Tolkien Trust sues New Line. Haven't received a penny from the films.

[HaemishM]

Corporations have long tried to find barely legal ways to suck their own dicks. Hollywood has perfected it to an art.

[Johny Cee]

Yes, but my point is that shit is not above board. Having tons of companies shifting money around to avoid recognition screams scandal to any auditor worth his salt. The moment you find a good fraud, you get the PCAOB issuing standards down your throat.

That's why we have SOX now.

It sounds like,  at the highest level of consolidation, the net income is unchanged.  The studios are just playing games with whether expenses are picked up as Cost of Sales or G&A.  Almost sounds like they're using percentage of revenue as the method for overhead allocation rather than using percentage of direct costs,  which is supposed to be frowned on but still happens in some industries (especially non-profits).

I do a fair amount of Cost to complete/Percentage of completion revenue recognition with general and specialty contractors,  and yah,  doing that much fucking around with your job costs is usually a big red flag.


Tax wise,  I'm not sure how they're getting around the IRS.  The IRS is okay with some income shifting, if you have a decent rationale for it, but moving large amounts of income to other related parties without a basis in services/goods provided will get your friendly IRS auditor in a state. 

[DraconianOne]

That's why we have SOX now.

As I understand it, SOX covers public companies.  I believe many - if not all - film production companies are private and therefore not covered by the SOX regulations.

Also, I'm not sure that it's entirely as dodgy as it's being made to sound - I don't think any of it's illegal, it just boils down to defining what the profit from a given film is and what is expenses.  Basically, in any film production course I've attended and in many of the more acerbic commentaries, there are two general guidelines: the first is that nobody knows anything when it comes to making a good film and the second is that films don't make money. 

The proof is in the fact that we're even chatting about this now: how come New Line - a studio that, relatively, is small fry next to your Time Warners and your Fox, have tried to get away with it so much over Lord of the Rings - first with Jackson, now with the Tolkien Estate and some matter regarding extras and actors that I CBATG right now.  I can't find any mention of their stock dropping in price - or even any mention that they have stock which makes me wonder if they're public or not - and I suspect that if their dealings were in anyway illegal according to any US accounting, tax or finance law, they would have already been sussed given the high profile nature of some of these lawsuits. 

Basically, they're cheeky fuckers who will screw anyone over for a quick buck.

[Calantus]

If they're a private company not screwing the IRS they can pretty-much cook the books any way they like as far as the law is concerned.

[Paelos]

That's why we have SOX now.

As I understand it, SOX covers public companies.  I believe many - if not all - film production companies are private and therefore not covered by the SOX regulations.

True, except Time-Warner, MGM, and FOX are. Paramount and Warner Brothers aren't. The rest are kinda smallish in terms of numbers. I'd say that the big players are under the regulations.

[Aez]

That's why big talents and big IP should simply ask for an unreasonably high upfront cost.

[Johny Cee]

That's why we have SOX now.

As I understand it, SOX covers public companies.  I believe many - if not all - film production companies are private and therefore not covered by the SOX regulations.

True, except Time-Warner, MGM, and FOX are. Paramount and Warner Brothers aren't. The rest are kinda smallish in terms of numbers. I'd say that the big players are under the regulations.

To get debt financing,  you're still going to have to produce attested financials and that means GAAP.

[DraconianOne]

True, except Time-Warner, MGM, and FOX are. Paramount and Warner Brothers aren't. The rest are kinda smallish in terms of numbers. I'd say that the big players are under the regulations.

This exactly highlights the convoluted nature of it all - Time Warner is public, Warner Brothers isn't.  Warner Bros is the film studio division of Time Warner, just as MGM (which I didn't think was public) is for Sony, 20th Century Fox is to Fox and so on. 

To get debt financing,  you're still going to have to produce attested financials and that means GAAP.

Most large production companies and studios will avoid debt financing for movies and go for equity financing instead - hence the plethora of associate and executite producer roles you see on film credits (as well as product placement so on and so forth).  Debt financing is usually the domain of smaller production companies and independent filmmakers who don't have access to the readies that the larger corporations do. 

That being said, the studios are generally able to finance their own productions so any extra funding they get just offsets the amount of money they stand to lose if it all goes tits up.  And when it comes to repaying the investors, the party line is "but the film hasn't made any profit!" and we're right back where we started.

[MahrinSkel]

Basically, the Tolkien Trust made the mistake of not having a lawyer specializing in Entertainment Law help them negotiate.  Somebody told them "Make sure you get a cut of the gross" and they didn't blink when New Line just called it "Gross Profit" and proceded to define it the same way they always defined "Net Profit" (as in, no movie ever makes any).  Tom Hanks made over $30M off of "Forrest Gump", the author never got anything past the option money (in fact, I think he had to drop his suit when they pointed out that under the contract he owed them something like 90% of the option money).  Tom Hanks got $20M plus a piece of the gross revenues, the author was in for 10% of a non-existant "Net Profit".

--Dave

[Velorath]

New Line absorbed by Warner.  Massive layoffs, and the departure of Bob Shaye and Michael Lynne expected, as New Line goes back to making lower budget stuff.  What impact this has on The Hobbit is unknown.