Hollywood Accounting Strikes Again: Investors In 29 Paramount Films That Earned $7 Billion Dollars Get No Return

from the those-accountants-are-really-expensive dept

Tue, Jan 15th 2013 8:03am — Mike Masnick

Ah, Hollywood copyright math. In the past, we've discussed a few instances of how massively profitable films use funny accounting tricks in order to avoid ever having to show an official profit, even as the studios themselves make out nicely. The key trick: the studios set up special subsidiaries just for each film, and then charge those subsidiaries huge sums of money for effectively doing very little. Thus, the studio gets all the money, but the actual "film" is shown as remaining in the red.

The latest example of this in action involves a group of investors who gave $375 million to Paramount Pictures expecting to see some return on blockbusters like Mission: Impossible III, Blades of Glory and the Transformers series. All in all, those $375 million dollars found their way into 29 movies, many of which were massively successful. In total, the collection of films brought in $7 billion dollars worldwide. And... Paramount didn't pay a single dime out to those investors, until they were finally taken to court.

The financiers charged Paramount with understating gross receipts, delaying payments, overstating production and distribution costs and hindering audit rights to verify revenue and costs with the films that Melrose II had funded. The plaintiff also had a bone to pick with how revenue from Melrose II-funded films was being received through Paramount parent Viacom, not Paramount, and how money was flowing. For instance, Paramount allegedly paid sister company MTV as a third-party participant for Nacho Libre and Charlotte's Web.

In reaction to the claims, Paramount initially described the lawsuit as "filled with hyperbole" and claimed that it "ignores the true facts."

Later, Paramount characterized the investors as being impatient. "Based on the performance of the films in which it invested, Melrose II is expected to make a double-digit return on its investment," the studio alleged.

Perhaps hoping to keep the mysteries of Hollywood accounting secret, Paramount has now worked out a "settlement" with the investors, just as hearings were about to begin. It seems likely that Paramount coughed up some money to keep the investors happy... and to keep from having to provide to the court information on how the money flowed, where all of us would have seen some more details of the infamous Hollywood accounting practices.

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Filed Under: accounting, movies
Companies: paramount

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Ninja (profile), 15 Jan 2013 @ 7:47am

Force the companies to include all subsidiaries in their accountings. Except that it aint happening in Corporate States of America.

And they want us to respect copyright. I can safely and happily say I infringe copyright whenever I can just for the heck of it. And while I'm at it I try to make sure my money is gonna land directly into the pockets of the artists/producers/developers who are the ones that really matter.
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The Real Michael, 15 Jan 2013 @ 8:17am

The *settlement* in this case = hush money. Hollywood doesn't want their shady accounting practices placed under public scrutiny.
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WysiWyg (profile), 15 Jan 2013 @ 8:20am

Taxes?
Every time I hear about "Hollywood accounting" I keep asking my self the same question; are they paying their taxes?

Now, I don't know jack squat about California taxlaw, and perhaps there are no taxes to be paid, but if there is - why aren't the IRS on their asses?
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jupiterkansas (profile), 15 Jan 2013 @ 8:26am

Re: Taxes?
They pay their taxes directly to the candidates.
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Anonymous Coward, 15 Jan 2013 @ 8:29am

Send in the tax inspectors as this is prima facia evidence of accounting irregularities.
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silverscarcat (profile), 15 Jan 2013 @ 8:32am

Hollywood should just get out of the movie making business. If they get over 7 billion dollars and can't turn a profit, well, they're doing something wrong.

Not to mention that they got a 1 billion dollar tax break this year. -_-

So, Hollywood, get your goddammed act together and just drop dead already!
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shane (profile), 15 Jan 2013 @ 8:32am

Under the Pall
All of this comes to light under the pall of the already well discussed issues with Aaron Swartz. This is further proof that the industries constantly supporting draconian copyright are themselves shot through with greed and corruption.

Whoever has to be made destitute, whoever's reputation has to be destroyed - nothing is too over-the-top for these filthy, greedy pigs. And the artists just keep swarming to them - supporting their causes and participating in their mammoth flesh-eathing machine.

No pity. I have no sympathy for artists so long as they continue to support this sort of filthiness.
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Josef Anvil (profile), 15 Jan 2013 @ 8:48am

Ummmmm
Isn't this the troll argument that is always offered up whenever Kickstarter is discussed?

