Iowa's Successful Film Tax Credit Program Faces Criminal Investigation

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By Mark Wolski

ST. PAUL, Minn.—Iowa Attorney General Tom Miller (D) Oct. 5 announced that his office, in conjunction with the state auditor and the state division of criminal investigation, had launched a criminal investigation into the state's film tax credit program. [Iowa Atty. Gen., Report, issued 10/1/09]
The program, which offers expenditure and investment tax credits for film productions shooting in Iowa, is currently suspended pending a separate investigation by Miller and auditor David A. Vaudt (R). Gov. Chet Culver (D) asked that the program be halted roughly two weeks ago after questions arose over whether tax credits were being appropriately awarded.

Criminal Investigation

The criminal investigation comes on the heels of a consultant's report on the tax credit program's operations. Released Oct. 5, the report said that the program is beset by a number of problems, including incomplete records, brokers' fees being included as qualifying expenditures, and the use of passthrough entities to allow more production expenses to qualify for tax credits.

According to the Iowa Department of Economic Development, which administers the tax credit program, production companies shooting films and television or video episodes or segments in the state can qualify for tax credits equal to 25 percent of their qualified expenditures. Investors can receive credits of up to 25 percent of their investment or expenditures, whichever is less.

Both types of credits can be transferred up to two times and carried over up to five years. The program also allows Iowa vendors to exclude 25 percent of the income from qualified film expenditures for each year for four years for income tax purposes.

State review of the program was necessitated by the consultant's finding that projects and credits were unsupervised, said Erin Seidler, spokeswoman for the Iowa Department of Economic Development. She said the consultant's initial findings also found luxury cars had been purchased by production companies in the state.

The final report, put together by Clifton Gunderson's West Des Moines, Iowa, office, reviewed 22 film projects being done in the state. It noted, however, that its review was limited because it could only find invoices and/or receipts from two of the 22 projects. Further, it stated, a custom-made database developed for tracking the status of film projects in the state had not been used.

Inconsistencies, Irregularities in Project Contracts

The report also stated that the film office had various inconsistencies in its contracts for film projects. Contracts were obviously being changed but were not identified as revised or amended, and it appeared that film project budgets were being increased.

The report also noted:

• Brokers' fees, the amount paid brokers who find buyers for tax credits, were used as qualifying expenditures in calculating tax credits, even though tax certificates had not been issued.
• In certain cases, limited liability companies were established as Iowa-based companies to purchase products and services from both in- and out-of-state companies. The report stated that by passing costs through Iowa businesses, the expenditures could be claimed as qualifying expenditures for the tax credit program.
• In other cases, out-of-state expenditures were detailed, yet included as qualified expenditures made in the state. The report stated that two out-of-state purchases for one production company totaled $1 million each, accounting for 75 percent of its total qualifying expenditures.
• Some nonproduction related expenditures appear to have been included as qualified expenditures, including luxury vehicles.
• The consultant was unable to find all of the signed certifications for film production credits. For certain productions, it stated, it was unable to locate the documentation identifying the total Iowa qualified expenditures, the amount used to calculate tax credit certificates.

Bob Brammer, spokesman for the attorney general's office, said while he could not discuss the subject or focus of the criminal investigation, he could say that the attorney general's investigation of the film tax credit office is still ongoing. He said he could not say how long the review would take.

He added that Miller has indicated his office will be working to recover any tax credits or state funds that were obtained illegally or not in compliance with credit guidelines. He said $32 million in tax credits have been issued and that they would all be reviewed to determine whether they were properly awarded.

Brammer said the AG's office believes that the state law that created the tax credits was not properly implemented. He said it appears that credits were not properly calculated, that production expenses were not adequately verified, and that projects were not always justified in terms of their economic benefit compared to their cost.

The Clifton Gunderson report can be found on the Iowa Department of Economic Development's website at

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