The U.S. Treasury has issued new guidelines that prohibit tools used in several controversial investment deals in Maine that left taxpayers on the hook for millions.

The federal New Markets Tax Credit program, created to help low-income communities by directing investment money to local businesses, helped funnel a $40 million investment in Great Northern Paper in 2012 and a $23 million investment in JSI Store Fixtures in Milo in 2013 using the tools that are now prohibited. The program essentially gives financiers income tax credits in exchange for investing in eligible businesses.

The changes to the federal rules come six months after a Maine Sunday Telegram examination revealed how the deals were structured so that investors using the tools would receive tax credits worth more than the investments they made.

The new guidelines, which were amended Oct. 30, specifically address the practices in the JSI deal of using New Markets Tax Credit program investments to refinance old debt, and using the investment to monetize existing assets, which GNP did when it structured a complex deal to buy equipment it already owned.

What remains unclear is whether these new guidelines have any bearing on investment deals closed in the past. The consensus at the state agency that administers a state version of the New Markets Tax Credit – or NMTC – program and among the local attorneys who have represented the financiers making the NMTC investments is that the guidelines clearly apply only to future investments under the federal program.

But that interpretation is not shared by a Rutgers University professor who studies community economic development programs and has been a vocal critic of the NMTC program.


“There were no new regulations issued regarding this, which means it’s a clarification of existing regulations,” said Julia Sass Rubin, a professor at Rutgers University’s Edward J. Bloustein School of Planning and Public Policy. “It’s not new. That’s the nuance I’m trying to hit. It might be that the (federal oversight) wasn’t clear on this in the past, but these are not new rules. This is existing law and existing regulations. There’s no other way to interpret it.”

The distinction is important because it raises the possibility that the deals should not have been considered eligible at the federal level, and presents grounds that taxpayers don’t have to honor the tax credits traded in the execution of the deals, according to Rubin.

The federal NMTC program, which is administered by the Community Development Financial Institutions Fund, offers investors tax credits worth 39 percent of the total investments they make in businesses in those eligible communities. The Maine Legislature in 2011 created a state New Markets program that’s built atop the federal program and also offers tax credits worth 39 percent of an investment.

The programs are similar except for a few key differences. The federal program does not require investors to receive approval before pursuing investment deals that trigger tax credits, while the state program’s board of directors must approve deals before tax credits can be issued. Also, Maine’s program offers “refundable” tax credits, which means if an investor doesn’t have Maine income tax liability, he or she can receive the cash equivalent. The federal tax credits are not refundable.

While the federal and state programs are separate, the financial firms that take advantage of them often make investments and claim tax credits under both programs, allowing them to double the amount of tax credits they receive.

In spite of the large investment figures in the GNP and JSI Store Fixtures deals, neither deal provided substantial capital the businesses could use to invest in their operations. Instead, the investment funds were either used to pay off debt or were returned to the lenders in the same day in a scheme known as a one-day loan, which were used to artificially inflate the value of the investment in order to return the maximum amount of tax credits to investors. Despite all this, Maine taxpayers will be required to pay out roughly $25 million to out-of-state investors over the next several years to make good on the tax credits they were awarded. The investors will also receive roughly $17 million in federal tax credits to offset their federal income taxes.


Rubin believes the Treasury’s clarification of the rules gives Maine a way out of releasing taxpayer dollars to investors involved in any deals that would be deemed ineligible under the federal program.

“The more important question is: Does Maine have to pay out a lot of taxpayer dollars for something that never should have been approved because it’s not allowed under federal rules?” she said. “To me the most critical thing is they misled the state.”

The sizable investment in Great Northern Paper’s mill nevertheless did not provide substantial capital for the business to use to invest in its East Millinocket manufacturing operations.

The sizable investment in Great Northern Paper’s mill nevertheless did not provide substantial capital for the business to use to invest in its East Millinocket manufacturing operations.


Chris Howard and Kris Eimicke, attorneys at Pierce Atwood who have been involved in several New Markets deals in Maine, say Rubin is wrong.

In an email, the pair disputed her interpretation of the new guidelines.