But... but .. but... if you donate to Kickstarter projects, you might not see a return on your investment.

So how is Paramount any different than Kickstarter?

Other than the fact that a film maker on Kickstarter may not know all the crafty accounting practices of Hollywood.
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Jordon, 15 Jan 2013 @ 8:49am

Redundant
It's $7 billion or 7 billion dollars, but not $7 billion dollars.
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Anonymous Coward, 15 Jan 2013 @ 8:50am

Maybe all they have too many employees. They're always talking about all the jobs they are creating. Maybe they should only pay "Bob" for his work for Paramount, instead of his work for Paramount, and his work for Shell Company 1, and his work for Shell Company 2, etc, etc, etc.
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weneedhelp (profile), 15 Jan 2013 @ 8:53am

The easiest way
To open someones eyes that isn't familiar with Hollywood accounting is to mention how Darth Vader Not Getting Paid, Because Return Of The Jedi Still Isn't Profitable

I have mentioned this to a quite a few people and the look in their eyes is shock. It grabs attention. More people need to know about these slimy bastards thieving practices as they cry wolf time and time again about piracy while their pockets overflow with money.
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Anonymous Coward, 15 Jan 2013 @ 8:53am

Re:
I have a suspicion that if the full extent of Hollywood accounting practices we to see daylight in court, there might have to be RICO charges following.

Of course would the DOJ actually go after Hollywood.

I love how a bunch of sleazy cheating pilfering companies expect their customers to be pure as the wind driven snow when it comes to buying their stuff....
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Anonymous Coward, 15 Jan 2013 @ 8:55am

What I find amazing is that an industry that is consistently unprofitable* can remain in business for so long and produce so many millionaires.

* allegedly, at least
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Ninja (profile), 15 Jan 2013 @ 8:58am

Re: The easiest way
A powerful tool awareness is.
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jupiterkansas (profile), 15 Jan 2013 @ 9:00am

Re: Ummmmm
Nobody expects a return on investment with Kickstarter. They are donors, not investors. Huge difference.
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jupiterkansas (profile), 15 Jan 2013 @ 9:02am

Re:
If you're paying people millions of dollars, there's nothing left to call "profits".
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Vincent Clement (profile), 15 Jan 2013 @ 9:03am

Re:
There is nothing unprofitable about the TV or movie industry. Hollywood has been a racket since day one.
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Anonymous Coward, 15 Jan 2013 @ 9:04am

Re:
Also they need tax breaks, but can afford to contribute to political campaigns.
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Anonymous Coward, 15 Jan 2013 @ 9:09am

Re:
Profit = taxes, so yes, it's good business practice to be unprofitable.

I worked for a startup that had a profit-sharing incentive for employees who got in early. After 5 years, I saw $0, and the owner sold the company for a tidy profit.

Now I know why we had such glorious end-of-year holiday parties - to eat up every last bit of profit so there was nothing to pay taxes on, and nothing to hand out to the employees.
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Anonymous Coward, 15 Jan 2013 @ 9:09am

Re: Under the Pall
Sadly it's only recently that many artists have been able to turn any sort of profit outside the "mammoth flesh-eating machine"

If you ever want your movie into the mainstreams theatres you're still pretty much stuck. Times are changing though, with more and more being successful outside, less and less new artists will go the old route. Unfortunately it's a slow process, probably going to need at least another generation, if not two before things truly shift to where the machine is not the norm
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DannyB (profile), 15 Jan 2013 @ 9:15am

Re: Re: Taxes?
It's more efficient that way. Cut out the middlemen.
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DannyB (profile), 15 Jan 2013 @ 9:16am

Re: Re:
It depends on how much of that money "flows" to the DOJ.
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Mr. Applegate, 15 Jan 2013 @ 9:17am

Re: Taxes?
What taxes, you have to "Make Money" to pay taxes, they claim they don't make any money.
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DannyB (profile), 15 Jan 2013 @ 9:19am

Re: Re: Under the Pall
The dam can break surprisingly quickly. There can be a trickle and then BOOM!

