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State Film Program Resumes, Now What?

Gov. Culver will lift the ban on the Iowa Film tax credit program in accordance with legal requirements, depending on the status of the film projects in question.
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Iowa Attorney General Tom Miller said the state will resume its film promotion tax credit program for projects previously submitted.

In a statement released from the Attorney General's Office, Gov. Culver will lift the ban on the Iowa Film tax credit program in accordance with legal requirements, depending on the status of the film projects in question. No new films will be added to the program until the governor and the legislature have the opportunity to review the program next year.

Miller said 28 films have eligible contracts, however, only 12 have responded after being contacted by the state. Miller said the rest have likely moved somewhere else.

He said it's their job now to make sure the film companies who do want to negotiate are vetted properly.

"The lack of scrutiny will be met with the full vetting and the full implementation of our responsibility under the law and our responsibility as public officials and guardians of taxpayer money," said Miller.

Miller said the criminal investigation continues. He said some of the film companies under investigation submitted expenditures totaling $5 to $6 million in expenses when the projects had actually spent less than $500,000 within the state.

He also said no one under investigation has been cleared so far, including the former head of the Iowa film Office and the former director of economic development

When asked about the Range Rover at the center of the investigation, Miller said the vehicle was a "blessing in disguise". He said that vehicle helped trigger the investigation.

Statement from the Attorney General's Office:

Attorney General Tom Miller said today the suspension of the Iowa Film, Television, and Video Project Promotion Program is being lifted by Gov. Chet Culver, and the state will move ahead with the Film Program in accordance with legal requirements, depending on the status of the specific film project. Miller also said no new film projects will be registered under the Film Program by the Iowa Dept. of Economic Development (IDED) until the Legislature and the Governor have an opportunity to review and reevaluate the program next year.

The Attorney General said the following actions are being taken in connection with the Film Program:

Criminal Investigation On October 5, 2009, it was announced that the Attorney General’s Office, the Polk County Attorney’s Office, the State Division of Criminal Investigation, and the State Auditor were undertaking a criminal investigation relating to the Film Office tax credit program. The criminal investigation continues.

The first step in reviewing the Film Program was the collection of information needed to understand what had occurred. Soon after the investigation was launched, it became apparent that the record-keeping for the Film Program had been haphazard, at best. With the assistance of IDED, fourteen banker boxes of Film Program documents were collected, categorized, copied, and scanned. DCI also seized several computers from IDED and is analyzing electronic data stored on those computers, including hundreds of emails. These documents are being reviewed by the offices involved in the criminal investigation.

Civil Investigation On September 18, 2009, the Governor took two important actions with respect to the Film Program. First, he wrote to IDED asking that the Film Program be suspended and that no further schedules of qualified expenditures be approved nor any further tax credits be issued. Second, the Governor sent a letter to the Attorney General, State Auditor David Vaudt, and the Director of the Department of Revenue, Mark Schuling, asking those state officials for their joint review, advice, and recommendations as to how pending issues with the Film Program should be resolved. Additionally, at this time, several personnel changes occurred at IDED, including the appointment of an interim director, Fred Hubbell.

Miller said the Governor handled the situation well by acting quickly and decisively, referring the matter to the other state agencies, taking the personnel actions he took, and freezing the tax credit program.

The Attorney General, the Auditor, and the Director of the Dept. of Revenue, along with the general counsel for the Governor, Jim Larew, and the Interim Director of IDED, have been meeting regularly. The meetings have been extremely valuable. The state officials are collaborating closely -- exchanging ideas, sharing information, and dividing tasks based on expertise and resources. Clearly, this is a complicated and multi-faceted situation, and a team approach is crucial in the state’s attempt to come to a fair, just, and expeditious resolution of this matter.

The Attorney General’s Office, in addition to reviewing documents, has been working to gather all information necessary to provide solid advice to the Governor and IDED. An important step in this regard was meeting with numerous film makers and their attorneys. The meetings were with representatives of projects in various stages of completion -- some with contracts and some without contracts. The meetings were informative and offered a fuller understanding of the movie industry, how the Film Program was operated, and how the Film Program compared with film tax credit programs offered by other states. The Attorney General’s Office also has been conducting in-depth legal research on a host of legal issues related to the rights and obligations of the State of Iowa with respect to the Film Program.

The Attorney General’s Office also is handling litigation brought by one filmmaker, Iowa Eye Entertainment LLC, with respect to its movie “Clean-Out.” IDED registered this project for the Film Program, but had not entered into a contract for the project. Iowa Eye sued IDED, asking the court to order the state to enter into contract. The court ruled in favor of Iowa Eye and issued a temporary order requiring the state to execute a contract. IDED will enter into a contract with Iowa Eye. The district court retained jurisdiction over the action and will hear arguments on the merits of the case and consider permanent relief.

Based on information collected and an evaluation of the situation, the Governor and the Attorney General have decided to proceed in the following manner:

1. Film Project Where Credits Have Been Issued. Prior to the Governor’s suspension of the Film Program, tax credit certificates were issued for approximately $32 million for 22 film projects. Most of these tax certificates have been transferred to other taxpayers. Some of the tax certificates already have been used to offset taxes due.