“That is absolutely not the case. These are not clarifications of existing rules. Rather, the CDFI Fund is expressing a new policy that will affect how this future round of NMTC allocation can be used,” they wrote. “This is consistent with the ways in which the fund has encouraged particular types of investments in prior years, such as requiring that applicants invest in healthy food initiatives. The CDFI Fund has the authority to decide which (financial firms) receive allocation, and by determining which groups receive allocation, they set policy.”


Chris Roney, general counsel to the Finance Authority of Maine, which administers the state New Markets program, concurred. He said his understanding is that the guidelines apply only to future deals.

“Accordingly, I do not believe it has any effect on federal deals already approved and nevertheless it is our view that this new guidance at the federal level has no impact on state NMTC deals already approved and awarded credits,” he wrote in an email.

FAME’s board recently amended the rules governing Maine’s program to prevent the issuance of Maine tax credits for any investment where more than 5 percent of the money is used to refinance prior loans, to make equity distributions, to acquire an existing business, or to pay transaction fees.

In addition, Rep. Ryan Fecteau, D-Biddeford, is trying to get a bill to be considered in the Maine Legislature’s next session, which begins in January, that would direct Gov. Paul LePage and the state tax assessor to recapture any tax credits deemed to be associated with “sham transactions.” His bill would also give FAME tighter control and stricter oversight over the tax credits, and establish benchmarks for job creation and job quality to measure the credit’s effectiveness.

The U.S. Treasury refused to make anyone at the CDFI Fund available for an interview.

Treasury spokesman Daniel Cruz declined to explain the agency’s refusal to coordinate an interview, but in response to questions from the Maine Sunday Telegram about the new guidance said the CDFI Fund “revises and updates” guidance for the New Markets program annually. In response to a question about whether the Maine Sunday Telegram examination in April played into the CDFI Fund’s decision to release new guidelines, Cruz said staff “has been discussing the topics of sponsor leverage and short-term bridge loans with industry stakeholders for some time.”


In response to a follow-up question as to whether the new guidance will have any repercussions for deals that would now be considered ineligible, Cruz said he couldn’t comment on specific deals.

“If we become aware of instances of potential abuse in the federal program, they are referred to the IRS for examination and the Office of the Inspector General,” he said.


The new guidelines raise again the specter of a tax-break program that on its face was expected to help businesses in poorer Maine communities, but did not in several high-profile examples. The state program has been used successfully in several instances where the controversial tools were not used.

In other cases, the now-prohibited tools were essential. In the JSI Store Fixtures deal, a financial firm invested $23.4 million in the Milo manufacturing business. The company used nearly half of it to refinance existing debt and returned the remaining $15.8 million to the financial firm on the same day in a one-day loan. Using a one-day loan inflates the value of the investment to increase the amount of tax credits the investor would receive. As a result of the deal, the financial firm claimed tax credits worth $9.7 million from both the federal and state governments.

In its new guidelines, the Treasury is saying that NMTC proceeds cannot be used “to repay or refinance any debt.” There is an exception if they are used “to repay documented reasonable expenditures,” which is determined by the Internal Revenue Service.


In the GNP deal, two Lousiana-based financial services firms invested $20 million each in the East Millinocket paper mill, which was a wholly owned subsidiary of Cate Street Capital.

The way the deal was structured, Cate Street Capital created a new subsidiary to receive the $40 million. The new subsidiary then used the majority of that amount, roughly $31.8 million, to buy the paper mill and all its equipment from the existing Cate Street subsidiary before funneling the money back to the financial services firms in another one-day loan. The majority of the remaining $8.2 million went to pay off Cate Street’s existing debt. Despite the $40 million investment in December 2012, GNP ultimately filed for bankruptcy, leaving 200 employees without jobs.

In the Treasury’s online FAQ section, it addresses a question as to whether a business entity can use an NMTC investment “to pay a debt or equity provider to monetize an asset owned or controlled by the (business) …”

The answer: “No.”

The question effectively describes what Cate Street Capital did when it used the investment to buy mill assets it already owned.

The original FAQ document included no suggestion that the clarification was only applicable to future deals.

But on Oct. 30, the CDFI Fund amended the language to make clear that the new guideline only applies to future deals.


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