What do you think will happen the first time an independent movie goes straight to, let's just say Google Play or iTunes and becomes massively popular, and maybe more than modestly profitable.
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Anonymous Coward, 15 Jan 2013 @ 9:21am

Re: Re: The easiest way
These aren't the profits you're looking for...
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DannyB (profile), 15 Jan 2013 @ 9:22am

Re:
Forget Bob. Think of money to candidates.

$1000 from shell company 1.
$1000 from shell company 2.
etc. etc
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Anonymous Coward, 15 Jan 2013 @ 9:22am

Re: Re:
"If you're paying people millions of dollars, there's nothing left to call "profits"."

Acturally, it's "If you're paying YOURSELF millions of dollars, there's nothing left to call "profits".
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Berenerd (profile), 15 Jan 2013 @ 9:23am

Petition the white house!
Someone should start one of them Whitehouse petitions to get them to see the true records of Hollywood accounting. Maybe we are't in a deficit at all if we follow their rules...
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Anonymous Coward, 15 Jan 2013 @ 9:39am

Re: Re:
And the irony is, that Hollywood directly sprang out of trying to get out of a racketeer's clutches.
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Anonymous Coward, 15 Jan 2013 @ 9:44am

and the stupid members of the government will still do whatever they are told to ramp up copyright laws because the studios say they are losing so much money, the whole movie business is on the verge of total collapse, taking thousands of jobs along with it! if ever there was a thick bunch of idiots, it has to be those in the Senate! Jeez!!
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Anonymous Coward, 15 Jan 2013 @ 9:48am

Re: Re:
Uh, that's insane. Avoiding profits to avoid taxes works about as well for a corporation, as staying unemployed to avoid taxes works for an individual. Sure, you avoid the taxes, but you also do not make money.

The only way the company would be worse off with turning a profit, is if the taxes and profit sharing add up to more than 100%, in which case you have that "Springtime for Hitler" scenario.

And if you had profit sharing, no profits were reported, the owner sold for a profit, and you got $0... you may want to talk to a lawyer, if you know what I mean.
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anonymouse, 15 Jan 2013 @ 9:54am

Re:
One day someone is going to invest in a movie and not be interested in taking a settlement they will hopefully reveal to all how the movie industry in Hollywood defrauds not only investors but also the taxman from receiving there cut. I for one cannot wait for that day as then, once one movie is proven to have received the special Hollywood accounting treatment, all others that have been produced by that company should be forced to reveal all the illegal use of subsidiaries to steal money from those that should be receiving it. I think the biggest that should be investigated is the star wars franchise.
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Anonymous Coward, 15 Jan 2013 @ 10:04am

Re: Re: Taxes?
Money laundering?
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Zos (profile), 15 Jan 2013 @ 10:07am

Well that explains where Knights of Badassdom has disappeared to, but i do have one question.
Why the fuck do people keep investing with them?
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Anonymous Coward, 15 Jan 2013 @ 10:08am

Re: Re: Re:
Or rather the politicians in charge. "Ya gotta grease the wheels a bit to keep the world going!"
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Chuck Norris' Enemy (deceased) (profile), 15 Jan 2013 @ 10:20am

Lawyer question
What is the difference between a "true fact" and a fact?
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Lowestofthekeys (profile), 15 Jan 2013 @ 10:20am

This is good, it'll put the investors off of Hollywood.

On a side-topic, Matt Stone and Trey Parker started their own production studios called "Important Studios" because they too hate Hollywood and its practices.

http://www.guardian.co.uk/film/2013/jan/15/trey-parker-matt-stone-important-studios
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Anonymous Coward, 15 Jan 2013 @ 10:24am

Re: Re: Re:
The sale would be a question of how the company was structured. If it was a startup it is safe to assume that it wasn't owned by shareholders. For a lot of small companies a singe person with responsibility is a natural structure. When that person sells the company, well he reaps the harvest.

