DEPARTMENITT~~;J~~~~~~--

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1 CITY COUNCIL March 18, 2013 PUBLIC HEARING SUBJECT: AN APPEAL OF THE CONFIRMED NOTICE OF ASSESSMENT OF DELINQUENT TRANSIENT OCCUPANCY TAXES AND HOTEL MARKETING LEVY FOR VALADON HOTEL, LLC, ZUMA INVESTMENT CO., LLC., AND STEFAN ASHKENAZY INITIATED BY: FINANCE AND TECHNOLOGY (David Wilson, DirectorW-_fl 4/,~./ PUBLIC INFORMATION AND PROSECU ON SERVICES DEPARTMENITT~~;J~~~~~~-- (Helen J. GOS$:; CITY PROSECUTOR'S OFFICE (James Eckart, City Prosecutor) STATEMENT ON THE SUBJECT: The City Council will consider an Appeal of the Confirmed Notice of Assessment of Delinquent Transient Occupancy Taxes and Hotel Marketing Levy for Valadon Hotel, LLC, Zuma Investment Co., LLC and Stefan Ashkenazy. RECOMMENDATIONS: 1. Deny the appeal, in part, as to Appeal Issue #1 and Appeal Issue #3; grant Appeal Issue #2 and modify the Confirmed Notice of Assessment of Delinquent Transient Occupancy Taxes and Hotel Marketing Levy for Valadon Hotel, LLC, Zuma Investment Co., LLC and Stefan Ashkenazy accordingly; 2. In accordance with WHMC , order that the entire amount of delinquent Transient Occupancy Taxes, Hotel Marketing Levy, Penalties and Interest be due immediately upon service of the City Council's determination, and that Staff may institute all necessary actions to recover all monies due; and 3. Adopt Resolution No _, "A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF WEST HOLLYWOOD DENYING THE APPEAL, IN PART, AS TO APPEAL ISSUE #1 AND APPEAL ISSUE #3; GRANTING THE APPEAL, IN PART, AS TO APPEAL ISSUE #2, AND MODIFYING THE CONFIRMED NOTICE OF ASSESSMENT OF DELINQUENT TRANSIENT OCCUPANCY TAXES AND HOTEL MARKETING LEVY FOR VALADON HOTEL, LLC, ZUMA INVESTMENT CO., LLC AND STEFAN ASHKENAZY ACCORDINGLY; AND IN ACCORDANCE WITH WHMC , ORDERING THAT THE ENTIRE AMOUNT OF DELINQUENT TRANSIENT OCCUPANCY TAXES, HOTEL MARKETING LEVY, AGENDA ITEM 3.8.

2 PEAL TIES AND INTEREST AS MODIFIED HEREIN BE DUE IMMEDIATELY UPON SERVICE OF THE CITY COUNCIL'S DETERMINATION; AND THAT STAFF MAY INSTITUTE ALL NECESSARY ACTIONS TO RECOVER ALL MONIES DUE." BACKGROUND ANALYSIS: In 1985, the City of West Hollywood ("City") adopted the "Uniform Transient Occupancy Tax Ordinance" which, in part, imposed a tax of the rent upon all occupants of any "hotel" [as that term is defined in WHMC (1 )] in the City for the privilege of occupying said hotel. The current amount of the tax is twelve and one-half percent (12% percent). The Uniform Transient Occupancy Tax Ordinance further requires that each "operator" [as the term is defined in WHMC (3)] collect the transient occupancy tax ("TOT") and hold it in trust on behalf of the City, file periodic reports of the TOT collected to the City's Tax Administrator, and remit the TOT collected to the City's Tax Administrator. Additionally, the City has also levied an annual charge/assessment ("hotel marketing levy") upon operators of hotels located in the Hotel Marketing Benefit Zone in order to: (i) promote the identity of West Hollywood as an urban cultural center; (ii) to develop and implement a destination marketing strategy targeting potential hotel guests; and (iii) to develop and undertake an advertising and public relations program focusing on the business and leisure trade. Since at least 2006, the hotel marketing levy has been, and remains, equal to one and one-half percent (1 %percent) of total room rents charged and received from transient hotel guests, and hotel operators are required to remit the hotel marketing levy to the City's Tax Administrator at the same time and in the same manner as TOT, and is also subject to the same penalties and interest. The reporting periods for TOT and the hotel marketing levy has been set by the Tax Administrator as monthly. Accordingly, all hotel operators are required to report and remit the TOT and hotel marketing levy to the City's Tax Administrator on the last day of the month following each reporting period. West Hollywood Municipal Code Section provides that TOT and any hotel marketing levy that are not tendered in a timely fashion are subject to the following: (a) First delinquency penalty of ten percent (1 0 percent) if not timely remitted to the City; (b) Second delinquency penalty of ten percent (10 percent) [in addition to the base amount and the first delinquency penalty] if not remitted within thirty 2

