Warner Bros. Faces Tax Fraud Investigation for ‘Sully’ Airplane Costs (EXCLUSIVE)

'Sully' Airplane Costs Trigger Warner Bros. Tax Fraud Investigation
Keith Bernstein

Warner Bros. claimed a production tax credit in Georgia on more than $600,000 worth of airplane equipment that was never used in the state, a Variety investigation has found.

The studio submitted the expenses in connection with “Sully,” the 2016 film directed by Clint Eastwood that was shot at locations including Georgia and California. Georgia offers a 30% tax credit for film production costs, provided they are incurred in the state.

Contracts and emails obtained by Variety show that the items billed to the Georgia film incentive program matched expenses that were actually incurred in California. As part of the effort to shift expenses to Georgia, the production went so far as to truck a small piece of airplane fuselage to a studio in Atlanta. The cost of the item matched the cost of a mothballed Airbus A320 that was used in California. The fuselage piece was not used in the film, but it was claimed as a Georgia-based expense.

Variety learned of the alleged tax fraud from a whistleblower who asked not to be identified. The same person also reported the issue to the Georgia attorney general’s office, which stated in writing last July that it had opened an investigation. Prosecutors are awaiting the results of an audit from the state’s Department of Revenue, which oversees the film incentive program.

“I can confirm that we opened a file and referred the matter to the Department of Revenue,” said Katie Byrd, a spokeswoman for the attorney general’s office.

In a statement to Variety, a Warner Bros. spokesperson denied wrongdoing.

“We carefully followed the rules and regulations as set forth by the state of Georgia,” the spokesperson said. “After production, we submitted our qualifying expenditures, and they were fully audited and approved without question by the Georgia Department of Revenue.”

Tax fraud can be charged as a felony in Georgia, punishable by up to five years in prison and a $500,000 fine. No major studio has ever been charged with defrauding a state film incentive program. And in Georgia, which operates one of the most lucrative programs in the world, not a single person has been publicly accused of bilking taxpayers.

The allegations could stain Warner Bros.’ reputation, cast doubt on the integrity of the incentive program, and raise questions about the state’s ability to oversee it. Since being alerted to the alleged fraud last year, Georgia authorities have been slow to respond. According to the studio, auditors from the Department of Revenue have not contacted the producers to ask about the allegations.

Eastwood’s office referred calls to Warner Bros. Dee Dee Myers, the head of communications for Warner Bros., was adamant that the studio would not risk its relationship with Georgia authorities over a relatively small amount of money.

“We want to protect our tax credits,” she said. “We don’t want to abuse the system. That’s a one-way ticket to ending the program for us and for the industry.”

Georgia’s film tax credit is seen as an economic engine in the state, and enjoys broad political support. Backed by Gov. Nathan Deal, it has doubled in size in just the last three years, with more than $800 million in credits certified in 2017, making Georgia the number three U.S. filming location behind California and New York.

Georgia’s film credit regulations explicitly encourage productions to support the local economy. To qualify for the credit, purchases or rentals must come from a “Georgia vendor.” The regulations also bar using a local vendor as a “conduit” for a transaction originating out of state.

Interviews and records show that the “Sully” producers engaged in a concerted effort to bill California expenses through a Georgia conduit, making it appear that they qualified for the credit. The funds were remitted to a California vendor, which supplied equipment for use in California.

“That becomes fraudulent, if there’s no Georgia connection,” says Peter Stathopoulos, an attorney who helped draft the state’s regulations. He added that he was speaking in general terms about the law and was not privy to the details of the case.

A second source, who worked on the “Sully” crew and also asked not to be identified, said that producer Tim Moore directed him to bill California-based expenses to Georgia whenever possible.

“I asked Tim Moore, ‘What do you want me to run through the pass-through company in Georgia?'” the source said. “He says, ‘Run all the expensive parts through them.’ It was blatantly just, ‘Charge it to Georgia.'”

Moore declined to comment.

Warner Bros., like all studios, seeks out production incentives whenever possible. Eastwood, who has worked with Warners for more than four decades, has shot most of his recent films in jurisdictions with generous rebates, including Michigan (“Gran Torino”), South Africa (“Invictus”) and California (“American Sniper,” “Jersey Boys.”)

The original plan was to shoot “Sully” in California as well, according to a letter obtained by Variety. But when the production lost out in the state’s annual tax credit lottery in 2015, the producers quickly moved most of the filming to Georgia and New York.

The only portion of the shoot that was not relocated were the scenes involving the water landing of an A320 and the ferry rescue of 150 passengers. That portion of the shoot took place at Falls Lake, a massive water tank on the Universal Studios lot.

