The Internal Revenue Service, concerned that the federal government could lose billions of dollars in potential tax revenues, is threatening to stop the spread of a method of tax-exempt financing that allowed Baltimore developer David S. Cordish to build two Indian casino complexes in Florida.
IRS documents obtained yesterday by The Sun cast doubt on several financing tactics that the Seminole Tribe of Florida used to bypass federal tax laws and build its casino complexes with tax-exempt bonds, which tribes typically can use only for "essential governmental functions."
In the deal that Cordish arranged to build the casino complexes in Tampa and Hollywood, Fla., the Seminoles enlisted Capital Trust Agency, a small government agency hundreds of miles away in the Florida panhandle, to issue $389 million in tax-exempt bonds on the tribe's behalf and then lend the money to the tribe in exchange for a fee.
Bond lawyers on the Cordish-led team have pitched the same method of financing used in the Seminole deal to tribes throughout the country in brochures and at conferences, hailing it as a back door in the tax code that lets Indians borrow money the same way that municipal governments and charities do.
The IRS began investigating the deal after The Sun reported in March that Cordish would be paid nearly 30 percent of the casinos' net revenue - about $1.3 billion over the next decade - under a financial-services contract that sidestepped federal laws governing remuneration from Indian casino operations.
The agency issued a "preliminary adverse determination" earlier this month declaring that the Seminole bonds were taxable and had been issued improperly.
The ruling - obtained yesterday under Florida's public records laws - casts doubt on the tribe's financing tactic, known in bond-industry parlance as "conduit" borrowing, and suggests that Capital Trust Agency is an "issuer for hire" motivated by the fees it collects. It notes that Capital Trust, created by the city of Gulf Breeze with the town of Century, funnels more money into the city's budget than property taxes do.
"If you can't issue tax-exempt bonds directly, trying to do it on a conduit basis is problematic," said Charles Anderson, the IRS' manager of field operations for tax-exempt bonds. "It's something the IRS will be looking at very closely." He cautioned any Indian tribe thinking of using tax-exempt bonds to seek the IRS' advice first.
Attorneys who handle such deals say virtually every tribe in the country with gambling operations is considering, or has considered, tax-exempt financing, aware of what Cordish and the Seminoles did in Florida. At least one other project mimicking the Seminole deal has been completed, and several others are in the early stages of negotiation.
"There are a lot of tribes out there that would like to do this kind of financing," said John Theberge, a specialist in tax-exempt bonds with the Washington law firm Holland & Knight who has no connection to the Cordish deal. "It gives them a lot more flexibility than doing a direct issue, and it saves them a lot of money."
Orrick, Herrington & Sutcliffe LLP, the national law firm that handled the financing for the Seminole bonds, provided the legal opinion that conduit bonds for Indian tribes complied with federal tax laws and has promoted the concept in brochures and at gaming conferences.
The IRS letter mentions a conference that included Ed Gray III, executive director of Capital Trust, who said during the call that conduit deals are a viable alternative "for projects that do not qualify" for tax-exempt debt.
"This may explain how the transaction evolved as it did, if the tribe believed that a conduit financing arrangement could allow the tribe tax-exempt financing for its commercial activities," the IRS letter said.
Lost tax revenue
Because interest that investors earn from tax-exempt bonds is not subject to federal income tax, each transaction earns what amounts to a federal subsidy. The Cordish deal would have generated about $233 million in federal tax revenue over 30 years if it had been financed with taxable bonds.
If the IRS prohibits Indian tribes from using tax-exempt municipal bonds to build commercial enterprises such as hotels and casino complexes, the move could make billions of dollars in interest subject to federal tax.
Attorneys related to the deal are fighting the IRS to forestall a final determination that the Seminoles' bonds are taxable.
"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 after learning of the IRS ruling this month. "And then that determination is appealable to the courts."
Besides forcing the tribe to pay a settlement to the federal government or issue 108 percent refunds to its investors, a "final adverse determination" could also imperil Cordish's 10-year deal with the Seminole tribe.