Incentives Watch: Federal Criminal Defendants Feel the ‘Sting’ of Louisiana Film Tax Credits

Although most people do not connect crime to tax credits, the fact is that tax credits can be worth millions of dollars. And when that much money is involved, it shouldn’t surprise us that the government will be closely watching those taxpayers claiming credits. In July, the U.S. District Court for the Eastern District of Louisiana ruled on United States v. Hoffman, a criminal case concerning mail and wire fraud in obtaining tax credits under the Louisiana Motion Picture Incentive Act. The court recently denied the defendants’ motions to dismiss a grand jury indictment.

In Hoffman, the defendants obtained tax credits for renovating a New Orleans mansion and turning it into a post-production film editing facility. The defendants used false expense reports  to obtain the credits. However, the facts in the case were not in dispute. The case hinged on the fact that, in order to constitute fraud, the defendants had to obtain “money or property.” The defendants argued that the film tax credits were not money or property.

It is easy to see tax credits as money or property because they are assigned a cash value and, in the case of Louisiana’s film credits, can be sold or transferred. However, the defendants did have some case law on their side. In Cleveland v. United States, a U.S. Supreme Court case from 2000, the court held that video poker licenses were not property for the purposes of mail fraud. Based on the Cleveland decision, the Fifth Circuit held, in United States v. Griffin, that an attempt to falsely obtain federal low-income housing credits in Texas did not constitute mail or wire fraud, as the tax credits were not property.

The court in Hoffman pointed out a crucial distinction between the Louisiana film credits and the federal low-income housing credits. The federal low-income housing credits were assigned to the property and could not be transferred unless the property itself was sold. Not only can the Louisiana credit be sold to another party, but Louisiana even allows those who receive the tax credits to sell them back to the state for 85 percent of their face value.

In arguing its case, the government relied on a later U.S. Supreme Court case, Pasquantino v. United States, another wire fraud case. In Pasquantino, the petitioners ordered liquor by telephone and smuggled it into Canada without paying excise tax. The court held that “Canada’s right to uncollected excise taxes … is ‘property’ in its hands.”

Louisiana’s film credit is quite generous, featuring a 30 percent credit on qualified production expenditures with no annual cap on the aggregate amount of credits that can be issued in a year. It’s hard to argue with the success of Louisiana’s Motion Picture Incentive Act. According to a FilmL.A. report, more productions in 2013 took place in Louisiana than in California. But that success doesn’t come without consequences. The Hoffman case is just one instance of fraud involving film credits in Louisiana, according to The Times-Picayune. And while tax credits continue to be big business, this probably will not be the last time someone is accused of trying to cheat the system.

Continue the discussion on LinkedIn:  Should tax credits be considered property?

For more information about California’s tax incentives, check out Bloomberg BNA’s Credits and Incentives Portfolios by signing up for a free trial of the Bloomberg BNA Premier State Tax Library today.

By:  Rishi Agrawal

Follow Rishi on Twitter at: @RAgrawal_SALT.

Follow BBNA on Twitter at: @BBNATax.
Join Bloomberg BNA's State Tax Group on LinkedIn.