3 (30) calendar days following the date on which the amount first became delinquent; and, (c) Interest at the rate of one-half of one percent (0.05 percent) per month for each month or portion thereof that the amount is delinquent. Since at least December 2006, Valadon Hotel, LLC has operated a hotel at 8822 Cynthia Street, West Hollywood -which is located within the Hotel Marketing Benefit Zone (thereby subjecting its operator to the hotel marketing levy). In December 2006, Stefan Ashkenazy filed a Statement of Information with the California Secretary of State confirming that he was the managing member of Valadon Hotel, LLC. [EXHIBIT A] [EXHIBIT 1A] In or about December 2008, the hotel commenced doing business as Le Petit Ermitage ("Hotel"), and in February 2009, Stefan Ashkenazy filed a "Business License Tax Form" with the City confirming the Hotel's name change (from Valadon Hotel to Le Petit Ermitage) and also listing himself as the "business owner" and "president" of the Hotel. [EXHIBIT B] According to Mr. Ashkenazy and other Hotel representatives, in late 2007 and the beginning of 2008, the Hotel commenced capital upgrades to its guest rooms in an effort to reb rand the Hotel into a "first class boutique hotel". During the renovation, the Hotel was partially closed. Mr. Ashkenazy and other Hotel representatives have informed City personnel that in April 2008, a fire occurred in the basement of the Hotel which caused "substantial damage to new furniture and fixtures which were set to be installed in the rooms as well as substantial smoke damage." Mr. Ashkenazy and other Hotel representatives further state that in September 2008, the Hotel suffered further damage as a result of the overflowing of its rooftop swimming pool. As with many businesses within the City (and throughout the county), the Hotel asserts that it financially suffered tremendously as a result of the recent fiscal crises and its impact on hotel industry in general. Although the Hotel continued operating in a partial capacity during this period of time, Hotel representatives have stated that the improvements were delayed due to negotiations and litigation between the Hotel and its insurance agency and agent/broker. [EXHIBIT C] In early 2009, City Officials met with Stefan Ashkenazy and other representatives of the Hotel to discuss the Hotel's legal responsibilities regarding the TOT that it was collecting on an ongoing basis and holding in trust for the City, as well as its obligation to report and remit to the City the TOT and hotel marketing levy. Although the Hotel operators met with City Officials on multiple occasions between 2009 and 2011, and despite the Hotel operators continued collection of the TOT from transient guests of the Hotel and reporting of same to the City, only five (5) partial payments were made to the City between 2009 and 2011 in spite of their continuous representations to fully pay the delinquencies. In November 2011, City officials and Hotel operators met to discuss the Hotel's continued lack of timely remittance of the collected TOT and the hotel marketing 3

4 levy. The City determined that an independent audit was needed to determine the extent of the delinquency. In or around November 2011, the City hired Lance Soli & Lung hard, LLP, Certified Public Accountants ("LSL"), to conduct a Limited Procedures Review of the Hotel for compliance with the City's Transient Occupancy Tax Ordinance and the hotel marketing levy for the reporting and remittance periods from August 1, 2008 through October 31, With the cooperation of the Hotel operators, LSL concluded its review in January 2012, and determined that the Hotel's underpayment of the TOT and hotel marketing levy for the reporting and remittance periods from August 1, 2008 through October 31, 2011 amounted to $1,417,230. The applicable penalties and interest on the delinquent TOT and hotel marketing levy was $286, 913 and $131, 490, respectively, computed through December 31, Based upon the LSL review and computation, the Hotel owed the City a total of $1,835,634 for delinquent TOT, hotel marketing levy, penalties and interest for the reporting periods between August 2008 and October [EXHIBIT D) While understanding the financial difficulties faced by the Hotel, in January 2012, after nearly three years of the Hotel's continued collection of TOT from its transient guests and its repeated failure to timely remit the TOT and hotel marketing levy to the Tax Administrator, City Officials engaged the City Prosecutor's Office to collect the delinquent TOT through the administrative remedies provided in the West Hollywood Municipal Code. In February 2012, representatives of the City's Finance Department and the City Prosecutor's Office met with Stefan Ashkenazy and the Hotel's "controller" to discuss the delinquent TOT and hotel marketing levy, as well as the Hotel's ongoing legal obligations related to current TOT and hotel marketing levy. At that time, Mr. Ashkenazy confirmed his role as the "Master of the House" of the Hotel and discussed that although the Hotel had continued to collect the TOT from transient guests of the Hotel, the money had been used to repay high-interest personal loans that he had obtained in order to allow for the continued operation of the Hotel during its financial difficulties. Mr. Ashkenazy agreed to comply with all legal responsibilities as they relate to the reporting and remittance of current TOT and hotel marketing levy and requested to negotiate a payment plan in connection with the delinquent TOT and hotel marketing levy. [EXHIBIT E) Between February and July 2012, the City Prosecutor's Office continued to discuss a potential payment plan with the Hotel operators through their attorney, Farhad Eshaghpour. As a result of the ongoing discussions, the Hotel operators made another partial payment to the City towards the delinquent TOT and hotel marketing levy in May Ultimately, an agreeable payment plan could not be reached between the parties. On July 20, 2012, in accordance with WHMC , the City's Tax Administrator issued a Notice of Assessment to Valadon Hotel, LLC; Zuma Investment Co., LLC; and Stefan Ashkenazy; and each of them, in connection with 4

