Garage foundation to fight IRS ruling

The foundation that sold nearly $31.5 million in bonds to buy the River Park Square garage will appeal a recent Internal Revenue Service ruling that the bonds aren’t tax exempt.

Meanwhile, former City Councilman Steve Eugster said last week’s IRS ruling means the city should not loan money from its parking meter fund to cover some of the garage’s debts. Eugster, a longtime critic of the city’s involvement in the project, also asked city and state agencies for a special inquiry into “possible criminal activity by city officials and others who participated in the city’s involvement” in the project.

Les Weatherhead, an attorney for the mall developer, said Eugster’s call for a special inquiry judge was “nonsense” but added “he’s entitled to ask them to do whatever he wants.”

The council moved toward making the loan, as required by state court rulings, as early as next week. City attorney Mike Connelly told council members Tuesday afternoon that proposed terms for the loan would likely be filed by today.

Laurel Siddoway, the city’s special counsel on River Park Square, said she disagreed with Eugster’s contention that the IRS ruling would negate the need for the loan.

The ruling is likely to be appealed, she said.

Attorneys for the Spokane Downtown Foundation notified the bond market Tuesday they planned to do just that, as they filed a “Material Developments Notice” on the IRS ruling. Although the federal tax-collecting agency says interest on the bonds may be subject to taxes, foundation attorneys say they complied with all the rules for tax-exempt bonds.

“The Foundation intends to file a protest and request consideration of the case by (the office of) Appeals,” foundation attorneys said.

Bradley Waterman, an attorney for the foundation, said he couldn’t comment beyond what was in the notice.

Last week, a report by the IRS agents based near Denver said the bonds should be subject to tax because agents didn’t believe the foundation qualified as a nonprofit organization. Investors who own the bonds could owe an estimated $1.7 million in taxes, although another entity that sold the bonds or certified them as tax-exempt could be forced to pay it.

Agents also contended that the mall’s developer, which sold the garage, received too much money in the transaction, and raised allegations of “kickback” and “potential fraud.”

Weatherhead denied those allegations, saying the 27-page report by the IRS was full of mistakes and that the payment described as a kickback never occurred.

The mall development firms are affiliates of Cowles Publishing Co., which also owns The Spokesman-Review.

In a series of agreements that stretch back nearly eight years, the foundation sold tax-exempt bonds in 1998 and bought the expanded garage from the developers in 1999 after the renovated mall opened. When the bonds were paid off with garage revenues in 2019, the foundation was to give the parking facility to the city.

In exchange, the city set up an agency to oversee garage operations and passed an ordinance promising to cover certain expenses such as rent, operations and maintenance with loans from the parking meter fund if the garage didn’t make enough money.

Proponents said the project was necessary to save a withering downtown retail district. Opponents, including Eugster, said the parking meter fund ordinance was illegal.

The state Supreme Court, however, ruled it was constitutional.

Soon after it opened, however, the garage was so deeply in debt that the parking agency asked for a loan.

The City Council, which by then included Eugster, refused to make the loan, saying it may never be repaid.

The mall developers, who have continued to operate the garage without payment, sued and the state Supreme Court recently refused to hear an appeal of rulings that order city officials to make the loan.

Previous state court rulings were based on the foundation being a qualified nonprofit that was eligible to issue tax-exempt bonds, Eugster argued in letters to city and state officials.

With the IRS now saying that’s not the case, the loan ordinance should be considered void and the Supreme Court ruling supporting it “no longer of force and effect,” he said.

Weatherhead countered that Eugster has offered many theories on why the loan ordinance wasn’t valid but has repeatedly lost court challenges on that front.

“The Supreme Court’s decisions are perfectly valid whether on not the IRS makes a determination on tax status that stands up,” Weatherhead said.

Eugster’s previous calls for criminal investigations of River Park Square by county and state agencies have been rejected.