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by Lee Rood, Des Moines Register and Tribune Co, published on April 4, 2010 Producers of at least eight film projects beyond the two already criminally charged reported millions of dollars in legally questionable expenses to seek taxpayer-backed tax credits, new records obtained by The Des Moines Register show. A Register review of those records, as well as interviews with industry experts and state officials, found: - The company that produces the nationally syndicated PBS show "Saddle Up With Dennis Brouse" reported expenditures of about $12.4 million on "sponsorships" - advertising deals that industry experts say typically do not involve cash changing hands. The production company, led by Iowa native Brouse, also pursued credits for costs related to the sale of tax credits, an expense officials in Iowa say is not allowed by state law. - Producers of the full-length independent film "Peacock" reported paying an abnormally high price for location fees to property owners - more than $1.09 million - to film in Odebolt, population 1,100, and other small towns in Iowa. - Los Angeles filmmaker Kip Konwiser, who has attempted to block public release of budget information for his unfinished film "Blackbeard," quadrupled his budget from about $5 million to $10 million and then $20 million. He and fired Iowa Film Office manager Tom Wheeler agreed to do so without the knowledge or approval of state economic development board members, or union workers whose pay hinged on the size of the movie's budget. Prosecutors question whether those costs should be allowable; Konwiser insists they should. State officials confirmed last week they believe additional filmmakers appear to have padded production budgets to qualify for some of the $32 million already doled out in tax credits the past two years. They declined to identify those filmmakers. They also confirmed a handful of producers who are still seeking credits will not be awarded the amounts they claimed before the investigation into Iowa's film incentives began. The change follows an audit of their alleged expenditures by Iowa's Department of Revenue. 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. Ross Johnson, a former investigative journalist who covered the finance and business side of the industry and is now a Los Angeles-based representative for major film producers and financiers, said Iowans have cause to be outraged. Several other states that jumped into the film-incentive business have run into problems. But the latest records, released as nearly a dozen filmmakers fight to keep their budget records private, offer further evidence that the manner and degree of expense inflation were unique to Iowa, he said. The deals, he said, were "Iowa specials." Others involved in film deals when the state incentive program collapsed, however, say state investigators face an uphill battle in trying to punish the expanding number of people they believe abused or mismanaged the film incentive program. That's because the program, crafted by lawmakers in 2006, was so poorly designed, overseen and managed by the state, they say. They argue Wheeler and other officials within the departments of economic development and revenue readily cooperated with filmmakers to add millions in expenses to build the film industry and its infrastructure quickly. They agree some transactions cost nothing in terms of actual cash, but argue the transactions had value and should qualify for tax credits. "None of these producers were hiding what they were doing," said Chad Witter, a tax credit broker involved in several deals. Witter worked with Brouse and Wendy Weiner Runge, a first-time film producer whose unorthodox claims for tax credits led to charges last month of first-degree theft against her and a partner. "Tom (Wheeler) was building a program and encouraging growth," Witter said. "I think everyone thought once it gets up and running, they will tighten the rules." Wheeler was fired in September and charged criminally in February with misconduct in office. 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. Campbell said she doesn't necessarily disagree with that direction from the Department of Revenue. Some transactions, she said, are subject to income tax under law even if no cash changes hands. Campbell said the state's criminal charges against Wheeler hinge on whether prosecutors prove he had a duty under the law to "audit" expenditure reports for reasonableness and fraud. Wheeler will argue that duty was never defined - for him or others in IDED. Of the seven people fired thus far at IDED over film office mismanagement, including former director Mike Tramontina and deputy chief Vince Lintz, only Wheeler has been charged criminally. Wheeler was hired as a low-level manager to pitch Iowa to filmmakers before lawmakers created the lucrative tax incentive program. Campbell contends Wheeler is being made the scapegoat for a program botched from the get-go. The Department of Revenue decided what was permissible under the program, and Tramontina and Lintz were the only ones with authority to sign off on tax credit certificates, she said. Prosecutors "are saying (Wheeler) had the criminal liability without the authority, and (Tramontina and Lintz) had the authority without the criminal liability," she said. Johnson, the representative for film producers and financiers, said the state will have a difficult time proving other defendants are guilty if Wheeler and others signed off on expenses not permitted under law. "If these guys are being told this is OK, doesn't that remove criminal intent?" he asked. Central to the