Oklahoma's loophole riddled Capital Formation Incentive Act
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The Crooked Law

Capital Formation Incentive Act, mapped and diagramed to bring out the wrongs. View

This tax credit investment incentive program was created by a law written under highly suspicious circumstances. The results was a means to enrich some state officials and cronies at the expense of the public and a major reason Oklahoma is now and will continue experiencing tax revenue short falls and resulting in under funding much needed programs.

In an effort to prevent discovery this law created the very situation the checks and balances of our constitutional form of government were intended to protect against. Now we find this law was created to defeat those checks and balances.

The current version bill to close a previous tax credit abuse loophole. The new 30 page bill was held up in the house by a key committee chairman only to resurface with a 50 page amendment buried in the flurry of last minute bills coming up for vote during the closing days of the 2006 session.

The chairman of the Oklahoma House Revenue and Taxation Committee, at the time running for US Congress, allowed the biggest known abuser of Oklahoma's tax credit loophole, the head of a group with a history of financial lawsuits, advise on new language to supposedly fix the loophole. The result thwarted the original intent to close the loophole leaving the law even more fraud friendly. The known tax credit abusing advisor was a key operative in the investment community's suddenly donating suspiciously large amounts to the chairman's campaign. Now a close examination of the chairman's campaign donations are highly suspicious, Read more about "Suspicious Donations"

History and background

Capital Formation Incentive Act -

The Capital Formation Incentive Act, is the latest version of a program ostensibly created to encourage investors to invest in Oklahoma business ventures, by offering tax credits up to 30% of the money invested. Limiting investors to a max loss of 70%, while retaining the upside benefits for the full investment. But, through a so called loophole tax credits amounting to 200% or twice the actual investment are being taken. Note: The area of the law addressing the 200% limitations is ambiguous leaving it unclear, what, if anything, is in fact limited to 200%.

This law is full of elements that on the surface might seem meaningless and explained away as just a technicality, yet make a significant difference in many places.

One of these is -- the venture capital company will own the investment. Not the investors . The investors can only own an interest in the venture capital company. This will come into play in several areas, including but not limited to leaving the venture capital company free to hide or disguise the structure, ownership, accountability who is involved, and the list is very long. All opening the doors for any number of financial accounting tricks.

Download a copy of the Capital Formation Incentive Act. Download

Wrong 1. Loopholes by design. -

On close examination we find key language was selectively scattered throughout the law in a way that some venture capital companies contend leaves a loophole allowing them to take 200% of the actual investment in tax credits. Tax credits they are allowed to immediately sell turning to cash. Note: The area of the law addressing the 200% limitations is ambiguous leaving it unclear, what, if anything, is in fact limited to 200%.

The results is a venture capital company, is free to take public money to not only fund the entire investment, but pay the so called investors an immediate up front 100% profit and a fully paid ownership in the investment. With proper timing, this can all be done in a way the venture capital company and the investors never have to put up one dime. Yet still realize huge unearned profits.

Later we will discuss who can qualify as a venture capital company.

Section 8.G was added to the law allowing the use of loans. Some venture capital companies are using the fact the law did not specify the loans had to be money at risk (not actually invested) use an (artificial) loan* to inflate the true investment, taking 7 times the tax credits or twice the actual money investor's have invested at risk.

How this works

Sections 14.2 and 25.2 state the investor's funds were at risk; and Sections 14.3 and 25.3 The investment was not made chiefly for the purpose of reducing tax liability.

More importantly, taking huge tax credits worth twice the investment is obviously an irresponsible use of public money. Yet state officials turn their backs refusing to challenge such blatantly obvious wrong.

The money taken does not appear in the budget, and therefore the public and state lawmakers have no way of knowing what is happening. The public will later experience unexplained tax revenue shortfalls. Stealing from state programs, as happened this year, 2008, eventually leading to tax increases.

Any way you cut it, some are gaining wealth by scramming public funds in return for nothing.

Note: Artificial loan is a financial ploy where one takes out a loan leaving the money in the bank as collateral. There is no intention to use the loan, only to generate a piece of paper stating one has an obligation to repay the loan. The loan is usually retired as soon as the loan paper serves the intended purpose.

What is a loophole? -

A loophole, is a technicality that allows a person or business to avoid the scope and misuse the intent of a law or restriction without directly violating the law.

Normally we think of a loophole as unintentional yet history is full of cases where favors were done, disguised as intentional oversight, etc. Then using the - "we all make mistakes defense." Something that we would expect, once realized, the honest person would make every effort to correct the problem.

In this Oklahoma case when the loophole was made public most state officials had no other political choice but to issue public statements condemning the loophole and some claiming they would plug the hole. But, they did not! They simply wrote a new law by adding some more words to better disguise the old law That brought the abusers more time. Now we are again learning the loophole is actually much wider than before the supposed plugging.

Wrong 2! Stripping the public of its constitutional protection. -

Lack of government oversight. Failure to protect the public interest. The law was written to strip the public of all its protection against abuse and wrong doing.

This is the cleverly deceptive and insidious part where one has to read the entire law to find what is missing. Below is what we cannot find in the law. These are the elements needed to protect the public against wrong doing.

This law structured the program to operate *

  • Outside the budgetary process.
  • Automatic and unattended.
  • Under no agency.
  • Void of oversight.
  • No requirement for reviewing the use of the tax credits.
  • No accountability.
  • No records are required to be sent to the government.
  • Hidden from the public.