The profit sharing, well probably something like 100% shared or he just didn't want to expand the business! If you are a small startup with a few interesting immaterial rights in your pocket (copyrights, patents or trademarks), you are more likely to get bought than if you are a large or medium sized fish.
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rkhalloran (profile), 15 Jan 2013 @ 10:24am

EXCELLENT riff on Hollywood accounting
Rob Reid (Rhapsody founder) did a riff on this at TED that will leave you ROTFL http://www.ted.com/talks/view/lang///id/1390
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Anonymous Coward, 15 Jan 2013 @ 10:27am

"Melrose II is expected to make a double-digit return on its investment"

Invest 375MM get back
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Anonymous Coward, 15 Jan 2013 @ 10:32am

Re: Re: Re: Under the Pall
Well, I think the problem is investment capital. Sure, you can croudfund a 1 million dollar production, but there are some limits there. Youtube premium is a far more interesting strategy for creators. Felicia Days cooperation with Microsoft and several other projects are showing that industries with no direct relation to Hollywood are interested in competing in the content war. If anything, that is how the cookie crumbles. Stable, viable alternative funding in sufficient amounts are what you want to force the old industry to renew their concepts!
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Anonymous Coward, 15 Jan 2013 @ 10:40am

Re: Re: Ummmmm
Bigger than most realize. The amount of control Paramount or other Hollywood productions want for taking the risk is all possibilities to control the release and enforcement of IPR. With them in hand, a production company can choose whatever business model they want and that is a huge step foreward from the conservative (in sense of no change) film industry.
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Josef Anvil (profile), 15 Jan 2013 @ 10:41am

Re: Re: Ummmmm
Fair point. I looked at it wrong. So basically the studios are far worse than Kickstarter.
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Ed C., 15 Jan 2013 @ 10:45am

Re: Re: Re:
You mean the ones in the DOJ who are already working for the big publishers, the ones given future job offers, or just the ones taking payments?

Either way, the DOJ isn't really going to bite the hand that feeds them. If all this ever reaches the light of day, the worse that could happen for them is that a few heads will resign and a few underlings will be given up as sacrificial lambs with favorable plea bargains, no one will claim any culpability, and the people who replace them will publicly claim that justice will be served while selling out before the seats they fill go cold. In the end, the publishers offer a settlement and everything will go on business as usual.

In reality, however, the big publishers have deep ties with the all major news outlets, not to mention congressmen and various heads in the executive branch. With the careers of so many of the current establishment on the line, they will individually ensure that nothing of the sort will ever happen. They would rather cover their own ass-ets than protect the American public.
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Ed C., 15 Jan 2013 @ 10:51am

Re: Re: Re: Re: Under the Pall
Considering how Paramount is apparently treating their investors, I doubt these independent competitors will have capital problems much longer.
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lolzzzzz, 15 Jan 2013 @ 10:52am

US govt = hollywood
so dont bother whining for 4 years you are gonna see it get worse and worse till you end the bs in both parties of your system.
its soo broken ....
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Calvin (profile), 15 Jan 2013 @ 10:52am

Why isn't this fraud?
If I was to do this as a small company I would be charged with fraud or false accounting so fast my head would spin.

Why doesn't this apply here?
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Ed C., 15 Jan 2013 @ 10:55am

Re: Re: Re:
The students had become the masters, no doubt. ;)
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Ed C., 15 Jan 2013 @ 11:08am

Re: Why isn't this fraud?
When you spread as much political "contributions" and direct "incentives" around Congress and the executive branch, you basically get all the laws and tax breaks you want, and carte blanche for any and all misdeeds. Ultimately, the government can NOT implicate you without implicating themselves.
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silverscarcat (profile), 15 Jan 2013 @ 11:10am

Re: Re: Re: Re:
Only a master of hiding profits, Ed.
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silverscarcat (profile), 15 Jan 2013 @ 11:11am

Re: Re: Why isn't this fraud?
So...

If everyone's corrupt...

Then no one is.

Is that it?

And, yes, I'm paraphrasing movie quotes today.
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Anonymous Coward, 15 Jan 2013 @ 11:16am

Re:
I wonder if that means pirates will respect them and not rip off their stuff...

Highly unlikely.
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dennis deems (profile), 15 Jan 2013 @ 11:24am

Re: Re: Re:
Avoiding profits to avoid taxes works about as well for a corporation, as staying unemployed to avoid taxes works for an individual. Sure, you avoid the taxes, but you also do not make money.
How so? Profit is what is left after expenses are covered. So long as expenses are covered, the business can operate.
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Jeff (profile), 15 Jan 2013 @ 11:36am

Perhaps the Gov't should hire Hollywood to keep the books
I can see it now:

"See this $17 trillion deficit?? Its actually not a liability... its an asset that you can charge to...

-- Blink --
-- Blink --

oh wait...