ongoing investigation and upcoming criminal court battles against Wheeler, Weiner Runge and Matthias Saunders, one of her partners in the film "The Scientist," is whether expenses claimed for credits were normal for the industry and permissible under state law. Weiner Runge and her lawyer have argued non-cash transactions and other allegedly inflated expenses she turned in to receive a tax credit award of $1.85 million were "normal in the industry." The state has had to use information provided by filmmakers to reconstruct budget documents for some productions. Some of the summary budget documents released this month to the Register potentially widen the scope of problems arising from the scandal. To prevent any more exploitation of the program, Thompson said his office, IDED and Revenue are screening past projects already awarded credits, those seeking credits at the time the program was suspended, and others that have contracts and the state's green light to proceed. But state officials still have yet to complete reconstructed budgets for a handful of finished films in the wake of the firings of key IDED officials. In civil court, meanwhile, 11 filmmakers - including Weiner Runge's Polynation Pictures and two companies led in part by Konwiser - have banded together to try to block the state from releasing to the public and the media summary budget information tied to their productions. Thompson alleged in a court hearing last month that some of those filmmakers are seeking to shield information because it is embarrassing or "incriminating." Konwiser said the documents' release would violate contractual agreements with actors and unions used throughout the industry. Officials from three top film-incentive states - New Mexico, Michigan and Louisiana - say their states do not award subsidies or rebates for any sort of transaction in which no cash changes hands or no taxes are paid. That includes sponsorships, in-kind expenditures and deferred expenses, such as those used by Brouse or Weiner Runge. Officials in those states also took greater precautions than Iowa to safeguard their film incentives. When Iowa put the incentive program in place in 2007, state officials failed to initiate many of the checks considered best practices in the industry - including postproduction audits and routine reviews of expenditures by state revenue departments. Louisiana experienced problems of its own. But like other states, it tightened regulations in recent years as its program matured. "We were able to take advantage of some history here," said Sherri McConnell, executive director of entertainment for the Louisiana film office. "Clearly, history shows some filmmakers are going to come to the state with the least amount of experience to try to take advantage of that industry and the state." Details tell the story of 3 cases in question Budget documents provided to The Des Moines Register under the open records law raise questions about millions more in expenses reported to the state by filmmakers to take advantage of the state's tax incentives. Here's a closer look at those expenses and why they could be problematic, according to some experts: WHO: Changing Horses Productions, a production company run by PBS "horse whisperer" Dennis Brouse, was awarded more in tax credits than any other filmmaker in Iowa over the past two years. TAX CREDITS AWARDED: $9.3 million THE PROBLEM: A stockbroker-turned-horse trainer, Brouse, 58, gained some of the subsidies by claiming at least $12.4 million in sponsorships for five projects. Those credits were then transferable, or saleable. "Sponsor" companies agree to provide advertising for a film or television production in exchange for advertising or merchandise related to the production. Filmmakers do not typically pay cash or taxes on such deals, and prosecutors say they should not qualify for subsidies under Iowa law. OTHER PROBLEMS: Brouse's summary budget information also included as much as $354,244 in expenses related to "implied" tax credit commissions, tax credit commissions and related financing fees. A review by accounting firm Clifton Gunderson released in September warned of such expenses but did not identify specific productions. State officials say those commissions shouldn't qualify for subsidies under Iowa law. "Taxpayers apparently helped pay for broker fees that filmmakers and investors used to help them sell their tax credits," the report noted. "Broker fees that exceeded $100,000 for certain films were written off as qualified expenditures." WHAT BROUSE AND HIS ACCOUNTANT SAID: Brouse did not return phone calls seeking comment. Chad Witter, a tax broker who did accounting on all five projects and acted as a registered agent for Brouse, said he had nothing to do with noncash transactions Brouse reported. "Dennis is the ultimate person responsible," he said. "I was provided the data. The actual (budget form) was prepared by the state." He added: "Prior to meeting Dennis, I had no idea what a sponsorship was. I had no idea how the film or television industry works." WHAT THE EXPERTS SAID: Vans Stevenson, senior vice president of state government affairs at the Motion Picture Association of America, said he was not aware of any non-cash transactions like sponsorships qualifying for state film subsidies. Ross Johnson, an industry representative for film producers and financiers, said: "I've seen hundreds of budgets, but this takes the cake. I've never seen anyone trying to claim these (sponsorships) as a cash transaction." WHO: The thriller "Peacock," featuring Ellen Page, Susan Sarandon and Keith Carradine, was filmed largely in Odebolt and other small towns around