 An A320 submerged at the Universal lot

To complete the shots, the production bought two decommissioned A320 airplanes. One came from a boneyard in Victorville, Calif., and cost $200,000. The second came from a facility in Goodyear, Ariz., and cost $350,000, according to contracts obtained by Variety. The first went to Falls Lake while the second was cut into pieces and used to shoot cockpit scenes on a Warner Bros. soundstage.

Since California was not subsidizing the production, the studio would have to pay full price for items used there. So the production set about passing off much of the cost to Georgia, where it would be 30% cheaper. In one email, Taffy Schweickhardt, the production accountant, discussed invoicing the Arizona plane “through GA Airplane Broker.”

With Tim Moore copied on the email, Schweickhardt wrote that the broker “Must have GA brick and mortar office with at least one employee.”

This is a significant requirement. Under Georgia’s film credit regulations, a “Georgia vendor” is defined as one that “has a physical location in Georgia with at least one individual working at such location on a regular basis.”

In other words, Schweickhardt was making sure that the bill for the second plane — which was purchased in Arizona and used in Burbank — would appear to meet the requirements of the Georgia tax credit. Schweickhardt declined to comment, referring questions to the studio.

Variety has obtained an invoice for $642,207 worth of airplane equipment, which was billed through a Georgia airplane broker. The most expensive item – a four-week “rental” of a fuselage piece – was listed at $350,000. That is identical to the purchase price of the entire Arizona plane.

The broker, who asked not to be identified, told Variety that he was asked to make out the invoice but did not purchase or sell the equipment. He said he was paid $1,500 for his trouble.

“I never saw the parts,” he said. “I never had any occasion to see anybody or do anything.”

 A slice of an A320 was sent to Atlanta

Records and emails show that a slice of airplane fuselage — about eight feet wide — was shipped from the Universal lot to the production’s Atlanta headquarters at ScreenGems studios.

“The fuselage arrived safe and sound this morning and is now being stored outside on the property where our Production Office is located,” wrote Holly Hagy, the production supervisor, in an email on Sept. 29, 2015.

The fuselage piece was missing seat cushions and some of the interior paneling. According to the studio, it was intended to be used as a cover set to shoot airplane scenes in case of bad weather. A spokeswoman for ScreenGems studios, however, says the production did not use the facility for plane shots.

“‘Sully’ only used our studios for office and support,” says the spokeswoman, Susan Dosier.

The studio could not find documentation to support its claim that the fuselage piece was intended for a cover set. In its statement, the studio acknowledged that the cover set was not needed, and the fuselage piece was never dressed or used. It was later sold off for scrap. The studio also said Georgia auditors were aware that the cover set was not used, and approved the expense anyway.

The other items on the invoice also match the costs of airplane equipment that was used at the Universal lot. A mechanical mount, called a gimbal, was billed at $200,000 for a four-week rental. That matches the rental rate for the gimbal used to mount the A320 during the water scenes in the Falls Lake tank. The sources said that the studio passed the cost of the gimbal to Georgia.

In its statement to Variety, the studio maintained that the $200,000 expense was for a different gimbal – one that was needed for a much smaller biplane. The biplane scene was filmed at Peach State Aerodrome, about an hour south of Atlanta, and took a single day, not four weeks. The studio says the gimbal was ultimately not needed. The source on the “Sully” crew said that in reality, there was never a gimbal in Georgia.

Another $87,000 was billed for a flight data recorder and a cockpit voice recorder. According to the studio, the items were props intended for “possible use” in NTSB hearing scenes, which were shot in Georgia. However, neither piece of equipment appears in the film. In truth, the whistleblower told Variety that the $87,000 expense actually represented hydraulic parts that were used on the Universal lot.

All credit applications are audited, either by the Department of Revenue or by a third-party auditor. The airplane equipment on the Georgia invoice, if accepted in full, would have generated a a credit of $191,000, which could then be sold for close to face value to Georgia residents or corporations to offset tax liability.

William Gaston, a spokesman for the Department of Revenue, told Variety that the department does “both voluntary and involuntary audits of the film tax credit,” but declined to discuss the “Sully” case.

“The Department cannot comment on active investigations,” he said.

Auditors in the department are able to cross-check expenses against production schedules, and disallow expenses that are deemed improper. But Allen D. Johnson, who retired from the department in 2015, told Variety that he and his colleagues were often overwhelmed.

“If you’re getting so many applications in, it’s hard to be too thorough or detailed,” he said. “The department tried to do its best to look over them to make sure they were good credits, but things slipped through.”

William Perry, the president of Georgia Ethics Watchdogs, said the state is ill-equipped to police the program.

“With any type of development or tax credits, where the state government is giving someone a break for something, there’s no accountability factor to it whatsoever,” he said. “Enforcement is non-existent and our standards are so low that I imagine people are getting away with a lot.”