Feds’ lawsuits hurt more than they help
- June 29, 2011
Many years ago I heard a story about good intentions gone awry.
Tourists were flocking to a scenic rock formation in a rural area of a Western state. Highway department engineers noticed the increased traffic on the road leading to the site and decided that it needed to be widened and improved. State law required that rock for such projects had to be obtained from the closest available source. So, you guessed it, the rock formation was dynamited to make gravel for the road.
This story probably was dreamed up to make a point about how well-intentioned people fail to see the forest for the trees (or in this case, the rock for the gravel). Unfortunately, two real legal cases fitting this same “what were they thinking” category are playing out in Virginia today.
The first involves a poultry processing plant in Harrisonburg sold by Tyson Food Inc. to competitor George’s Inc. last March. The U.S. Department of Justice filed an antitrust lawsuit in May charging that the deal substantially weakens competition among processors in the Shenandoah Valley. Instead of three processors operating in the area —Tyson, George’s and JBS Pilgrim’s Pride — now there are only two.
In a news release, the Justice Department depicted itself as a protector of Virginia poultry producers. “America’s farmers deserve competitive prices and terms for the sale of their services, and the Antitrust Division will vigorously pursue anticompetitive acquisitions that stand in the way of achieving that goal,” said Christine Varney, assistant attorney general in charge of the Antitrust Division.
Who would dare take a stand against farmers and the Justice Department in such a worthwhile pursuit? How about four Virginia elected officials who represent not only Shenandoah Valley farmers but also the workers at the poultry plant. In a bipartisan response normally seen when the Defense Department threatens to close a military base, two Republicans — Gov. Bob McDonnell and Rep. Bob Goodlatte — and two Democrats — Sens. Mark Warner and Jim Webb — sent a joint letter to U.S. Attorney General Eric Holder urging him to consider the economic impact of the suit.
The Virginia lawmakers point out that if George’s hadn’t bought the poultry plant, it likely would have closed. That event would not only reduce competition but also eliminate 500 jobs and contracts with 121 poultry farmers. Webb summed up the situation best. “A legal victory that leads to a shuttered plant would be no victory for Virginia workers.”
While that spat is going on, another legal imbroglio could have even bigger repercussions.
The federal Fourth Circuit Court of Appeals has reversed a Tax Court ruling on the allocation of Virginia historic tax credits through partnerships. The commonwealth contends that this arrangement is a nontaxable exchange. A three-judge panel of the Fourth Circuit, however, sided with the IRS in May. The judges decided that allocating tax credits to investors this way amounted to a “disguised sale” of property that should be subject to federal income tax. The full Fourth Circuit refused to reconsider the ruling.
The Virginia Department of Historic Resources warns that the decision could have a devastating effect on efforts to restore historic buildings in the commonwealth and around the country.
In Virginia, developers and their partners can receive state tax credits equal to 25 percent of eligible expenses incurred in rehabbing a historic building. Tax credits resulted in $2.65 billion spent rehabilitating 2,000 state landmarks from 1997 to 2009, according to a study by Virginia Commonwealth University. These projects created nearly 6,000 jobs.
Often tax credits are critical in determining whether projects get done at all. The cost of rehabbing a historic structure usually is higher than the market value of the completed project. So tax credits close the gap.
To give you an idea of how the court ruling would change things, the National Trust for Historic Preservation estimates that taxes would eat up $700,000 in potential financing in a $2 million project.
William Frazier, a principal with the architectural firm Frazier Associates in Staunton, says the ruling already has had a chilling effect on potential projects throughout the state. “This decision will virtually halt the possibility of any construction rebound in most downtowns in the commonwealth,” he says.
Obviously, the IRS needs to collect taxes that are legally owed to the government, which is facing huge debts and deficits. Likewise, court issues should be decided on matters of legal principle, not economic expediency.
But tell me why federal agencies are pursuing lawsuits that would eliminate scarce jobs and kneecap a building industry still struggling to recover from the recession?
Somewhere common sense has to prevail. Otherwise, we’re just crushing more rocks to build roads to nowhere.