Independent Income

All Hollywood last week seemed to have a rendezvous with the U.S. Government. In Manhattan the Department of Justice suit against the major studios, to divorce producers from control of theaters, was in its third week. On the West Coast, the Bureau of Internal Revenue was sniffing at the heels of the independent producers, who seemed to be getting too much money through a loophole in the Revenue Code. Variety predicted that the outcome might well be no suits to recover more than $30,000,000 in back taxes.

The two actions were peas out of the same pod. For years the major studios, by controlling distribution, had been able to force exhibitors to take four or five grade B pictures for one star-studded hit.

To many a Hollywood artist, this situation was intolerable: they wanted to make better pictures. Led by such stalwarts as Nunnally Johnson, Fox's highest paid writer ($3,500 a week), the gilded slaves quit, to start their own personal corporations.

Virtue's Reward. But artistic integrity had more than its own reward. By going independent--and by an artistic use of the capital gains tax--they could also make money fabulous even for Hollywood. A corporation can hold its picture for six months, then sell it and call the profit a capital gain, taxable at 25% instead of 85-95%, the top tax on ordinary income. A producer can either 1) sell his interest as a stockholder in the corporation; or 2) dissolve the company that made the picture. An example: Independent Producer Lester Cowan, who made Story of G.I. Joe and Tomorrow the World, sold his interest as a stockholder at a net profit of $1,000,000. By paying only a 25% capital-gains tax, he pocketed $750,000 as compared to the mere $100,000 he would have had if he had paid an income tax.

Actor Gary Cooper formed Cinema Artists Corp. and made Along Came Jones. Then he dissolved Cinema Artists --and stands to make at least $40,000 after paying the capital-gains tax. If he had made a picture for a major studio, he would have been paid a salary of $175,000, and then paid out most of it in taxes.

Plug the Hole? Just who discovered this corporation fade-out is a mystery.

But Sam ("Include me out") Goldwyn is given the credit. It has worked out so well that actors and producers, all trying bravely to look like frustrated artists, have formed more than 100 independent companies. Newest comers: Burgess Meredith and his wife, Paulette Goddard, who have incorporated (with Benedict Bogeaus) as Camden Productions to make Diary of a Chambermaid.

Even if the U.S. Treasury plugs the capital-gains tax hole (and it may take an act of Congress), the harm will have been done--to the majors. The independents have learned how to make more money alone, by avoiding the tremendous overhead of big studio plants and top-heavy platoons of executives. Example: Actor James Cagney and his brother Bill have made as much on two independent pictures, even by paying corporation income taxes, as they made on six pictures at Warner Bros.

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