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Film fiasco: What did the Department of Revenue know, and when?

April 05, 2010

It looks like Iowa taxpayers may have spent many millions subsidizing pretend filmmaking expenses, according to a long investigative piece in yesterday's Des Moines Register. And, the story hints, this might have been done with the knowledge and approval of "officials" at the Iowa Department of Revenue.

The pretend expenditures were through "sponsorships." Somebody would agree to "sponsor" the film -- say, by promoting it on a website -- in exchange for being named in the film credits. They would assign some tremendous value to the sponsorship and to being named in the credits, and the Iowa Film Credit would award tax credits based on this value -- with no cash (other than taxpayer cash for the credits) ever changing hands. The story reports that one producer claimed credits based on $12.4 million of these sponsorships - which, the way the film program was run, could have resulted in over $6 million of tax credits that the producer could sell for real money. If so, the State of Iowa assigned $6 million of tax receivables in exchange for -- nothing.

Film trucks burning taxpayer money in Downtown Des Moines in early September, 2009, just before the film credit scandal exploded.

Oh, say the producers, there was real value there. There's an easy way to prove it, then. If a film producer really receives sponsorships of $12.4 million in services in a business exchange, he is required to report it as taxable income. The rules that allow tax-free exchanges don't cover "sponsorships," so the amount would show up on as taxable income. On the other side, the taxpayer could deduct only the actual cash expenses incurred -- the cost of adding the "sponsor" name to the film credits. If that value was real, then it needs to show up on the producer's federal income tax return. If it's not there, he is lying either to Iowa or to the IRS.

The scandal has led to criminal charges against Tom Wheeler, former director of the Iowa Film Office. His attorney says she's ready to drag the Department of Revenue into the mess:

Angela Campbell, his defense attorney, does not dispute that Wheeler approved a range of activities as eligible for tax credits when no cash was actually spent.

However, she said, he did that after receiving direction and approval from officials within the Department of Revenue and others at the Iowa Department of Economic Development.

"If Revenue said it's OK, Tom didn't have the authority to disagree," she said.

So far no published rulings from the Department of Revenue have surfaced blessing cash-free film credits. While you have to take what the defense says with a grain of salt, it will be ugly if it turns out that the Department of Revenue really was blessing this raid on the state treasury. It looks as though there remains more dirt to surface:

Jeffrey S. Thompson, a deputy state attorney general who is among those leading the state investigation, said prosecutors are "working to take whatever actions we can under the law to recover money for the state or hold people accountable."

Thompson hinted the full story of what went wrong in Iowa's film office is still unraveling.

"When Iowans find out the extent of this, they are going to be outraged," he said.

Wow. If it's more outrageous than what's already been reported, there should be riots when it comes out.

While it's nice that the Des Moines Register is digging into this story now, it would have been better if they had provided more than fanboy coverage of the credit when it was first enacted. State 29 has a must-read post on the failures of Iowa's media in the film credit fiasco. Bonus: he calls me a "busy capitalist pig/tax blogger guy." I think that will be the new Tax Update motto.

Related: The Iowa 'let's pretend' film tax credit

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