For some Hollywood financiers, tax reform is a horror script
Hollywood, Calif. — Lee Winkler leans over his Caesar salad in the dimly lighted dining room at Scandia Restaurant. Three men slip into the next booth. ``That's going to be a very interesting meeting,'' says Mr. Winkler, head of Global Business Management Inc. and a past or present business manager for stars like Burt Reynolds. Then, lowering his voice, ``That gray-haired guy helps finance about 25 percent of the movies in Hollywood through tax shelters.''
How many films the financier will put together through tax shelters after next Jan. 1 is an open question. Even before tax reform has been signed by President Reagan, it is sending tremors through the entertainment world.
Hollywood-watchers say tax reform will accelerate the financial conservatism many stars are already displaying -- a novel concept in a world known more for limousines, fur coats, and multimillion-dollar movies than for fiscal prudence.
Analysts think the shift will occur not only in the personal lives of entertainers but also in the funding of movies and television shows, since both make use of breaks that tax reform cuts out.
``The talk on the cocktail circuit is changing,'' observes Bruce Stiglitz, tax partner at Lobe & Lobe, the country's largest entertainment law firm. Hot tips from friends about risky investments and tax shelters -- some pushed by dubious business managers who are paid a 10 percent finder's fee -- have lost some of their allure. Dull concepts like pensions and savings are getting a new polish.
The tax bill could also cut back the number and cost of movies and TV series. The biggest casualties will be in TV production, says Art Murphy, industry analyst with Variety and a professor at the University of Southern California. Before, many movies and TV series were financed in part by the investment tax credit (ITC). Production companies could set aside 7 percent of production costs and offset half their income.
This contributed to escalating costs: An average feature film, which cost less than $2 million to produce 15 years ago, now runs around $16 million today, Mr. Murphy says. ``When the ITC came along, there was an attitude of `Oh well, the government's paying for it anyway.' ''
The tax bill eliminates the investment tax credit, although companies won a ``transition rule'' exemption on many films they had already agreed to make.
``It's going to pinch the feature film producers great and small, but the greatest impact is going to be on the television producers'' who use many more hours of programming and thus leverage the tax benefits of the ITC more, Murphy says.
Many films and TV series are financed by tax shelters. That money will dry up with tax reform as well, and could do so quickly, since private investors are eager to get their money out before they lose the shelter and preferential capital gains.
With less tax shelter and ITC money at hand, major film producers will probably put out one or two fewer films per year, Murphy says, and some marginal producers could go out of business. ``Producers are going to have to live within their means,'' he notes.
The most successful actors, screenwriters, and other artists are incorporated. When Paramount wants to hire, say, Clint Eastwood, it hires and pays ``Malpaso Productions,'' which in turn pays Mr. Eastwood. By creating this ``loan-out company,'' Eastwood gets pension and other benefits that corporations qualify for; he can also put off paying taxes on the money until the end of the fiscal year, which allows him to invest it. Tax reform chips away advantages of incorporating.
Under current law, an entertainer can begin his fiscal year whenever he pleases. A TV actress might start the fiscal year before fall shooting; that way, income would be pushed into the next tax year. A football player could end his fiscal year before the season begins. With tax reform, fiscal will years conform to calendar years.
Another problem is volatility. It's common for, say, a screenwriter to make several hundred thousand dollars one year and almost nothing the next. Even now, says Louis Garelick at Global Business Management, ``One lean year can be devastating for somebody, because of the tax implications and their spending habits.''
But it gets worse under tax reform. Gone will be income averaging, which allows people to spread their taxable income over several years, thus lowering their taxes in their peak years.
This poses a problem not only for the stars, but for their hungrier brethren. Ninety percent of the Screen Actors Guild's 65,000 members earn $15,000 or less annually from acting.
But it's not as bad as it might have been, says guild spokesman Mark Locher. There was a terrifying period when it looked as if Congress would eliminate deductions for business expenses. Actors, dancers, and musicians typically spend 20 percent of their income on expenses like r'esum'es, photos, agents (10 percent), classes, and equipment. But after Charlton Heston and other stars pleaded their case on Capitol Hill, Congress granted full deductions for low-income entertainers.
Mr. Locher thinks this exemption, combined with lower personal rates, will put moderate- and low-income entertainers on an even basis with current law.
``More and more entertainers take an active interest in their money,'' business manager Winkler says. ``They come to me and say, `We're working and we want to get a house,' or, `I want to get enough money to get a ranch.' I never heard that before. It used to be `I want to be a star.' ''