Weekly television digest (Jan-Dec 1960)

10 DECEMBER 5, 1960 IS TAXING AXING THE LITTLE MAN? Hollywood TV-film circles are becoming increasingly bitter toward the U.S. Internal Revenue Service’s method of taxation. Many film executives contend it’s an unfair arrangement, imposed because of the successful capital-gains deals made on 2 of TV film’s early hit series, I Love Lucy and Dragnet. They complain that it’s unjust to use 2 rare hits as the standard by which to measure a field that has a turnover of more than 40 series a year. What producers want is a return to the cost-recovery method of taxation. Under this procedure, if a producer spent all of his production budget on a series (and he normally does), he was not taxed, because he had no profit. But under the current, much-criticized method of amortization, IRS projects an estimated net income on his series and allows the producer to write off only 60-to-90% of his production costs. The figure is flexible, depending on an estimation of the potential income of the series. This is what rubs producers the wrong way. The film men say that instead of being taxed on the realistic basis of the show’s true costs & profits, they are taxed on its problematic rerun value. “But with the downturn in the syndication market, potential income becomes an illusory figure,” one executive told us bitterly. But IRS contends that costs should match revenue, and it bases its amortization on the producer’s best judgment of the value of his series. “We have a realistic, flexible approach to the problem, based on our interpretation of Sec. 167 of the Tax Code,” one IRS source told us. “We rely basically on the judgment of the taxpayer unless we find his judgment is not in conformity with the facts.” Moreover, points out IRS, comparatively few decisions regarding TV film makers have been appealed, although hundreds of such decisions have been made. Smaller Firms In Trouble But the smaller, one-&-2-series companies say this method of taxation will put them out of business. Some threaten to sue the govt, to recover their payments, contending that the method is illegal. With market conditions so fluid, they ask, how can anyone accurately assess the potential value of a series? The same producers argue that the tax puts an additional burden on them for each year a show continues, and some say that, because of this, they are ending successful series before they might normally do so. Take, for example, a series of 35 episodes, budgeted at $50,000 each. Under the IRS amortization method, there could be a $5,000 tax on each film, for a total govt, bill of $175,000 at the end of the season. But the “little” producer can’t ante up a tax sum like that each year the series continues, because he is frequently prevented from gaining additional revenue by a sponsor-exclusivity contract which won’t allow him to syndicate his show while it’s still in first run. These smaller producers do not consider the tax to be any great hardship on the giants of TV, but the little fellows often have to borrow money to pay their taxes. IRS officials in Hollywood told us they were well aware of the strong opposition to their amortization method, but refrained from going into detail because of 2 developing factors which may have a strong bearing on the situation. Said Frank Schmidt, acting district dir. of IRS in Los Angeles: “We are now in the process of making quite a bit of examination in this area, but we haven't completed our study. It is being coordinated by our national office because of TV’s national scope. We seek a base of facts.” The other factor: The issue is now before the U.S. Tax Court, and much depends on the disposition of these pending cases & the current study. The cases: (1) Jack Chertok Television and Ann Sothern, concerning the Sothern series produced by Chertok, and (2) J.C.P. Corp. and Thomas Lewis, in regard to the Loretta Young series. Chertok and Miss Sothem filed their appeal in 1958, are now in the process of settling their dispute, and expect the situation to be resolved by the end of this year. J.C.P. and Lewis instituted their appeal last July 7, against a tax claim of $1,250,000. In Washington, IRS is expected to issue a clarifying ruling soon — but observers are inclined to doubt that it will include much of a break for the producers. Experts think that relief, if it’s to come, must be given by Congress. One of those most outspoken against the present set-up is Bob Cummings. Although his 193 episodes of The Bob Cummings Show have been in rerun for a year, Cummings says he hasn’t yet made a cent on the show, and points to taxes as the principal heavy. In order to pay the taxes on the series during the 5 years it was in production, Cummings told us, “we had to borrow enormous sums of money from the bank.” Adds the producer-star: “I believe that in the long run we’ll do better by leasing the films as MCA is doing. MCA will make a lot of money out of them, and the better it does, the better I will do. “But in the first year I received nothing, because of distribution costs & residual payments. As owner, I waived my own residuals, although that doesn’t seem right. I own 50% of the 193 films. If you own a show, you’re in trouble. The govt, seems to insist that we go broke. So in my new series, I will be an employe. If you are owner & producer, you watch others taking all the fruits of the orchard, and leaving you one tree. A hot show becomes a tax target.” Concludes Cummings morosely: “The sad part of it is that Hollywood has almost disappeared as a movie capital. So here’s TV — in which the creative talent took over — and now there’s a chance it, too, could be destroyed by excessive taxation. I have been closed down by the govt., and our 91 employes have lost their jobs. Some don’t have new ones yet. What is happening is socialistic.” Another Hollywood producer-star who finds himself in a tax bind is Ozzie Nelson, owner-producer-star of The Adventures of Ozzie & Harriet on ABC-TV. He is currently contesting a tax claim of $1.1 million, covering the first 3 years of his series. The case is in the appellate div. of IRS. Explaining his situation. Nelson told us, “I would not be allowed to sell my films if I wanted to, because I have exclusive contracts with Coca Cola and Eastman Kodak. In addition, I am not sure I will ever syndicate the films, what with David & Ricky having their own careers. But the govt, tells me ‘maybe you will want to syndicate them eventually’ — and taxes me on this assumption. We claim this is speculation and that they are also speculating as to the value of the films.” Nelson has a backlog of more than 300 films. ABC-TV finances his series in return for 40% interest in the show. Robert Saudek Associates, producer of the Leonard Bernstein concert specials for CBS-TV, will syndicate the series in Europe & other overseas TV markets. The 12 Bernstein specials made thus far will be sent on tape or kinescope. The move represents Saudek’s first venture into the international syndication market.