Cinematic Shelter

Bankrolling movies has long been considered a risky investment, and indeed it is. Nonetheless, a growing number of wealthy investors who seldom if ever come near a set or meet a star are pumping money into movie production, seeking not only glamour but write-offs that will reduce the taxes on their other income. Since 1973, a rising amount of tax-shelter money has been funneled into movie production by non-Holly-woodians who earn $125,000 to $200,000 a year--especially doctors. By some estimates, the flow could reach $1 billion in 1976. Tax-shelter money now at least partly finances the production of more than half of all the films shown in the U.S., including such recent big-name flicks as Shampoo, Chinatown, Breakout and The Great Gatsby.

Tax Pitfalls. Movie tax shelters usually work this way: an investment "packager" forms a partnership of people who put up in cash 25% of the cost of a film. The packager obtains a bank loan for the remaining 75%--a "nonrecourse" loan that will be repaid only if the film makes money. The packager then buys an already completed movie for the partnership.

If an investor puts up $25,000 in cash, his share of the loan will be about $75,000, and the total cost of the movie to him will be figured for tax purposes at $100,000. He gets three tax breaks: 1) he can deduct interest on his $75,000 share of the loan; 2) in the first year, he can take two-thirds of the 10% investment tax credit on his $100,000 share of the movie's cost; 3) most important, he can take a depreciation write-off on the whole $100,000--80% of it in the first 18 months. For $25,000 in cash, the investor can get write-offs that in the first year virtually wipe out the taxes on $75,000 to $100,000 of his nonmovie income.

Lucrative as such deals are, they have pitfalls, which not all packagers explain to their clients. If the movie is a disaster and the partnership cannot repay its bank loan, then part of the tax deductions go to the bank rather than the investors--who will be billed for back taxes, plus interest. Oddly enough, if the movie is a gargantuan hit that brings in profits for years, the investor may be even worse off. Since he has taken most of his tax write-offs in the first year or two, his share of the profits in later years will be taxable. Added to his nonmovie income, those profits can lift him from the 50% into the 70% tax bracket.

There is a possibility too that congressional tax reformers will end the bonanza. A bill that would have erased most of the tax advantages of investing in movies passed the House last year. It is pending before the Senate Finance Committee and a new attempt to muster votes for it probably will be made in 1976. Columbia Pictures Industries, Inc. Vice President Burton R. Marcus concedes that the current law has bred abuses that "constitute a rip-off and ought to be eliminated." Like other motion-picture executives, however, he is afraid that Congress may enact legislation that would damage the industry's ability to obtain conventional outside financing.

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