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Hollywood Accounting — How Harry Potter Loses Money
An anonymous reader writes "Techdirt has the details on how it was possible for the last Harry Potter movie to lose $167 million while taking in nearly $1 billion in revenue. If you ever wanted to see 'Hollywood Accounting' in action, take a look. The article also notes two recent court decisions that may raise questions about Hollywood's ability to continue with these kinds of tricks. For example, the producers of 'Who Wants To Be A Millionaire' now have to pay $270 million for its attempt to get around paying a partner through similar tricks."
Peter Jackson had to sue New Line Cinema to get paid for LotR. New Line claimed they lost money on the trilogy.
Anyone who loves or hates any language, platform, or manufacturer, doesn't know what they're talking about.
The producers of Forrest Gump used the same math to claim a loss on that one too.
Gross doesn't cut it always either, see Peter Jackson and Lord of the Rings.
No, this trick won't work for tax purposes. The IRS isn't that dumb (and when they are dumb it is never in your favor). The reason they are able to get away with it from a tax perspective is they actually do pay taxes on it.
What they are doing is setting up a separate corporation for each movie. The corporation is the one that makes contracts with the actors/directors/whoever. Then the studio charges the corporation a (bankrupting, in this case) amount for distributing the movie. Much more than actually distributing the movie cost, but of course the corporation pays it, and ends up making no profit on the movie. The studio still has to pay taxes.
Now, as an average person, you can try to do that, and set up your own personal corporation so you can deduct 'business expenses,' but the IRS will still make you pay a full amount. The studios also still have to pay the full amount in taxes, just not to other people (unless other people sue).
Studios will still continue to do this kind of thing, because while on highly profitable movies, juries might not favor them, on less profitable movies it will be easier to get away with. Obviously it is fraud, but I don't know if it is close enough to the legal definition to press legal charges.
Qxe4
The document shown probably concerns net calculations for a deal with a writer. A Deadline comment said:
These are VERY high loads, but they are TYPICAL loads for writers, who very rarely receive "cash break" or "studio breakeven" type deals. To repeat, nothing has changed under the sun: the "net" deal articulated above is fairly standard for writers. Typically writers are compensated up-front with a kicker if a film is absurdly profitable. Writers rarely, if ever, get gross or "studio breakeven" or "cash breakeven" -- i.e., a share of the revenue from the first dollar of revenue, or a share of the profits from the first dollar of profits. When the studio cut the deal above with the writer, I can't imagine they told the writer: "Once we breakeven, you get paid! We all win!" They probably said to his agent/lawyer: "We'll give you the standard "net" kicker", which is exactly what he got.
I.e. the writer got paid on a fixed basis regardless of movie performance, with the "net kicker" that no one really expects to see (except maybe on "Avatar").
Note the document has nothing to do with taxes. That is a very different story.
Canna get to your urrrrrrrrl
So, um, someone wanna post a mirror/text?
Karma: Non-Heinous
Predates Forrest Gump. See Buchwald v. Paramount, regarding "Coming to America".
General Relativity: Space-time tells matter where to go; Matter tells space-time what shape to be.
HAHAHA Techdirty is now being dirty, they REMOVED the news. Google follows by not offering the cached page, EVEN THO IT EXISTS!
Check the article HERE: http://webcache.googleusercontent.com/search?q=cache:8V1pgRKUcLsJ:www.techdirt.com/articles/20100708/02510310122.shtml
Without debating the merits of pirating copyright material, I'd point out that the people who sign on the dotted line for "net" deals know exactly what they're getting, which is nothing -- writers, actors, directors and "staff" (of which I guess I'm one) sign their contracts with the advice of a lawyer and a manager, and all of these people know exactly what "defined net" is, and how it's defined is completely clear in the contract. We should respect contracts, right? I can assure you whoever is complaining about their deal in TFA isn't J.K. Rowling, she's getting gross points.
The only revenue sharing deals that ever pay off are "first-dollar gross" or "dollar breakeven" deals, where the money directly from the box office is split. Net deals have always been a fantasy -- it was true when Art Buckwald sued Paramount over to Coming to America in 1990 and it's still true now. In this particular case of Harry Potter, what WB appears to have done is borrowed the money to make Order of the Phoenix at a high rate of interest, and is paying off its note so slowly that the negative cost of the film keeps going up relative to the revenue. What isn't mentioned is that Warner Bros. probably borrowed the money from AOL Time-Warner, it's parent, in the first place. :)
Don't blame me, I voted for Baltar.
And it's pretty much standard too - just invest as much as you can in your future projects and you won't have to pay taxes or anything on it. I used to work at a company (.com startup) that did the same thing. Every year they invested a rough $2 million (net profit) in the development team (4 people) - eventually the development team became their own company so they just shifted funds back and forth (here you go 2 mil. to build this application, here you go 2 mil. for rent) - the developers kept the same desks, computers etc. I believe they off-shored a healthy profit as well.