:-)
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shane (profile), 15 Jan 2013 @ 11:37am

Re: Why isn't this fraud?
Because the number of people infuriated by it is relatively small.
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shane (profile), 15 Jan 2013 @ 11:41am

Re: Re: Under the Pall
If by "any sort of profit" you mean get rich, then your comment holds some water.

Artists have always had to work under the patronage of others. Broadly speaking, you don't eat, wear, or live in art. The richer your patron, the more you can make. And guess what sort of art rich patrons are interested in.

Ever heard of a Triumphal Arch?
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shane (profile), 15 Jan 2013 @ 11:43am

Re: Re: Re: Re: Re: Under the Pall
I'd be interested to know what percentage of the money put up for any given movie is independent investment money, and how much of it is borrowed from a bank.
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shane (profile), 15 Jan 2013 @ 11:49am

Re: Re: Re: Re: Under the Pall
That really is the crux of the matter. The problem is that our current financial system limits the total amount of currency there is, produces constant inflation, and has a central control over where the new money comes from. That source is the banking industry.

If you can get a bank to finance you, you get fresh new money - a chance to get ahead of the curve, to carve out market share in a way private investment simply cannot do for you. What do banks want? They want sure things.

http://www.hollywoodreporter.com/news/wall-street-love-affair-movies-375945

How do you get sure things? It's not technically possible, but it is very helpful if you make competition illegal.
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Lowestofthekeys (profile), 15 Jan 2013 @ 12:03pm

Re: Re:
Kind of hard to rip off their stuff when they allow free streaming of South Park.

Also this little gem:

" I don't care about piracy for our stuff. I find it a fascinating thing to talk about, how the world is changing and all. But we're not like Lars over here. Its going to be interesting to see what happens over the next few years though."

http://treyparker.info/archives_transcripts_spstudios_05apr05.htm
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Atkray (profile), 15 Jan 2013 @ 12:15pm

Re: Re: Taxes?
Dude, that's not even funny.
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cosmicrat (profile), 15 Jan 2013 @ 12:36pm

Absolutely needs to be reformed
In 15 years working in movies and TV production, I have worked for all the big name studios you would recognize. Never once has my pay stub said anything like "Paramount, Disney, Universal". It's always some shell company you've never heard of.

Hollywood accounting absolutely needs to be reformed. But then again, as pointed out above, our entire system of banking, trading and financing needs to be reformed even more urgently.
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Bilateralrope, 15 Jan 2013 @ 12:36pm

Re: Taxes?
Hollywood account doesn't change the total profit, just which company earns it. So I can't see it changing the total amount of taxes that need paying, thus the IRS is unlikely to care.

It might even cause Hollywood to pay more taxes than normal.
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nasch (profile), 15 Jan 2013 @ 1:00pm

Re: Re: Re: Re:
Profit is what is left after expenses are covered. So long as expenses are covered, the business can operate.

And the owner's salary is an expense.
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nasch (profile), 15 Jan 2013 @ 1:03pm

Re: EXCELLENT riff on Hollywood accounting
Rob Reid (Rhapsody founder) did a riff on this at TED that will leave you ROTFL http://www.ted.com/talks/view/lang///id/1390

Bad link.
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Ed C., 15 Jan 2013 @ 1:21pm

Re: Re: Re: Re: Re:
Try reading the comment I was responding to first, SC.
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Ed C., 15 Jan 2013 @ 1:27pm

Re: EXCELLENT riff on Hollywood accounting
Is this it? http://blog.ted.com/2012/03/20/the-numbers-behind-the-copyright-math/
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Anonymous Coward, 15 Jan 2013 @ 1:28pm

Re: Perhaps the Gov't should hire Hollywood to keep the books
FTFY....

"See this $17 trillion deficit?? Its actually not a liability... its an asset that you can charge to... a Collateralized Debt Object (CDO)... which you can then roll up into a Combination of Collateralized Objects (CCO) and then you can sell indexed securities that are tied to the CCO's payoff (and we know when that will happen...)

This is how Wall Street can turn the deficit into something that they can sell to dumb schmucks (aka common investors) with misleading and incomprehensible diagrams showing how all the funds flow in a circle and eventually 'fill up' the CCO (when pigs fly....) thus returning the investors funds with a double digit return."

