Commentary

Mass. AG Coakley Prosecuting $4.7M Fraud in Film Tax Credit Program

Tomorrow Los Angeles-based movie director Daniel Adams is scheduled for a probable cause hearing in Boston Municipal Court after being arraigned in connection with fraudulently submitting film tax credit, or movie production incentive, applications claiming inflated expenses for two films made in Massachusetts.

Attorney General (AG) Martha Coakley alleges that Adams’s actions resulted in an overpayment of more than $4.7 million in taxpayer money through the Commonwealth’s film tax credit program. Specifically, Adams was charged with two counts on the charges of Making a False Claim against the Commonwealth and two counts of Larceny of Over $250.

The investigation began in March 2010 when an investigator at the Massachusetts Department of Revenue (DOR) spotted suspicious tax returns. Further investigation by the AG’s office and DOR allege that Adams began defrauding taxpayers as early as 2006.

Allegedly Adams’s first film, The Golden Boys (originally named Chatham), was reported to DOR as costing more than $6.7 million and granted him a tax credit payment of more than $1.6 million. Investigators allege the film only cost $2.3 million. Prosecutors are seeking a return of $1.1 million for The Golden Boys.

Allegedly Adams’s second film, The Lightkeepers, allegedly was reported to DOR as costing $17 million and granted him a tax credit payment of $4.2 million. Spending for this film is even more suspect. For example, prosecutors allege Adams paid actor Richard Dreyfuss $2.5 million, when in fact he was only paid $400,000. Prosecutors are seeking a return of $3.6 million for The Lightkeepers.

Moviegoers may be seeking a return for the cost of their tickets as well. Neither film fared well on the popular movie review aggregator website RottenTomatoes.com, with the films receiving paltry 27 percent and 37 percent audience approval ratings respectively.

According to DOR, the Commonwealth has a generous film tax credit program:

The Massachusetts film tax incentives, as amended in July 2007, are composed of a tax credit equal to 25% of a film’s production cost, 25% of a film’s payroll costs and an exemption from sales tax for film productions. The tax credits can be used to reduce the production company’s tax liability, and to the extent that the tax credits exceed that tax liability, production companies may receive cash refunds from the Department of Revenue equal to 90% of the amount of the tax credit remaining.

The tax credits may also be transferred or sold by production companies to third parties, who can use the tax credits to reduce their Massachusetts corporate, insurance, financial institutions, or personal income tax liabilities.

In some cases, sales to third parties are direct sales from the production company to such third parties. In other cases the credit may be sold to tax credit brokers, who in turn may resell the credits to Massachusetts taxpayers who use the credits to reduce their state tax payments.

Meanwhile the entire program’s efficacy has been called into question. In 2010 the Commonwealth spent $14.6 million in taxpayer money to support 83 individual productions that eventually generated a measly $0.8 million in new state revenue that partially offset the tax credits. In 2009 the Commonwealth spent $82.4 million in taxpayer money to support 86 individual productions that generated a trifling $10.4 million in new state revenue that partially offset the cost of the tax credits.

Film tax credit enabling legislation TIR 06-1 was passed by the Massachusetts legislature and signed by then Governor Mitt Romney in 2005 effective January 1, 2006. The program was later amended through TIR 07-15.

For more on film tax credits, see my Denver Business Journal op-ed here and my previous blog post here.