May 8, 2004 - The IRS says Baltimore developer David S. Cordish's $455 million deal to build two hotel-casino projects for the Seminole Tribe of Florida appears to violate federal tax law and has ordered an investigation into the use of tax-exempt bonds to finance the enterprise.

The agency also is exploring the initial fees paid to Cordish and other brokers of the deal, suggesting the payments to private businesses are inappropriately high for a tax-exempt financing that is meant to benefit only "essential governmental functions."

Cordish and Seminole Tribe officials would not comment on the IRS investigation, which was revealed by the tribe in documents distributed for review by bond investors. The documents included letters in which the tribe disagreed with the IRS and promised to fight.

"Unfortunately, all I can say to you is what's in there," Cordish said Friday when asked to comment on the investigation.

The two Seminole Hard Rock Hotel & Casino complexes -- one in Tampa that opened in March and another in Hollywood, Fla., that is scheduled to open next week -- are widely regarded as some of the most ambitious and potentially profitable Indian casino projects in the country.

Cordish's deal to develop and finance them entitles him to a share of the gambling proceeds that is projected to exceed $1.3 billion over the next decade, and could make the Baltimore native one of the highest-paid developers in the history of Indian gambling.

Pulling together the Hard Rock project, which was detailed by The Sun in a two-part series earlier this year, required Cordish to navigate a murky underworld of tribal gambling and politics. With a former confidant of Donald Trump as a partner, Cordish and his associates crafted a deal that pushed the regulatory boundaries of Indian gambling, salvaging it even as the tribe's former chief was ousted amid a sexual harassment scandal, its business manager was indicted for embezzlement and fraud, and its chief counsel was shot while relaxing in his home.

Financing is one of the project's most complicated and controversial elements; it is the first use of tax-exempt municipal bonds for Indian casino hotels.

In a letter mailed last week to the Capital Trust Agency, a municipal entity in Florida that issued bonds for the project on the tribe's behalf, IRS field operations manager Charles M. Anderson said the deal "causes a concern that the debt issuance may fail one or more provisions" of the federal tax code. He requested reams of documents and notified the agency that the deal has been targeted for "examination."

In his letter, Anderson said the IRS will also investigate the fees paid to attorneys, investment advisors and other groups as part of the deal -- roughly $38.6 million, according to a summary of the financing that was given to potential investors. That payment to private businesses, Anderson wrote, suggests that the bonds could be "private activity bonds," which are not allowed to be tax-exempt.

Neither the IRS nor the bond documents make clear who received the $38.6 million in fees that are under review. But Cordish's contract with the tribe, a copy of which was obtained by The Sun, says he was entitled to 3 percent of the bond issue -- $12.3 million -- as payment for arranging the financing. The most lucrative element of Cordish's contract with the tribe -- the share of the casino profits that he will receive for the next 10 years -- was not mentioned.

Tax-exempt financing is more typically used for projects like hospitals or highways, and the IRS considers it tantamount to a federal subsidy. Since investors in the Seminole deal's tax-exempt bonds don't pay income tax on the interest they earn, the deal would deny the federal treasury more than $233 million in tax revenue over the 30-year life of the bonds.

If the IRS determines that the bonds are taxable, investors in the casino projects would be entitled to refunds and the future of the Hard Rock complexes could be in peril. Alternatively, the tribe could reach a settlement with the IRS or the bondholders that keeps the financing in place, a response that bond specialists consider more likely.

Tribal officials made clear, however, that they plan to fight the IRS, as they promised investors when they lined up to buy the project's bonds.

"The Seminole Tribe of Florida agreed that it would contest any challenge by the IRS," tribal counsel Jim Shore wrote in a letter disclosing the audit to municipal bond repositories, a requirement under the bond deal. "The Seminole Tribe of Florida intends to honor its obligations."

Because of the unique financing, negotiators of the Hard Rock deal contemplated problems with the IRS, bond documents show. Cordish and the tribe could have sought an official determination from the IRS that the deal was legal -- called a private letter ruling -- but instead chose the more common route of hiring an experienced team of tax and bond lawyers who investigated the deal and issued opinions that it would hold up under scrutiny.

Perry I. Israel, a Sacramento, Calif.,-based lawyer who is regarded as one of the country's top specialists in tax-exempt municipal financing, issued a detailed opinion to investors saying the tax-exempt status of the deal was appropriate. Tribal officials referenced that opinion in their letters to the IRS and said they stand behind it. Israel could not be reached for comment yesterday.

Indian tribes are subject to stricter rules than municipal governments, and are generally prohibited from issuing tax-exempt bonds for hotel and casino projects, but the Seminoles sidestepped those restrictions by issuing bonds through the Capital Trust Agency, which deemed the Hard Rock project to be an economic development project and agreed to lend the bond proceeds to the tribe.

The deal also was structured so that only a portion of the project's financing -- $389 million -- was tax-exempt, and the money was used only to build the hotel, parking garages and other elements of the project surrounding the casinos. The gambling halls themselves -- more clearly prohibited under the tax laws -- were built and equipped with $21 million in taxable bonds and additional money contributed by the tribe.

Anderson's letter never mentioned the casinos, but questioned whether "the use of bond proceeds to finance the acquisition, equipping and improvement of convention, lodging and restaurant facilities ... represents an essential governmental function of the tribe." He could not be reached for comment.

Tribal spokesman Gary Bitner was quoted in The Bond Buyer saying "the sense is that this is an inquiry that is ultimately going to prove to be a non-issue." He declined to comment yesterday citing "regulatory reasons."

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