Profit Squeeze Leads to Tangle Over Licensing, Tax Credits : TV Networks, Producers Battle Over Fees

As the TV networks and Hollywood producers conclude negotiations over licensing fees for shows returning for the fall season, squabbling has intensified over the networks’ push for producer concessions in the wake of lower inflation and an industry profit squeeze.

Licensing fees--money the networks pay for the right to air a show at least twice--and the tax credits associated with them have developed into a key battleground because rising production costs have made it difficult for producers to recoup their costs after the usual double airings during the television season. Meanwhile, lower television ratings and an advertising slump have put pressure on the networks to protect their bottom line.

B. Donald Grant, president of CBS Entertainment, said some producers came to the negotiating table early this month seeking a 15% to 20% increase in license fees.

He said CBS, which just concluded its negotiations last week, was able to negotiate licensing fees for returning series at about a 5% increase.

“The inflation rate has slowed to 3% to 5% and it is therefore our feeling that increases in license fees should be in sync with the inflation rate of the country,” Grant said. “Producers who haven’t controlled costs shouldn’t be able to pass those costs on to us.”

It costs between $1 million and $1.5 million to produce an hourlong show, more than twice as much as a decade ago. Some pricey shows such as “Miami Vice” reportedly have cost as much as $2 million per episode. The networks typically pay $875,000 in licensing fees for each 60-minute show, according to Broadcasting magazine. That leaves the producer with a deficit of between $125,000 and $625,000.

Until now, producers have accepted that risk, knowing that they could recoup the deficit from foreign sales, videocassette rights, syndication to local television stations and investment tax credits.

In fact, all three networks have talked producers into accepting lower licensing fees on the grounds that the producers were going to receive federal investment tax credits.

But in 1971, NBC sought to amend its tax returns to claim the tax credits for itself. NBC was joined by ABC in 1982. Though both networks were rebuffed by the Internal Revenue Service, they filed suit in U.S. Court of Claims to press their claims. NBC dropped out but ABC pressed ahead.

In response, 13 Hollywood production companies on Feb. 28 filed suit against ABC seeking $1.5 billion in compensatory and punitive damages from the network for its alleged “unfair and unethical” practices in licensing programs.

ABC had no comment on the suit and none of its executives would talk for attribution about the licensing issue.

Investment tax credits are tax breaks available to corporations and taxpayers for, say, buying a new car for business use or purchasing new machinery for a manufacturing plant. They are intended to provide an economic incentive to expand, provide new jobs and otherwise bolster the economy.

Before 1975, rules guiding tax credits for television programs were vague and on occasion both producers and networks claimed them.

But since that year, when Congress amended the tax code in an effort to clarify the issue, producers have been able to claim a credit of 6.66% on the cost of producing a program. That meant a producer could expect to get back $6.60 for every $100 he spent on a show. In practice, however, the actual value of the credit can be twice as much because it is calculated after taxes. Perhaps $100 million annually in credits is at stake in the producers’ dispute with ABC.

Thus the credits can make quite a substantial difference on the balance sheets of who ever gets to claim them.

“The person that can claims the credit is the person that owns a part of the film or show--the person who has the investment risk,” said Scott Racine, a Los Angeles tax attorney. “On a pure equity basis, the networks, who supply the financing for the programs (through the licensing fees they pay producers) would seem to be entitled to the credit.”

However, Stuart Robinowitz, a New York lawyer who represents the producers said: “Congress passed the tax credits to give an incentive to take risks. It is inconceivable that Congress would have thought it necessary to give a tax break to networks over the creative community. You don’t have to give oligopolists like the networks a tax incentive.”

Barney Rosenzweig, executive producer of CBS’ “Cagney & Lacey” series, said the investment tax credit “makes a difference between whether I’m in business or not in business.”

But earlier this TV season, Rosenzweig made six episodes of a one-hour series for ABC called “Fortune Dane.” He said that his per-episode deficit was almost $300,000, only partially covered by the $500,000-to-$600,000 investment tax credit that he took on the program.

Rosenzweig said he figures the tax credit into production budgets when making programs and, like other producers, has come to rely on it in much the same way that real estate investors rely on their depreciation allowance.

In deference to such complaints, NBC orally agreed to drop its tax credit claims saying, “this action will remove a source of contention between NBC and its suppliers and testifies to the sincerity of our effort to improve relationships between the two industries.”

Times staff writer David Crook contributed to this story.