The City of Federal Way has completed its purchase of a vacant big-box store property with a $5 million state grant, but controversy lingers over a letter the city wrote to the seller extending a tax deferral.
Federal Way financial planner Matthew Jarvis claims the city committed fraud by stating in writing that it was buying the Toys R Us property under the threat of condemnation, without having any intent to condemn it.
Jarvis says he will file a whistle-blower complaint with the Internal Revenue Service this month against the city.
“This move is clearly tax fraud,” Jarvis said. “It’s a misstatement of fact to provide a tax benefit.”
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The city’s letter to the seller, Pal-Do Company President Brian Park, declares that the property was sold under threat of condemnation and eminent domain.
Park demanded the letter as a condition of selling the vacant store and nearly 4 acres for $5.375 million. Park could not be reached for comment.
City Council members Jack Dovey and Jim Ferrell voted against the purchase last month. They both objected to the letter, saying it was untrue because the city never intended to condemn the property. Ferrell called the letter “legal fiction.” The city’s statement extends from three months to two years the time Park has to invest money from the sale into new property without paying taxes, Jarvis said. He noted that the 21-month extension makes it much more feasible for Park to reinvest the purchase price and defer taxes.
The city plans to use the property at 31510 20th Ave. S. for a performing arts and conference center. It has no money to construct such a facility, which is estimated to cost from $25 million to $40 million.
City Attorney Pat Richardson said the city’s letter complies with the law.
“What we’re doing is common practice and legal,” Richardson said. She acknowledged “there was no discussion of condemnation before there was the direction from the council to negotiate a purchase.”
Five council members approved the purchase last month and authorized the letter, Richardson said. Because the city plans to use the property for a public purpose, it had the right to use eminent domain to acquire it, Richardson said.
David Tucker, Seattle-based spokesman for the IRS, said he couldn’t comment on a particular tax situation.
A University of Washington professor said he believes the city’s letter is legal.
“My understanding is it is perfectly legal and it’s common practice,” said Justin Marlowe, assistant professor of public affairs.
“Certainly on the face of it you can make the claim it looks inappropriate.” But Marlowe added, “It’s difficult to prove intent (to condemn) one way or another.”
Jarvis objected to the letter during public comment at the Dec. 7 council meeting when the purchase was approved.
In her Dec. 8 letter to Park, Richardson wrote that if negotiations failed, “the city, acting in the public interest , may use its right of eminent domain to acquire” the Toys R Us property “for public use.”
In that event, Richardson said she “would file a condemnation suit and arrange a trial to determine the just compensation to be paid for the property.”
The city’s deadline for using the state grant to buy the property was Dec. 30.
The deal closed Dec. 22.