La. limits credits on some film fees

listNew rules addressing which movie costs can earn film tax credits in the state could limit the fees paid for producers, executive producers, directors, financing and other costs.

In October the Louisiana Office of Entertainment Industry Development issued a memo saying the state will no longer pay tax credits for related-party financing fees and has placed a cap on how much producer, executive producer, director and other “above the line” costs are eligible to earn tax credits. That cap has been set at 12 percent of total Louisiana production expenditures, or $3 million, whichever is less, according to the memo, Motion Picture Incentive: Audit Guidelines.

The changes are a natural evolution of the film tax credit program that has attracted movie productions to the state, say officials.

“It’s constantly being revised and tweaked,” said Chris Stelly, director of the Louisiana Office of Entertainment Industry Development, the division within the Louisiana Department of Economic Development responsible for administering the film incentive program. “The law has a few gray areas that we’ve tried to clarify as best we can. Most of these things are just clarifying some things that should have already been the practice.”

Related-party transactions are those where the movie company has a close relationship — often financial or legal — with other firms it has dealings with.

For example, the upcoming Jean-Claude Van Damme movie “Universal Soldier: A New Dimension” was produced by Unisol 4 Productions LLC, headquartered in Louisiana, and financed by JJJJ Walker LLC in Baton Rouge, owned by Gregory M. Walker. Walker is listed as an executive producer of the movie, according to the Internet Movie Database. JJJJ Walker LLC paid itself and Walker, its owner, $255,000 in producer and executive producer related-party fees.

The $11.5 million film also listed $1,590,000 in related-party financing fees as a Louisiana expense the movie was able to earn tax credits toward, according to the movie’s audit report.

“Universal Soldier” is hardly alone when it comes to related-party transactions being addressed in the new rules. The upcoming action sci-fi film “Looper,” to be released this year, earned tax credits on nearly $3.6 million in related-party financing fees paid to Endgame Louisiana Funding LLC for the $35.7 million film, according to the movie’s audit report. Producer fees of $440,000 were paid to Endgame Entertainment Co. LLC for the producing services of James D. Stern. Both Endgame Entertainment Co. and Endgame Funding are owned by the same members. Endgame Funding is the sole member of Endgame Louisiana Funding, according to audit documents. Officials with Endgame Entertainment did not return calls and emails seeking comment about the state’s new rules. The movie earned nearly $9.9 million in tax credits from the state.

The Advocate reviewed audit and other documents for these two movies and 18 other film projects shot entirely or partially in Louisiana from 2009 to 2011. These projects, which included big-budget, silver screen sensations like “Secretariat” and “Twilight Saga: Breaking Dawn,” spent $204.2 million in the state in salaries for Louisiana workers and other in-state costs. Because of this in-state spending, those movie projects earned tax credits totaling more than $55.7 million.

The portion of a movie production made in the state is subsidized through Louisiana’s film incentive program at a rate of 30 percent in the form of tax credits the projects earn. The Louisiana labor portion of the film earns a 5 percent tax credit.

Included in the more than $204 million in film activity spent in the state in 2010 and 2011 for the 20 movie projects reviewed is more than $10.4 million in producer fees and also more than $5.7 million in related-party financing fees.

“Universal Soldier,” which came through the system under the older set of reporting rules, was given final approval by the state and awarded its $2.9 million in tax credits in November 2011.

Clint Mock, a local CPA who specializes in auditing film projects applying for state incentives and conducted the movie’s audit, said the costs or fees were in keeping with the state’s rules and accounting industry and legal standards.

“I understand how his business has operated in the past and is currently operating,” Mock said, explaining why “Universal Soldier’s” nearly $1.6 million in financing fees are a credible cost of making the movie. “He serves as the vehicle to house his investors’ money. This individual doesn’t make a dime off of financing fees. Where he profits from, is his executive producer fees. And that’s fine.”

“This individual who loaned the money, he collects his funds from many different sources, and it’s put into this one LLC,” Mock added. “And the financing fees, dollar-for-dollar, is not pocketed. He uses that money to make other productions.”

Walker, who has produced more than a dozen movies, could not be reached for comment about the state’s new rules.

CPAs and others in the industry say fees paid to producers have to pass certain “tests for reasonableness” before the costs are allowed the state subsidy.

Generally, the producer needs to prove a certain track record of success at making movies before the state will sign off on the costs, Stelly said.

“It’s really about what will the market bear, what’s an appropriate amount for people to be paid for certain services,” he remarked. “What is their level of experience? Have they even made a movie?”

The tweaking likely will close any loopholes that potentially could allow production companies to pad movie budgets and therefore earn more in tax credits, those interviewed said.

“With the related-party transactions, like I said, the opportunity for abuse was there,” Mock said. “Because if you just charge yourself a lot of money, you’re just ballooning the cost to generate tax credits. That’s the ultimate danger.”

When asked if film production companies have paid themselves inflated producer and financing fees that would add to the amount of tax credits earned, Stelly said, “I think there’s always that potential. But we’re constantly adopting measures of control.

“I think there’s always that possibility,” he added. “But it’s our job to prevent that as best as we can. That’s our due diligence. Have we found any clear cases? None that I can recall at the moment. Have we disallowed certain expenditures? Absolutely, that just happens. But we are looking out for the integrity of the program.”

When asked if producers have given themselves jumbo salaries with little justification, Mock said, “No audits that I have done that has happened.”

“And to be honest, the way I know Chris (Stelly) and his team, even though they might have been following the letter of the law, they wouldn’t have allowed that. Because that’s just clear abuse,” Mock said.

Mock, like others in the business, went on to praise the changes, saying the added measures amount to what CPAs should be doing anyway, and ultimately translate to the program’s increased credibility.

“I think what the state’s trying to do is excellent in that it’s trying to thoroughly analyze what you truly are doing when you make that production,” said Leonard Alsfeld, a broker with FBT Film and Entertainment in New Orleans.

“So in a way, this is a natural next step, to set some boundaries on producers. And set some boundaries on local producers whose budgets are typically small and therefore are a little higher risk, (and whose movies may be) a little more difficult to distribute, maybe a little bit more difficult to underwrite,” Alsfeld said.

“All that being said, I’m a fan of having this language added in here,” said Mock. “Because, like I said, Louisiana has the best incentive program in the nation. And it’s the most regulated.”

Article originally written by Skip descant and published by The Advocate