5 delinquent transient occupancy taxes, hotel marketing levy, late-payment penalties, and interest resulting from the operation of the Hotel. [EXHIBIT F] On July 30, 2012, Valadon Hotel, LLC, timely filed a request for an administrative hearing before the Tax Administrator in order to show cause why the amount of TOT (and hotel marketing levy) assessed pursuant to the Notice of Assessment was incorrect. [EXHBIIT G] Although the administrative review hearing was properly scheduled (and Notice duly issued to Valadon Hotel, LLC) for August 28, 2012 [EXHIBIT H], at the request ofvaladon Hotel, LLC (through its attorney, Farhad Eshaghpour) [EXHIBIT 1], the hearing was continued to September 25, 2012 and the continuance was duly noticed [EXHIBIT J ]. On September 24, 2012, the City's Tax Administrator received written correspondence from Douglas Walsh (litigation counsel for Valadon Hotel, LLC; Zuma Investment Co., LLC; and Stefan Ashkenazy) containing supplemental argument and authority for Valadon Hotel's contention that the amount of TOT assessed in the Notice of Assessment was incorrect. On September 25, 2012, the Tax Administrator conducted an administrative review hearing. In attendance on behalf of the Hotel operators were Douglas Walsh, Esq., Farhad Eshaghpour, Esq., Stefan Ashkenazy, and Geoffrey Sunderland, CPA. The City's Tax Administrator (David Wilson, Interim Finance Director) and Attorney James Eckart were also present. On October 4, 2012, the City's Tax Administrator issued a "Confirmed Notice of Assessment of Delinquent Transient Occupancy Taxes and Hotel Marketing Levy." [EXHIBIT K] The City's Tax Administrator concluded that after having carefully considered the evidence submitted by and on behalf of Valadon Hotel, LLC, as well as the statements and legal argument presented in the Request for Hearing, Hearing Brief, and at the administrative review hearing, the Tax Administrator determined that Valadon Hotel, LLC; Zuma Investment Co., LLC; and Stefan Ashkenazy, and each of them, have failed or refused to remit the requisite TOT (and hotel marketing levy) for the reporting period between August 2008 through December 2011 as follows: Transient Occupancy Taxes Hotel Marketing Levy Penalties Interest Total Due $1,274, $ 152, $ 301, $ 175, $1,903, The notice required that all delinquent amounts due and specified in the "Confirmed Notice of Assessment of Delinquent Transient Occupancy Taxes and Hotel Marketing Levy" be remitted to the City on or before 4 p.m. on October 19,