Custom electronics and digital signage for your business: www.evcircuits.com
NPR's Planet Money covered this before too. Gone in 60 Seconds grossed $240 million at the box office, but somehow "lost" $212 million. Their accounting is about as realistic as their movies.
http://www.npr.org/blogs/money/2010/05/the_friday_podcast_angelina_sh.html
the money left after subtracting everything else.
remember, every paid actor showing up to market the show, sighingings general appearance limos, water, gift baskets, ad space and many, many other expenses.
Why people in hollywood keep falling for that is beyond me. They have to know they aren't getting crap. It must be part of the game. The step you must take before getting millions up front.
The Kruger Dunning explains most post on
This reminds me of when I worked for Hitachi Power Tools (HPT). Beyond the confusing owner ship of the company ( X% is owned by Hitachi Koki which is Y% owned by Hitachi Group, etc.) and the five year rotation of executives fresh from Japan (once they get a handle on the US market, they're sent elsewhere and are replaced by someone with no knowledge of the US market), they had a very interesting accounting practice:
Every month the head finance/accounting guy spent a few days locked in his office to produce reports of all sales, expenses, and inventory numbers for that month, last three months, last six months, and last 12 months for the parent company in Japan. In Japan they'd review these reports and would determine the quantity and price of each product we'd buy from them. This insured that HPT in North America would not be profitable, so if any income tax were to be paid, it would go to the Japanese government. On top of that, they wouldn't give any raises due to being in the red.
http://www.nytimes.com/2005/06/27/business/media/27movie.html is the really old initial lawsuit article.
But basically Jackson had a gross cut contract, and claimed that New Line sold some of the rights to things like DVD distribution to other Time Warner companies for lower than market value - which of course reduces their gross (and hence Jackson's cut).
I think they settled, but I didn't really follow it closely - it's a pretty obvious technique though bound to get you sued...
That's not exactly true. The players unions in major sports negotiate with the owners of the league's teams to determine the total player compensation. This is the major thing that's keeping the NFL players and owners from reaching a new agreement -- the players want to see what portion of the revenues go to player salary, but the league is refusing to release the revenue figures. In the NBA, the salary structure for rookies, and the max salary for players, is partly a function of league revenues.
For any industry where individuals make a big difference to the product, the pay of the individuals in in some way related to revenues. Sometimes it not as clear-cut as a % of gross or net... that tends only to be the case where there's a higher level of risk.
"Trolls they were, but filled with the evil will of their master: a fell race..." -- J.R.R. Tolkien on Olog-hai
Once a thief, always a thief. Remember that Hollywood itself was created to escape Thomas Edison's patent enforcers. In California the land was cheap (at that time), the sun was usually shining (free lighting), and they were a very long way away from the east coast and Edison.
Win, win, win!
"It's the height of ridiculousness to say for those 9 lines you get hundreds of millions."
Sure it's perfectly legal and moral to set up shell corporations. It's what you do with them that matters.
I do happen to know a little something about corporate accounting. I actually once recommended that a company be split into two captive parts. The reason was that it had highly profitable software half and a very unprofitable hardware sales half. Splitting the company in two had a legitimate purpose: it made it easier to sell the software business by making its value more clear. Eventually it was sold to a company that already had a hardware business and it's co-joined hardware twin simply folded. That was all completely above board.
In accounting you are constantly making up fictional "expenses", but they are offset by fictional income. You do this in order to make the financial performance of your various business structures more clear. What you CANNOT do is make up expenses to mask changes in owner's equity.
I know that stuff that looks like this happens all the time, and there are lots of borderline cases where legal corporations are created in order to take advantage of various angles in tax law. Many of those schemes are probably illegal, but are allowed de facto because nobody has the time to unravel them. That's why certain politicians always try to understaff the IRS. It's not to defend Joe Blow, who can't hide any significant income. It's to protect the guy who can play the "blind them with bullshit" game with armies of lawyers and accountants.
The situation is different for taxes (which are an exaction in which you have no say) and business deals (which are supposed to be negotiated in good faith). When you enter into a profit sharing contract, you can't take a chunk of revenue, move it from your left pocket to your right and call that an "expense". The proper name for that is "fraud". It doesn't matter how formally correct you make the transaction appear. Substance matters in accounting, and if the substance of a transaction is fraudulent, it's fraud.
In fact, that is the very essence of skillful fraud: to make that which is unconscionable seem superficially correct in every form. You can't pass a counterfeit bill and use "it's such a good copy it is indistinguishable from the real thing." You can't engage in a fraudulent transaction and say, "But all the incorporation papers, purchase orders and invoices are in order."
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They got him on tax evasion only because they couldn't get him on murder... its not like they willingly chose tax evasion over murder.
Unless the actors in question have the studio donate the actor's profits to the Church of Scientology. The Co$ then goes and pays the actor a "stipend" to live on, tax free, and, since the Co$ is a "charity", the movie studios get to write that off. The actors get to live tax free, the Co$ gets to play with the interest, and the studios get a tax break. Isn't religion wonderful?
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