Iowa. TAX CREDITS AWARDED: $3.2 million THE PROBLEM: Producers of the movie reported spending $1.09 million of their $9.5 million production budget on film locations in Iowa - more than any other film that received credits in Iowa and more than what is typically paid for feature films anywhere. City and state officials say they were unaware of that kind of money changing hands for public or private locations. Odebolt Mayor Ronald J. Rex said he knew the crew traveled to several locations in Iowa, but his town didn't get rich from the moviemaking. "They gave the city $2,000 for assistance for different things, and my security people all got about $500 each for three of them," he said. "I guess what they spent could have been considerable, but what they left around Odebolt wasn't much." WHAT COMPANY OFFICIALS SAID: Two top managers for the movie — production manager Brian Bell and production accountant Dianne Mapp-Cheek — failed to return phone calls seeking comment. The address listed for the film's only investor, Skillpa Productions, is the same as that for Mandate Pictures, an independent film studio that produced the Academy Award-winning "Juno," starring Page. Kelli Konop, a Mandate executive in charge of physical production and registered agent for the film, did not return phone calls seeking comment. (John Skillpa happens to be the fictitious name of the bank clerk with dual personalities in the movie.) WHAT THE EXPERTS SAID: A maximum location fee anywhere in the United States would be about $10,000 a day, according to Ross Johnson, a representative for producers and financiers. In Iowa, the maximum is more likely to be $1,000 to $2,000, he said. "Peacock" filmed in Iowa from May 6 to June 19, 2008, according to its contract. Had the crew shot every single day for 44 days — which is not likely — location costs based on the $1.09 million figure would have cost about $24,772 a day. Ken Droz, a communications manager for the Michigan film office, called spending $1.09 million for film locations on a $9.5 million movie "highly unusual." WHO: Kip Konwiser, who was gearing up for filming of the movie "Blackbeard" in Des Moines when incentives were suspended in September, confirmed in a recent court hearing that he raised his movie's budget to $20 million. Konwiser said much of that growth happened because he added costs for promotions and advertising into the budget — so more Iowa workers, such as recent college graduates and other nonunion workers, could get work as a result. TAX CREDITS AWARDED: "Blackbeard" has yet to turn in any expenses; the film has not resumed production. THE PROBLEM: Typically, publicity and advertising expenses are not part of a film's production budget. They come much later, during distribution, officials in other states said. So they don't tend to qualify for incentives tied to production. OTHER PROBLEMS: Konwiser said in a July 6 e-mail to Iowa Film Office manager Tom Wheeler that he didn't want to make a $10 million increase in his film's budget public to guild and union members. By then, contracts had been signed, and he said disclosure would "confuse" union workers because they are paid based on tiers that hinge on the size of the production's budget. "We do not want to pay an extraordinary premium with guilds for a $10 mm movie budget when it is actually half of that amount (or less when bond, contingency finance charges are removed) for production," he wrote. "We currently qualify as Tier 1 and do not want (cannot) to allow this to go to another Tier level." Wheeler wrote back: "The preliminary award (of $10 million) is what my division leadership wants me to suggest to our agency director for approval before presenting the application to the full IDED board of directors." The board approved the application for a $10 million movie; the $20 million budget never went before the board. WHAT COMPANY OFFICIALS SAID: Konwiser acknowledges that the move to put promotions and advertising in the production budget was unusual. However, he said, he did so because his independent film company acts as its own distributor and had the financing to do so. Konwiser said the move was made as part of plans to create many more jobs tied to the movie, after state officials recruited him to bring movie business to Iowa. Already in the works, he said, were elaborate plans to spend three or more years in Iowa, using the new incentives to build jobs, infrastructure and vendors that would help the industry blossom. He already had committed to using Southridge Mall in Des Moines as a studio and launching point for five family movies. All that stopped, he said, when Iowa reneged, the program was suspended and his financing from a local lender ended. "We were literally the baby thrown out with the bath water," he said. WHAT THE EXPERTS SAID: Both Ross Johnson and Vans Stevenson, senior vice president of state government affairs at the Motion Picture Association of America, said they had not heard of instances in which other filmmakers had done the same to qualify for incentives. Johnson, an industry representative for producers and financiers, said it is not uncommon for filmmakers to have different budgets — for banks, states, guilds and directors. But it is highly unusual for distribution costs to be rolled in with production. Jeffrey S. Thompson, a deputy attorney general, said increasing budgets exponentially also reaps more financing for filmmakers like Konwiser. Banks loan money on the promise of the amount of tax credit awards anticipated. Source: www.desmoinesregister.com |
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© 2006-2010 Dominik Keppner
© 2006-2010 Dominik Keppner