6 On October 18, 2012, Attorney Douglas Walsh filed a request for an appeal before the City Council, on behalf of Valadon Hotel, LLC, Zuma Investment Co., LLC, and Stefan Ashkenazy, of the Confirmed Notice of Assessment of Delinquent Transient Occupancy Taxes and Hotel Marketing Levy. [EXHIBIT L] The Notice of Appeal specifically seeks City Council review on the following three issues: 1. "Responsible Parties;" 2. "The Confirmed Notice of Assessment Includes Amounts That Cannot Be Collected By The City;" and 3. "The Penalties and Interest Assessed." On November 13, 2012, the City Clerk duly issued a Notice of Appeal Hearing to Valadon Hotel, LLC, Zuma Investment Co., LLC, and Stefan Ashkenazy confirming that the appeal hearing had been scheduled for December 17, [EXHIBIT M] At the request of Valadon Hotel, LLC, Zuma Investment Co., LLC, and Stefan Ashkenazy through their attorney, Douglas Walsh [EXHIBIT N], the City Clerk duly issued a Notice of Continuance of Appeal Hearing to Valadon Hotel, LLC, Zuma Investment Co., LLC, and Stefan Ashkenazy rescheduling the appeal hearing to February 19, 2013 [EXHIBIT 0]. On February 12, 2013, Attorney Douglas Walsh filed a request for the appeal hearing before the City Council, on behalf ofvaladon Hotel, LLC, Zuma Investment Co., LLC, and Stefan Ashkenazy, of the Confirmed Notice of Assessment of Delinquent Transient Occupancy Taxes and Hotel Marketing Levy, be continued to a date beyond March 4, [EXHIBIT P]. On March 6, 2013, the City Clerk duly issued a Notice of Continuance of Appeal Hearing Before the West Hollywood City Council Regarding Confirmed Assessment of Delinquent Transient Occupancy Taxes and Hotel Marketing Levy to Valadon Hotel, LLC, Zuma Investment Co., LLC, and Stefan Ashkenazy rescheduling the appeal hearing to March 18, [EXHIBIT Q]. Appeal Issue #1 - "Responsible Parties" Counsel for the appellants argue that the City cannot hold Zuma Investment Co., LLC and Stefan Ashkenazy liable for the delinquent TOT and hotel marketing levy solely based upon their status as "managers" or "officers" ofvaladon Hotel, LLC, as it would violate Section 17158(a) of the California Corporations Code. As set forth in greater detail in the City Prosecutor's response [EXHIBIT R], the Tax Administrator is not conferring liability upon Zuma Investment Co., LLC and Stefan Ashkenazy solely based upon their "manager" status. Rather, in accordance with provisions of the Corporations Code and the holding in People v. Pacific Landmark (2005) 129 Cal. App. 4th 1203, liability results from their personal participation in the criminal conduct resulting in the delinquency. 6

7 Appeal Issue #2- "The Confirmed Notice of Assessment Includes Amounts that Cannot be Collected by the City" Counsel for the appellants argues that the Confirmed Notice of Assessment includes hotel marketing levies that are not collectible as they extend beyond the statute of limitations set forth in California Code of Civil Procedures section 338(a). CCP section 338(a) specifically sets forth that an action upon a liability created by statute (not including a transient occupancy tax) is three (3) years from the date that the liability became delinquent. The Confirmed Notice of Assessment includes the reporting periods for the hotel marketing levy from August 2008 (which was due on September 30, 2008) through December 2011 (which became due on January 31, 2012). As the City formally commenced this action on July 20, 2012 (with the issuance of the Notice of Assessment), any portion of the hotel marketing levy that became due on or before June 20, 2009 would not be collectible by the City. In the instant case, Staff agrees that the hotel marketing levy for the reporting periods of August 2008 (due September 30, 2008) through May 2009 (due June 30, 2009) would not be collectible. A revised calculation for all delinquent TOTs, hotel marketing levy, penalties, and interest is attached hereto and incorporated herein as [EXHIBITS]. Appeal Issue #3 - "The Penalties and Interest Assessed" Counsel for the appellants argue that the penalties and interest are improperly assessed against the Hotel operators because (i) the Tax Administrator explicitly and/or impliedly consented or agreed that such penalties and interest would not accrue, and (ii) the Tax Administrator otherwise failed to notify the Hotel operators of the accrual and/or to otherwise demand the payment of the penalties and interest. As set forth in greater detail in the City Prosecutor's response [EXHIBIT T], the Tax Administrator never consented or agreed to waive or excuse the accrual of penalties and interest, nor did he modify the required "remittance period" for the transient occupancy taxes and hotel marketing levy so as to prevent the accrual of penalties and interest. Moreover, the Hotel operators were notified of the imposition and accrual of the penalties and interest through the enactment of the Municipal Code, and the Hotel operators cannot be allowed to benefit from their ignorance of the law. ALTERNATIVES: The City Council could vote to deny the appeal in its entirety. 7

8 CONFORMANCE WITH VISION 2020 AND THE GOALS OF THE WEST HOLLYWOOD GENERAL PLAN: This item is consistent with the Primary Strategic Goal of Fiscal Sustainability and the Ongoing Strategic Program of Institutional Integrity. General Plan ED-2: Expand the City's tax base to support fiscal stability. EVALUATION: Department of Finance and Technology will take all necessary actions to recover all monies due. ENVIRONMENTAL SUSTAINABILITY AND HEALTH IMPACTS: N/A OFFICES OF PRIMARY RESPONSIBILITY: Department of Finance and Technology; Department of Public Information and Prosecution Services and the City Prosecutor's Office. FISCAL IMPACT: If the Confirmed Notice of Assessment of Delinquent Transient Occupancy Taxes and Hotel Marketing Levy is upheld and, in part, modified the City will collect $1,855, in delinquent Transient Occupancy Taxes, Hotel Marketing Levy, Penalties and Interest. ATTACHMENT: Exhibit A-T 8