IRS casts doubt on Cordish-Indian deal

Preliminary ruling finds bonds not tax-exempt

December 07, 2004|By Robert Little | Robert Little,SUN NATIONAL STAFF

The Internal Revenue Service has made a "preliminary adverse determination" that the tax-exempt bond deal Baltimore developer David S. Cordish arranged to finance two hotel-casino complexes for the Seminole Tribe of Florida is invalid and that the bonds are subject to federal taxes.

The determination - the first significant word from the IRS since it launched an investigation of the deal in April - could let the federal government strip the project of a $233 million subsidy and collect that sum in taxes or penalties.

And it also could jeopardize Cordish's claim to nearly 30 percent of the tribe's gambling profits over the next decade from casinos in Tampa and Hollywood, Fla. The Sun reported in March that those payments, compensation for arranging the financing with Merrill Lynch and a Florida bonding agency, could be worth more than $1.3 billion.

Cordish and attorneys connected to the deal stressed yesterday that the ruling was preliminary and said they expect a long process of contesting and debating the issue before it is resolved. Bond issuers may contest the ruling in private IRS conferences and then before the agency's Office of Appeals.

"There are several more steps, or determinations within the IRS itself, before a final taxability determination will be made one way or the other," Cordish said by e-mail yesterday. "And then that determination is appealable to the courts."

But an attorney for the Seminole Tribe warned that his clients have no intention of paying taxes or penalties to the IRS and said they will reconsider their payments to Cordish if necessary.

"Whoever opined that those bonds were tax-exempt ought to be contacting their malpractice lawyers," said Joel Hirschhorn, a Miami attorney and special counsel to the Seminole Tribal Council. "We bargained for one thing, and if it turns out we have something else then we're going to revisit the arrangement [with Cordish]. We're going to act appropriately to seek out just compensation from the parties responsible, so that this does not cost us in any way."

Investors who purchased the Seminole Tribe bonds, lured by tax-free interest of as much as 10 percent, are entitled to refunds of 108 percent plus interest if the IRS issues a final "Determination of Taxability," according to public documents released with the bond offering.

But bondholders said yesterday that a more likely outcome if the IRS determination withstands Cordish's challenge would be some type of settlement, which would compensate the federal government for the $233 million in lost taxes over the 30-year life of the bonds while still allowing investors to earn tax-free interest.

Bob MacIntosh, vice president and portfolio manager for the Boston investment company Eaton Vance, said the IRS determination could wreak havoc on his company's bond funds, which bought Seminole Tribe bonds to package into a portfolio of tax-exempt investments for its clients.

Having to pay taxes through such a fund is complicated, expensive and always avoided whenever possible, he said.

"What we understand is that the tribe is most likely going to enter into a settlement agreement," he said. "The last thing they want to do is have the bonds declared taxable."

The IRS ruling could also block other deals using tax-exempt bonds that were crafted to mirror the Seminole Tribe deal. The Cabazon Band of Mission Indians in California, which structured a similar tax-exempt deal worth $145 million for its Fantasy Springs Resort Casino in Indio, Calif., received notice in July that it was the target of a similar investigation.

"I think a lot of other tribes have their financing on hold, waiting to see how this one turns out, and if the IRS said they're taxable, that's not good," said Michael LaPierre, program manager for the California Statewide Communities Development Authority, which issued the bonds on behalf of the Cabazons. "But these are separate issues, and I'm still standing behind our bonds."

The Cordish Co., developer of Baltimore's Power Plant complex in the Inner Harbor, is a renowned developer of inner-city retail and entertainment projects nationwide. The Seminole Hard Rock Hotel and Casino deal was the company's first Indian casino project, and the contract granting the company a share of the casinos' gambling profits made Cordish one of the highest-paid developers in the history of Indian gambling.

The financing for the Seminole casino deal, detailed by The Sun in a two-part series in March, was among its more innovative and controversial elements, marking the first time that an Indian hotel-casino project was financed largely with tax-exempt municipal bonds.

Because Indian tribes are prohibited from using tax-exempt bonds for anything but "essential governmental functions," the Cordish-led team arranged for $410 million worth of bonds to be issued by the Capital Trust Agency, a municipal bond authority on the Florida Panhandle, and for the money to then be lent to the Seminoles.

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