The congressional committee responsible for oversight of the federal tax laws has released a report proposing to eliminate the loophole that developer David S. Cordish used when he financed two Indian casino complexes in Florida with tax-exempt municipal bonds.
The staff of the Joint Committee on Taxation said Congress never intended for Indian tribes to bypass federal laws that restrict the use of such bonds to "essential governmental functions" on Indian reservations.
The Sun reported in March that Cordish had avoided the restrictions by arranging for a municipal agency on the Florida Panhandle, which is subject to more lenient tax laws, to issue $410 million in bonds. The money was then lent to the tribe to build the Seminole Hard Rock Hotel and Casino complexes in Tampa and Hollywood, Fla.
Cordish is expected to earn a fee of more than $1.3 billion over 10 years for developing the complexes, the first to use the loophole. He did not respond yesterday to a request for comment.
The committee, in a report issued Wednesday, proposes to "clarify" the law by instituting an explicit ban, one among dozens of suggestions designed to "curtail tax shelters, close unintended loopholes and address other areas of noncompliance in present law."
The IRS has already declared the Seminole bonds invalid, a preliminary ruling that Cordish and the tribe are contesting. Because interest on tax-exempt bonds is not subject to federal income tax, investors can save millions of dollars with each deal and tribes can pay much lower interest rates to borrow money. The Seminole deal alone is estimated to have been worth roughly $233 million in taxes over 30 years, if the bonds had been issued as a taxable investment.
The IRS also is auditing a similar bond deal for the Cabazon Band of Mission Indians in California, which used the same attorney and underwriter that Cordish used for the Seminole bonds.
The proposal from the staff of the Joint Committee on Taxation would change federal law to make clear that tribes borrowing bond money from a government "conduit," as the Seminoles and Cabazons did, are subject to the same spending restrictions as tribes that issue bonds themselves.
The report was requested by the full committee, which is composed of senior members of the Senate Finance Committee and the House Committee on Ways and Means.
"The use of conduit borrowings have been promoted as a method for avoiding the essential governmental function requirement," the report said. "The proposal simply clarifies the intent of Congress. Indian tribes must use the proceeds of tax-exempt bonds in the same manner whether they are direct issuers of such bonds or conduit borrowers."
Impact on casinos
A change in the relatively obscure section of federal law concerning Indian bonds could have broad implications for the booming, $16 billion-a-year Indian casino business. At least one other Indian tribe has scrapped plans to use tax-exempt bonds to build a hotel complex adjacent to a casino because of the IRS audits, and attorneys who work with tribes say dozens more deals were being pondered.
Tax-free deals are so attractive that at least two Indian bond issues appear to have gone forward even in the face of the IRS' apparent opposition.
Officials in Sandoval County, N.M., issued $48.5 million in bonds on behalf of the Santa Ana Pueblo tribe to refinance a hotel and golf course complex adjacent to a casino. The county and the tribe reached final agreement on the deal on June 17 and the bonds were sold later that month - nearly two months after the IRS audit was disclosed publicly and described by The Sun.
And the Capital Trust Agency, the municipal authority that issued the Seminole Tribe's bonds, appears to have issued an additional $50 million worth for the tribe around May 20 - about three weeks after it was notified of the IRS audit.
Officials involved in the deal did not respond to telephone calls or e-mails, and no detailed description of the latest bonds could be obtained. But the additional financing is mentioned in disclosures filed by the tribe's financial dissemination agent, U.S. Bancorp, as part of the Cordish bond deal. The tribe's financial statements, also included in the bond records, show the tribe's debt increased in May by about $50 million.
An official with the IRS said it can't stop government agencies and tribes from issuing tax-exempt bonds for Indian projects, but cautioned that they are opening themselves up to a potential audit and possible tax bills for their bondholders.
"If someone thinks the IRS is just flat-out wrong, and they want to continue what they're doing and take their chances, that's their right," said Charles Anderson, manager of the tax-exempt bond field operations for the IRS. "But it's not what we would recommend."
The New Mexico deal was arranged by the same Merrill Lynch & Co. underwriters who arranged the Seminole and Cabazon deals. A spokesman for Merrill Lynch declined to comment yesterday. Daymon Ely, chairman of the Sandoval County Commission at the time the Santa Ana Pueblo bonds were issued, said he doesn't recall whether county officials were aware of the Seminole audit at the time, but added that he might have approved the deal anyway.
At a meeting of Indian gaming specialists in California last week, an attorney who worked on both the Seminole and Cabazon deals, Perry E. Israel, said that tribes and bond specialists are confused about Indian bonds because of a lack of clear guidance from the IRS. Anderson called that suggestion "disingenuous."
The IRS has a procedure, called a private letter ruling, that allows tribes and their lawyers to get formal approval or rejection of their financing plans before bonds are issued. But Anderson said none of the tribes involved in conduit deals had asked for the IRS' opinion. "I have to conclude that people know the answer, but may not want the answer they would get," he said.
"It seems like the lawyers and underwriters are exploiting the tribes by taking the money and not bothering to come in for an easy private letter ruling request," Anderson said. "How they can issue an unconditional opinion is beyond me, but truth be told there are only a handful of law firms and underwriters willing to jeopardize their client tribes in this manner."
The Joint Committee on Taxation ordered the report on tax loopholes after learning that the federal Treasury loses almost $250 billion a year in potential tax revenue because of underreported income from taxpayers. The recommendations about Indian bonds are the latest suggestion that Cordish's deal with the Seminoles, initially regarded as a precedent-setting milestone in the Indian gambling business, has sparked a regulatory backlash that is likely to discourage any similar deals.
The National Indian Gaming Commission, responsible for regulating Indian casinos, has quietly expanded its oversight role to include one of the more controversial elements of the Cordish deal, according to a letter last month from U.S. Sens. Ben Nighthorse Campbell and Daniel K. Inouye, two senior members of the Senate Committee on Indian Affairs.
The letter said that the commission has stepped up its review of development and financing contracts that don't meet the Indian gaming law's strict definition of "management contracts."
Because Cordish's deal was crafted to avoid the definition, the commission has never reviewed it in final form or signed off on its financial arrangement, which grants a Cordish Co. subsidiary nearly 30 percent of the casinos' profits for 10 years. Under a management contract, profit-sharing arrangements are typically limited to five years, or seven years in extraordinary circumstances.
The commission is also targeting deals that seem to violate laws prohibiting non-Indian developers from gaining a "proprietary interest" in an Indian casino, according to the letter. The Cordish team was warned by the commission in August 2000 that an earlier version of the deal - which granted the developer less money per year than the final deal does, according to a marketing study commissioned for the deal - "raises a question of whether the tribe actually has sole proprietary interest in the gaming operation."
Philip Hogen, chairman of the National Indian Gaming Commission, would not say yesterday whether his agency is looking into the Seminoles' deal with Cordish. But he said preventing tribes from handing too much money to non-Indians is part of the commission's mission.
"We have to keep our eyes open and not overlook our trust responsibility," Hogen said. "We're not being heavy-handed, but we've seen tribes getting the short end of the stick."
Sun staff writer Mike Adams contributed to this article.