*Note: There are words in the law suggesting some level of involvement by the Oklahoma Tax Commission to give an appearance of government oversight.. A close examination of the law reveals that is a purely administrative function. More of a recording and blanket rubber stamping. Involving no responsibility, judgment or real authority that would require any member of the Commission to act to aid the fraud. Keeping their hands clean.

The program runs free standing with venture capital companies taking as much money as they desire, while state officials simply turn their backs.

The only limiting factor appears to be the desire of those benefiting to avoid scrutiny by trying to keep the program operating below the radar screen.

Wrong 3! Those turning their backs? -

This law allows state officials to legally benefit, while keeping their involvement hidden. Section 1.C.27

State officials continually brush this off as "there in nothing illegal involved". The same state officials who are free to participate as an investor, and hide their involvement, by obeying another part of the law that requires all information about the program be kept secret.

Why would state officials want to step in and look for wrong when they, their families, friends, cronies, and major supporters can legally benefit making huge profits without investing one dime.

Note: Even when a state officials or lawmaker has no involvement stopping this program would result in many wealthy and powerful, themselves often innocent, left holding worthless tax credits and owing back taxes.

How this happened. -

This tax credit investment incentive program, now known as the Capital Formation Incentive Act, was started in the 1990's. The original author, Senator Ted Fisher, said the abuses started after some unknown person "tweaked" the law, and he failed to notice.

Biggest known abuser, biggest donor, with history of financial lawsuits involved in writing the new bill. -

The biggest known abuser of tax credits, with a history as a defendant in financial wrong doing lawsuits delivered one of the bill's authors a large bundled campaign donation and was allowed input in writing the bill that was supposed to close the loophole he was abusing.

Kevin Calvey, R-Del City, a candidate for US Congress in 2006 was one of the sponsors of Senate Bill 1577 and also chairman of the House Revenue and Taxation Committee, making him a key player in shaping the subject tax credit legislation. At the time of the writing of the new tax credit legislation, in March 2006, Rep. Calvey received $21,900 from the principals of Altus Venture the largest known tax credit abusers. This same loopholes remained in the new legislation, with other changes to benefit Altus Venture even more.

One glaring change was the addition of Section 22.G exempting certain Rural Venture Capital Companies, which Altus Venture appears to qualify, from recapture. Recapture is the recover of tax credits when a violation of the law is found to have occurred. Free Altus Venture to continue taxing tax credits while freely abusing the law.

State lawmakers under oath trading their souls to the devil for votes on pet projects. -

Senate Bill 1577 was sent to the floor for vote at the end of the 2006 legislative session. A time of throwing responsible lawmaking to the lions, and those under oath trading their souls to the devil for votes on pet projects.

A time when a rush to pass an inordinate number of last minute bills and on the fly changes, prevents understanding and deliberation, and voters often knowing little more than the title of the bill. Long and complicated bills are always a gamble. Bills are often voted on by what the bill title implies to the voter or simply swapping votes on pet projects. A risky practice, and now the odds finally came due.

A time to slip a bill created for fraud right under the rubber stamp voting lawmakers.

The Capital Formation Incentive Act, one of the most irresponsible imaginable failed to receive one Nay vote! All Yea's for a bill that is costing the public $100's millions.

The entire program is hidden from the public and state lawmakers. Section 1.C.27 -

A program so well hidden that only a very small group knows what is occurring!

Only a small select group of state officials are allowed to know what is happening?

The legislation, Senate Bill 1577, involves a program that possibly as few as only one state official, in the Oklahoma Tax Commission, has been allowed access to what is happening. Section 1.C.27. The legislation requires all information about the program be kept hidden from the public and state lawmakers.

The law states - Section 1.E "The Tax Commission shall prepare or cause to be prepared a report on all provisions of state tax law that reduce state revenue through exclusions, deductions, credits, exemptions, deferrals or other preferential tax treatments. The report shall be prepared not later than October 1 of each even-numbered year and shall be submitted to the Governor, the President Pro Tempore of the Senate and the Speaker of the House of Representatives. ..... The report shall include, for the previous fiscal year..."

Because of the timing of the program, this ruled out these officials starting to see the full impact, until October 1, 2008. Ref. Capital Formation Incentive Act, Section 1.E.

Kept hidden includes

  • how much the program is costing the public.
  • where the money is going.
  • who is involved.
  • who is benefiting.
  • what if any benefit the public is receiving.

Section 1.C.27

Note: Underlined parts are changes to be added to the Tax Code, while strike outs are changes to be deleted from the Tax Code.

27.  The disclosure of information, as prescribed by this paragraph, which is related to the proposed or actual usage of tax credits pursuant to Section 2357.7 of this title, the Small Business Capital Formation Incentive Act or the Rural Venture Capital Formation Incentive Act.  Unless the context clearly requires otherwise, the terms used in this paragraph shall have the same meaning as defined by Section 2357.7, 2357.61 or 2357.72 of this title.  The disclosure of information authorized by this paragraph shall include:

a. the legal name of any qualified venture capital company, qualified small business capital company, or qualified rural small business capital company,

b. the identity or legal name of any person or entity that is a shareholder or partner of a qualified venture capital company, qualified small business capital company, or qualified rural small business capital company,

c. the identity or legal name of any Oklahoma business venture, Oklahoma small business venture, or Oklahoma rural small business venture in which a qualified investment has been made by a capital company, or

d. the amount of funds invested in a qualified venture capital company, the amount of qualified investments in a qualified small business capital company or qualified rural small business capital company and the amount of investments made by a qualified venture capital company, qualified small business capital company, or qualified rural small business capital company.

Section 1.C.27

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