Film Tax Credits Can Prompt Federal Fraud Prosecution

By Emma Beyer

A federal appeals court ruled that film and TV tax credits are property and thus subject to federal mail and wire fraud laws, handing states a victory in monitoring fraud in the growing entertainment tax credits realm.

In United States vs. Hoffman, the U.S. Court of Appeals for the Fifth Circuit found that because Louisiana was administering its tax credits, the fraudulent issuance of those credits would deplete the state treasury, meaning Louisiana had a property interest in the tax credits and could prosecute for fraud in relation thereto.

“Tax-credit fraud is, to our knowledge, the most common form of economic development incentive fraud,” Greg LeRoy, executive director of Good Jobs First in Washington, a nonprofit group that tracks economic-development spending, told Bloomberg Tax in an email. “This is not the first conviction in Louisiana, and abuses in Iowa and Michigan several years ago caused both of those states to cancel their film production tax credits.”

Defendants Peter and Susan Hoffman and Michael Arata, owners and operators of Seven Arts Pictures Louisiana LLC, were charged with submitting false invoices for construction work and film equipment and circular banking, a process in which money is transferred between accounts to look like movie expenses.

The defendants were found guilty by a jury and received probation for all charges and are currently seeking an appeal. Stealing credits via fraud has the same economic effect on the state as “embezzle[ing] funds from the treasury,” the court said in agreement with the state.

In disagreeing with the defendants, the court said the state tax credits weren’t akin to video poker licenses, which the U.S. Supreme Court rejected as a basis for federal wire fraud prosecution in Cleveland v. United States. The appeals court also mostly affirmed the trial court sentences, rejecting arguments that the evidence was insufficient for conviction.

The Curious Case of Benjamin Button, Django Unchained, Twelve Years a Slave, and The Dallas Buyers Club were all filmed in Louisiana, making the state one of the most popular filming destinations in the U.S. The state attributes this recent spurt of filming to its growing state tax credit program, which has been subject to similar instances of fraud.

Are Credits Worth It?

Observers have long wondered if film and TV credits actually are cost-effective in generating state revenue. LeRoy says the problem lies with states’ excessive generosity in credits.

“They are not really ‘tax credits’ in the sense that they reduce a production company’s income tax liability,” LeRoy said.

Instead, they are reimbursing “a company, dollar-for-dollar, for 30 or more percent of their in-state expenditures,” he said. That could mean, using Louisiana’s top corporate income tax rate of 7 percent, that unless the company brings in large amounts of taxable profits, “you are gifting the companies an amount equal to hundreds of times its income tax liability.”

The case is United States v. Hoffman, 5th Cir. App., No. 16-30104, 8/24/18.

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