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Connected Lawyer Pledged Tax Credits Before They Were Approved

Tuesday, June 05, 2012

 

Less than a week before Curt Schilling’s 38 Studios defaulted on a $1.125 million payment due to the Economic Development Corporation (EDC), the state’s Film and Television Office was questioning whether the video game company was even eligible to receive tax credits that might have saved the cash-strapped company, according to e-mails obtained through a public records request.

On April 26, Film and Television Office director Steve Feinberg sent an e-mail to former EDC executive director Keith Stokes asking whether 38 Studios’ agreement with the state qualified the company for tax credits. Feinberg questioned whether the company was entitled to access tax credits based on the $75 million loan guarantee it received from the state.

"According to 38 Studios, and my understanding, 38 could not access the tax credit program based on the funds that were guaranteed by the state," Feinberg wrote to Stokes. "However, they are stating that they are not using funds which were guaranteed by the state. These are new, additional funds."

Stokes never responded to Feinberg’s e-mail. A follow-up e-mail sent on May 7 was also not returned. Nine days later, Stokes resigned from his post.

38 Studios Lobbied for Tax Credits in 2010

Despite the confusion, the Providence Journal reported Saturday that $14.3 million in anticipated tax credits had already been pledged as collateral to secure about $8.5 million in loans for the struggling company, which was unable to make payroll and laid off every single employee in May.

The pledged tax credits and loans were arranged by Providence lawyer Michael Corso, a top tax credit broker with close ties to House Speaker Gordon Fox. The loans came from BankRI, which was co-founded Malcolm G. Chace III. Coincidentally, Corso used to work for Chace’s cousin, Arnold, at Cornish Associates.

Governor Chafee said Monday that he first learned 38 Studios was asking about tax credits last November, but noted that the discussion “went away” quickly. That didn’t stop 38 Studios from continuing to press Feinberg to approve the credits, however. Three days after Christmas, the company’s Chief Financial Officer, Rick Wester, sent a letter to Feinberg claiming the company was eligible under its agreement.

“Specifically, Section 6.02 (u) of the Agreement, which governs the Company's use of Motion Picture Production Tax Credits, permits the use of the tax credit program once the Company has met certain conditions," Wester wrote.

Significant Risk

Still, Corso was taking a significant risk by posting the tax credits as collateral when it had only initial certification from the Film and Television Office. According to the rules and regulations of film tax credits, “the letter of initial certification is only a statement of conditional eligibility for the production and, as such, does not grant or convey any Rhode Island tax benefits.” 38 Studios was also never incorporated in Rhode Island, which is part of the requirements for tax credit eligibility.

“To assume, an individual or an organization will get tax credits is risky just because an application is filed,” said Dr. Edward Mazze, distinguished University Professor of Business Administration at the University of Rhode Island. “There is a considerable amount of information required before any tax credit is granted which may include audited financial statements, payroll records, supplier invoices, company information and personnel records. Anywhere in the review process, the application can be denied.”

Mazze said it would be illegal for unauthorized individuals to promise tax credits.

“Buying or selling tax credits before they are approved is a bad decision because the credit may never come about,” he said. “It would be criminal if someone outside of a tax credit granting authority promises tax credits to individuals and organizations without authority.”

More Oversight

For State Representative Teresa Tanzi, who has consistently called for more oversight over tax credits since she was elected in 2010, the 38 Studios saga is just the latest problems to arise from a tax credit system that has few checks and balances.

Tanzi said that while the film tax credit laws are written “quite well,” only seven percent of all tax credits have “any stated purpose.” She compared the situation at 38 Studios to low-income residents who seek payday loans, noting that Schilling was desperate for any money he could get to keep the company afloat.

“38 Studios puts a spotlight on why we need consistent oversight on these things,” Tanzi said.

Chafee: “We’ve Been Scorched”

Separately, Col. Steven O’Donnell, head of the Rhode Island State Police, told GoLocalProv on Monday that he is still looking into what happened at 38 Studios. He said an investigation is not yet underway. During a press conference Monday, Chafee referred any State Police questions to O’Donnell.

The Governor also nominated three Rhode Islanders (Roland Fiore, Stephen Hardy and William Holmes) to join the EDC board. Coincidentally, Holmes represents Rhode Island Carpenters Local 94, which worked on the interior of 38 Studios’ downtown headquarters.

Chafee pledged a more conservative approach from the EDC when it comes to loaning taxpayer funds in the future.

“We've been scorched, we've been burned,” he said referring to the 38 Studios deal.

 

Dan McGowan can be reached at [email protected].
 

 

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Comments:

i don't think anyone in RI is surprised by this.

