is held by the government and there is no possibility of repayment.
As Viviano explains, the property right lost by the owner is not simply a right to the proceeds of a foreclosure sale, but the "equity" he holds in the entire property. This, in turn, means that he is owed compensation equal to the fair value of that right (less the value of the tax delay and the associated fines and expenses), not just the money that brings a forced auction beyond the tax delay.
Justice Viviano is also rightly concerned that the majority of the state or local government that runs the auction will have an incentive to bid low or otherwise act in such a way that the owner gains the full value of the country in question is denied. After all, they have little incentive to maximize profit as an owner selling their own property would normally do. On the contrary, the aim of the county will usually be to get the money due to it as soon as possible. They could easily short-circuit the owner.
For these reasons, the Rafaeli case will not end all Michigan tax cuts. In addition, courts in several other states, the majority states, have ruled that their local governments are entitled to the full value of any property that has been lost through a tax lapse, even if it is more than necessary to pay for the tax delay in question. The Michigan decision does not apply to these other jurisdictions. While most states are already reimbursing surplus foreclosure sales, there are some who don't.
Despite these limitations, Rafaeli's decision is an important victory for property rights and a valuable tool to contain abusive tax losses. Hopefully, courts in other states with similar guidelines will start following Michigan's example. They would also do well to take Viviano's analysis of the property rights in question, not the majority.
NOTE: As mentioned above, this case was negotiated by the Pacific Legal Foundation. My wife Alison Somin started working at PLF earlier this year, although she is not involved in the Rafaeli case. My own involvement in revenue problems goes back many years, long before I even met Alison. Nonetheless, I include a disclosure like this on all contributions to cases contested by PLF so that no one can claim that I am somehow hiding a conflict of interest.