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."

Comments

Peter Jackson

[jjohnson]

Peter Jackson had to sue New Line Cinema to get paid for LotR. New Line claimed they lost money on the trilogy.

Re:Peter Jackson

[virtualchoirboy]

A cut of the *gross* may not even work. If I'm reading the various blogs correctly, what the movie studios do is set up a new company for the production of each movie, lend that new company a ton of cash for the creation of the movie. The studio then has to get paid back before any net or gross calculations are performed because it's a loan repayment, not a cost of production. Since it's a loan, they also get to charge interest. Thus, with a big enough initial "loan" and corresponding interest rate, it's possible to rig things so that no movie ever turns a profit - regardless of the quality or box office draw. /props for the creative way of avoiding payouts //still think it's equivalent to stealing

Re:Not Hollywood alone

[phantomfive]

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.

Re:Not a new trick

[Jeremy Erwin]

Darth Vader actor David Prowse warns beware of small print

Once a Thief, Always...

[Nom du Keyboard]

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!