Comment #1 by donatello gori on 2012 06 05

From the distinguished University Professor of Business Administration at URI, Dr.Mazze says it all:
"It would be illegal for unauthorized individuals to promise tax credits.
Who does that entail? Fox, Corso, Stokes, and those who knew like M
Corso should be in jail for criminal activity on his part by posting the tax credits as collateral that he had no right to do, he and Fox should be prosecuted by the fullest extent of the law. Put in jail.

Corso was taking a significant risk by posting the tax credits as collateral when it had only initial certification from the Film and Television Office. According to the rules and regulations of film tax credits, “the letter of initial certification is only a statement of conditional eligibility for the production and, as such, does not grant or convey any Rhode Island tax benefits.” 38 Studios was also never incorporated in Rhode Island, which is part of the requirements for tax credit eligibility.

“To assume, an individual or an organization will get tax credits is risky just because an application is filed,” said Dr. Edward Mazze, “There is a considerable amount of information required before any tax credit is granted which may include audited financial statements, payroll records, supplier invoices, company information and personnel records. Anywhere in the review process, the application can be denied.”




Still, Corso was taking a significant risk by posting the tax credits as collateral when it had only initial certification from the Film and Television Office. According to the rules and regulations of film tax credits, “the letter of initial certification is only a statement of conditional eligibility for the production and, as such, does not grant or convey any Rhode Island tax benefits.” 38 Studios was also never incorporated in Rhode Island, which is part of the requirements for tax credit eligibility.

“To assume, an individual or an organization will get tax credits is risky just because an application is filed,” said Dr. Edward Mazze, distinguished University Professor of Business Administration at the University of Rhode Island. “There is a considerable amount of information required before any tax credit is granted which may include audited financial statements, payroll records, supplier invoices, company information and personnel records. Anywhere in the review process, the application can be denied.”

Mazze said it would be illegal for unauthorized individuals to promise tax credits.

Comment #2 by dis gusted on 2012 06 05

The question is whether Corso told BankRI that 38 Studios had the actual tax credits or whether BankRI accepted an obviously conditional letter when underwriting the loan. The first instance is illegal, the second instance is bad underwriting. I wonder what the limits on Corso's errors and omissions insurance are...

Comment #3 by Todd B on 2012 06 05

Carceiri? Come out, come out... where ever you are!

Comment #4 by Ned Rivers on 2012 06 05

All these new financial schemes create money out of thin air. A “tax credit investor” from Hollywood puts up money for a company that doesn’t make films, and the crooked Bank Rhode Island loans money on it?

Also, if you check the annual reports at the RI Secretary of State online, 38 Studios is considered a foreign corporation, since it has been and continues to be incorporated in Delaware. They can’t get film tax credits unless they’re incorporated in this state.

Apparently, Schilling tweeted in January of this year that he immediately needed a senior accountant. I would guess so! Investigate BankRI! Never mind putting the police donut squad on the case. Get auditors into that Bank!

Comment #5 by Shalala Shamba on 2012 06 05

Don't give this right wing schmo any more money.
See story below.
"The company's misfortunes have opened Schilling to allegations of hypocrisy, given his conservative politics and his recent plea for millions of dollars more from the state to save the business. Schilling called for smaller government when he campaigned for Republicans such as George W. Bush, McCain and Scott Brown.

"Apparently smaller government, in Schilling's world, applies to other people, maybe city kids stuck in underperforming schools or disabled adults looking for help back and forth to medical appointments."
http://www.masslive.com/redsox/index.ssf/2012/06/curt_schillings_38_studios_wha.html

Comment #6 by Jack Cottone on 2012 06 05

No "special" tax credits for anyone. If you must give out tax credits give it to those businesses already here.
If a business is a good investment, private investors will invest. There is no reason to risk tax-payer money.
Politicians, Are you listening?

Comment #7 by Wuggly Ump on 2012 06 06

I've never understood the justification for tax credits. A project qualifies for say $10 million in tax credits, then sells them for fifty cents on the dollar. The State spends $10 million, the project gets $5 million, and a third party gets the rest, with no benefit to the project or the State. Why not just give the project the $5 million and save the taxpayers the rest???

Comment #8 by Andrew Dzykewicz on 2012 06 06

No! It can'r be! A CONNECTED lawyer?? Never would something like that happen here. That only happens in corrupt place like Rhode, Oh wait a minute, maybe it did happen.

Why does the trail always lead back to 3 or 4 people high up in the Legislature?

Comment #9 by Mike Hamel on 2012 06 07

In most states tax credits are agreed to by legislatures that do not want to recognize the credits in their state budgets in the year that the tax credits are granted.

In Rhode Island's case the practice often boils down to a long term borrowing arrangement when the credits are presented at the tax window. No provisions have been made in advance for $150 million of historic credits due to be presented in the next couple of years. Check out the state capital budget where this upcoming borrowing is documented.

Comment #10 by Richard Langseth on 2012 06 08




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