No I didn't just take the Financial Bubble and turn it into s Deficit bubble, there is real 'equity' there that will be available as soon as the deficit is covered (or the US is repossessed by China, in which case all CCO's are null and void...)
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albert, 15 Jan 2013 @ 1:32pm

Hollywood Accounting
Companies pay taxes on earnings after expenses, net income. (unlike the Unwashed Masses- us). Movies never make a profit, that's Hollywood Accounting, 101. HA 102 says that movie studios almost never make front-end deals (investor repaid % of GROSS income), except to get a really big star. Most investor deals are back-end (% of NET income). No income, no investor payback.

RULE: Don't EVER do a back-end deal with a studio. It's a sucker bet. You'd think folks would have learned by now.
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Anonymous Coward, 15 Jan 2013 @ 1:55pm

The big movie labels are insane. Boycott them all.
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gorehound (profile), 15 Jan 2013 @ 1:58pm

Just Boycott this whole MAFIAA Industry !!! Stop feeding them your money.
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silverscarcat (profile), 15 Jan 2013 @ 4:28pm

Re: Re: Re: Re: Re: Re:
I did.

I was making a Star Wars reference.

Darth Vader: When we last left, I was but the learner, now I am the master.
Obi-Wan: Only a master of evil, Darth.

See?
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John Fenderson (profile), 15 Jan 2013 @ 4:33pm

Re: Re: Taxes?
It could matter. The IRS collects more taxes on 1 million dollars earned by a single entity than the same million dollars earned by multiple entities collectively.
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Anonymous Coward, 15 Jan 2013 @ 5:21pm

Re: Re:
I'm not a South Park fan so, no, I won't bother.

I'm not confident that you'll stop being a jackass and accuse me of doing it anyway, though.
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The Real Michael, 15 Jan 2013 @ 5:36pm

Re: Absolutely needs to be reformed
"In 15 years working in movies and TV production, I have worked for all the big name studios you would recognize. Never once has my pay stub said anything like 'Paramount, Disney, Universal'. It's always some shell company you've never heard of."

Doesn't surprise me. From what I understand, a new shell company is created on a per-film basis and then closed once production is finished, so that there's no paper trail left to be audited.
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PaulT (profile), 16 Jan 2013 @ 1:29am

Re: Re:
I love it. You respond to a link about an independent studio set up by people tired of being ripped off by studios, posted in response to a story about how Hollywood rips off its own investors, and all you can do is come up with some bullshit about piracy.

It really shows how single-minded and alienated from reality you people really are.
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Anonymous Cowshit (profile), 16 Jan 2013 @ 3:32am

Point of no return
Money contributed - money used successfully - no return to contributors. Not an investment then, but rather a donation.

Hollywood should register as a charity to avoid scamming (er, misleading) people with both money and optimism, otherwise at some point (why not already?!) they'll be prosecuted for confidence trickery (i.e. fraud).

Not only can the Nigerian 419 scammers learn something from Hollywood, but there could be a movie in this! :-)
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Ed C., 16 Jan 2013 @ 5:20am

Re: Re: Re: Re: Re: Re: Re:
Sorry, I didn't get the reference.
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silverscarcat (profile), 16 Jan 2013 @ 6:44am

Re: Re: Re: Re: Re: Re: Re: Re:
Eh, it happens.
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Zos (profile), 17 Jan 2013 @ 9:54am

Re: Re: Re:
i don't need to pirate south park, just like most comedy central programming it's available next day from the web site.

it's even got it's own plug in for plex so i can watch easily from my tv's.
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Anonymous Coward, 30 Jan 2013 @ 3:00pm

You should get your facts straight before writing an article that is full of misconceptions and straight false information. The investors were paid a ton of money from Paramount, to say they didn't earn a dime is just straight false and irresponsible reporting.
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nasch (profile), 30 Jan 2013 @ 8:44pm

Re:
The investors were paid a ton of money from Paramount, to say they didn't earn a dime is just straight false and irresponsible reporting.

And your source for this information?
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Top Quality Conveyancing Work, 8 Jan 2014 @ 8:59pm

Why you are paying millions of dollars to the people? Do you like to share about it?
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Hire Experienced Accountants, 10 Feb 2014 @ 8:36pm

I think Hollywood accountants are doing great to fulfill their demands. I completely agree with them.
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