38 Studios may miss out on tax credits

PROVIDENCE, R.I. (WPRI) - Curt Schilling's embattled video game company 38 Studios LLC could be ineligible for millions of dollars in state tax credits that it desperately needs because the firm isn't incorporated in Rhode Island.

38 Studios is a limited liability company organized under Delaware law, according to records at the secretary of state's office reviewed by WPRI.com. The company did register its business in Rhode Island in September 2010, but did so as an out-of-state LLC.

Rhode Island's tax credit law explicitly states that productions are only eligible to receive credits if the business in question is "formed under the laws of the state of Rhode Island."

(Separately on Thursday, CVS Caremark executive Helena Foulkes resigned as vice chair of the R.I. Economic Development Corporation; Moody's Investors Service said Rhode Island will pay off bondholders if 38 Studios defaults; and Schilling linked to what seems to be leaked artwork from "Project Copernicus," the game 38 Studios is developing with money from Rhode Island's loan guarantee.)

Christine Hunsinger, a spokeswoman for Governor Chafee, said the state is aware that 38 Studios' corporate residency is in question. "That is information that is part of the due diligence [for its tax-credit application], so those questions will be and are being asked," she told WPRI.com on Wednesday, declining to say more.

• Nesi's Notes: Full coverage of 38 Studios
• PDF: EDC fact sheet on 38 Studios
• Timeline: How the 38 Studios deal unfolded

38 Studios is in a race to stave off insolvency and is seeking more than $8 million from Rhode Island's film-and-television tax credit program as soon as possible; it could sell those to raise badly needed cash.

At a press conference Wednesday, Chafee characterized 38 Studios' first game, "Kingdoms of Amalur: Reckoning" - which was developed at its Maryland studio and released in February - as a "flop." That quickly led Schilling to hit back at the governor on Facebook.

"I wanted to clear up some misinformation around 38 Studios first product, Reckoning," he wrote around 9:20 p.m. "Sales of Reckoning OUTPERFORMED EA’s expectations and sold more than 1.2 million units in the game’s first 90 days in the market." The NPD Group says 460,000 units have sold in North America.

Failing the eligibility test for the tax credits would be another blow to 38 Studios, which has been unable to attract private investors and has not responded to requests for comment. Asked about the situation on Wednesday, Chafee told reporters: "You can read the law governing film tax credits."

No 'RI entity' as of March

A disclosure notice 38 Studios sent to bondholders on March 15 lists only two incorporations, both in Delaware: 38 Studios LLC, the parent company, and 38 Studios Baltimore LLC, the former Big Huge Games studio it bought from THQ in 2009 that developed "Reckoning."

38 Studios "is exploring the possibility of converting to a 'C' corporation ... pursuant to the applicable laws of the State of Delaware, and other state and federal laws," the company wrote just two months ago in the disclosure notice. "The company is also exploring the possibility of establishing a Rhode Island entity."

There's no evidence that since March 38 Studios has formed a separate subsidiary organized under Rhode Island law that would be eligible for state tax credits.

38 Studios' Rhode Island registration lists its principal office as that of National Registered Agents Inc. in Dover, Del. Other big businesses based in Rhode Island, such as CVS Caremark and Textron, list their actual headquarters' address as their principal offices. 38 Studios does list One Empire Plaza as its mailing address.

Steven Feinberg, executive director of the R.I. Film & Television Office, told WPRI.com he has never approved any tax credits for 38 Studios and said "at this time" he can't discuss whether the company is eligible. The EDC, which lured 38 Studios to Rhode Island with a $75 million loan guarantee, directed questions to the governor's office.

'Not looking for tax credits'

38 Studios' sudden bid for tax credits marks an about-face by Schilling, the former Red Sox ace who founded the company in 2006. In March 2010, as he began relocation talks with Rhode Island, the ex-pitcher wrote on his blog: "Contrary to written reports I've never said or will say 'give us tax credits or we bolt.'"

Schilling subsequently reiterated his lack of interest in tax credits in a radio interview in July 2010, the same week the loan guarantee was approved. "Unbeknownst to a lot of people, we’re not looking for tax credits," he told WEEI. "Tax credits are an endgame play. ... Tax credits for us are not - they were never, ever something we were after."

Schilling's change of heart on the matter has dismayed Chafee, who suggested last week 38 Studios is trying to double-dip by using state loan money to fund work which makes it eligible for state tax credits. The governor has asked lawmakers to change the law so 38 Studios would be unable to do that next year.

Michael Corso, a lawyer in Providence who brokers tax-credit transactions, played a key role in the 38 Studios deal. Schilling and 38 Studios director Tom Zaccagnino met with then-EDC executive director Keith Stokes and House Speaker Gordon Fox at Corso's office in March 2010 to discuss the potential agreement, according to The Providence Journal.

Corso could not be reached for comment after business hours on Wednesday.

Separately, two of 38 Studios’ top executives have apparently left the struggling company. CEO Jen MacLean and John Blakely, senior vice president of product development, both revised their LinkedIn profiles to say that they no longer work there. Employees were seen carrying items out of its Providence building on Wednesday.

"The shakiness of this company is a tragedy for Rhode Island," Chafee said.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi's Notes blog. Follow him on Twitter: @tednesi