Several serious irregularities occurred in connection with most of these tax certificates. The law was ignored or misapplied in most situations.

a. Shoddy Documentation of Qualified Expenses. The standard IDED contract for the Film Program requires final budget expenditures for a film project to be submitted to IDED on a “Form Z,” which is a verified, detailed form for expenses. The contract also allows IDED to require additional documentation, such as itemized receipts. Only two film projects for which tax certificates were issued submitted a Form Z, much less any other documentation. The Film Office accepted expense spreadsheets generated by the movie companies. Clearly, the Film Office did not adequately validate expenses that were the basis for millions of dollars of tax credits.

b. Misapplication of the Two Statutory Tax Credits. The statute offers two types of tax credits for film projects. The first is a qualified expenditure tax credit equal to 25% of the “payments made to an Iowa resident or Iowa-based business” for tangible costs related to movie-making. The second is an investment tax credit for 25% of investments made in a movie project which are used to pay non-qualified expenses (essentially, expenses outside of Iowa). The investment tax credit is capped at the amount of the qualified expenditure credit (i.e., 25% of expenses in Iowa).

The Film Office routinely misapplied the statute by granting tax certificates based on 50% of the qualified expenditures – so-called “1/2-price movie-making.”

c. Wrongful Use of “Pass-Through” Corporations. As mentioned, the statute requires a qualified expenditure for a tax credit to be a “payment to an Iowa resident or Iowa-based business.” Under Iowa statutes and administrative rules, an Iowa-based business must be a business whose commercial domicile is in Iowa, meaning Iowa is the principal place from which the business is directed or managed. The Film Office routinely misapplied Iowa law by granting qualified expenditure tax credits based on out-of-state purchases funneled through “pass-through” corporations set-up by movie companies. These shell companies had little or no connection to Iowa and were set-up to take advantage of Iowa tax credits, under the Film Office’s inaccurate interpretation of the law.

d. Other Inappropriate Expenses. The Film Office granted tax certificates on several other types of expenditures that do not conform to the statute. Two examples: First, the Film Office wrongly determined that “deferred payments” were qualified expenditures. Clearly, the statute requires “payments.” Second, the Film Office wrongly determined that “sponsorships” of films were qualified expenditures.

The State Auditor is carefully reviewing documents relating to these projects from a civil as well as a criminal point of view. The Attorney General’s Office continues to research the State’s ability to “claw back” credits that were issued incorrectly. This appears to be difficult where the certificates have been transferred, and most certificates have been transferred.

2. Film Projects with Contracts Where No Credits have been Issued. On October 22, 2009, IDED sent a letter to twenty-eight film projects that have contracts, but have yet to receive tax certificates. The letter stated that performance under the contract was suspended, effective September 18, 2009. The letter requested information setting forth the current status of the program and an itemization of total expenses and qualified expenditures, including an itemization of payments made to Iowa residents and Iowa based businesses to date. Very few film projects have responded to the letter.

a. Projects Completed and Expenses Submitted. There are four completed projects with contracts that have submitted expenses to receive tax credits. To date, only one project has submitted the required Form Z. The Department of Revenue is reviewing this project and will request more documentation (receipts) to validate expenses. IDED will send a letter to the other projects stating that the suspension of performance under the contract is being lifted and that a Form Z must be submitted in order for IDED to move ahead and verify eligibility for tax credits

b. Stale Projects. Since IDED did not receive responses from many film projects, there is a significant likelihood that little or no work has been done on these projects. The contracts have production deadlines, and not meeting these deadlines is an event of default under the contract.

c. Other Projects. IDED will send a letter to other projects with contracts stating the following:

(1) Suspension of performance under the contracts is being lifted.

(2) Film projects must be completed according to deadlines set out in the contract.

(3) Film projects must submit expenses, upon completion, with a “Form Z” and any other documentation requested by IDED.

Film projects will be bound by the contractual provisions, which state that tax credits will be awarded according to the statute and the administrative rules. IDED and the Dept. of Revenue will carefully and fully “vet” any expenditures used to claim credits.

3. Projects with Registration Letters and No Contracts. There are 105 other projects that have been registered under the Film Program, but do not have contracts. These projects are in various stages of completion. Some are completed and others have most likely left the state.

On November 4, 2009, IDED sent these projects a letter stating that, effective September 18, 2009, all contracting for registered projects was being suspended.

IDED will soon send a letter to registered projects. The letter states that suspension in contracting is being lifted. The letter states that IDED is willing to engage in contract discussions. The letter states that projects have until December 15, 2009, to notify IDED of a desire to move ahead, and, if projects don’t respond by December 15, 2009, their registration will be considered cancelled. Many of these projects are old, and there is a good likelihood that many will not respond. IDED will not enter into contract discussions with respect to a project if persons involved in that project are under investigation with respect to other projects in the Film Program.

If contract discussions result in the execution of a contract, then film projects will be bound by contractual provisions that cite the statute and the administrative rules. IDED and the Dept. of Revenue will carefully and fully “vet” any expenditures used to claim credits.

4. New Film Projects. No new film projects will be registered under the Film Program until the Legislature and the Governor have an opportunity to review and reevaluate the program next year.

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