Fallout From Tax Reform : TV Firms Shifting Production of Shows to Canada

The entertainment industry, like every other business sector, has been girding for tax reform for nearly a year. Deals have been timed to take advantage of the anticipated changes in the tax code, and prominent actors such as Charlton Heston lobbied successfully for tax breaks for struggling actors.

But the most sweeping changes may show up on the television screen. Producers who are losing the investment tax credit are under new pressure to reduce their costs, and the result may be fewer high-action, high-expense TV dramas.

The loss of the investment tax credit may also signal the flight of some production to foreign countries. Already, some major television producers have shifted the filming of some series to Canada to take advantage of the exchange rate and lower union costs.

Saving $250,000 a Week in Canada

Stephen J. Cannell Productions, one of the most successful producers of hourlong TV action series, has shifted production of its “Stingray” series from Southern California to Calgary, Alberta.

The reason is “purely economic. We didn’t go there to get a different ‘look’ or anything,” says Michael Dubelko, executive vice president and chief operating officer of the Hollywood firm. “We’re saving $250,000 every single week, and we figured we’re losing the ITC anyway.”

Similarly, Orion Television is producing its new prime-time series “Kay O’Brien” in Toronto.

“The basic reason is economic,” said Richard M. Rosenbloom, president of the TV unit, noting that “some of the major studios have backed away from doing the big action series” for cost-conscious reasons.

For the past decade, the investment tax credit has enabled producers to deduct 6% of the cost of most films and TV shows from their federal tax bills. For many independent producers, the tax break cushioned the difficult early years of a new production company. Even if a producer sold a successful TV series, network license fees did not fully cover production costs. Typically, a producer gets no income from a series until its reruns begin airing off-network.

Networks Increased Fees Only 10%

At Cannell Productions, Dubelko says it would be almost impossible for an individual to launch a TV production company as Cannell did in 1979. Dubelko contends that production costs have jumped 50% to 60% since the early 1980s, yet networks have increased their fees just 10% to about $800,000 per hour episode. By shooting “Stingray” in Canada, he says, “we’re still losing about $200,00 a week, but it’s better than losing $400,000 to $500,000 a week.”

Francis T. Vincent Jr., chairman of Columbia Pictures Industries, also marvels at the changes that have occurred in the television production business in his nine-year tenure.

“Capital is now a major requirement, whereas 10 years ago, the license fee really covered the cost of production,” he says.

George Smith, MCA’s general tax counsel, predicts that without the investment tax credit, “producers are going to have to pass additional costs on through to the networks.”

Neither CBS nor ABC executives were available for comment. And, through a spokesman, NBC Executive Vice President John Agoglia said he did not want to discuss the effect of the tax bill until it is finalized.

But the networks are almost certain to resist the producers’ arguments for significantly higher fees. Networks have not been able to command the increases in advertising rates that they initially sought for the fall season, and both CBS and ABC have revised their 1986 revenue projections downward.

“I think the country will readdress the need for an ITC in a couple of years,” said MCA’s Smith, noting that since the first ITC was introduced in 1962, lawmakers “have taken it out twice, in 1967 and 1969.” Each time, the device was reinstituted “because they saw capital formation in the country slipping.”

Despite the compromises struck last weekend, a number of entertainment accountants and lawyers caution that “transition” rules affecting the industry have not yet been finalized. The most significant are the rules determining how long producers can claim the ITC.

Disney Lobbied for Additional Rule

Judging from the rules drafted by both the House and Senate, however, the industry generally expects that it will be allowed to claim the ITC for motion picture or television films if they had a written agreement prior to Jan. 1, 1986, and can place it “in service” within three years.

Walt Disney Co., anxious to retain the ITC for films that it promised to produce for a limited partnership called Silver Screen II, helped lobby for an additional transitional rule. That rule would allow the ITC for films if the funding was obtained through a public offering before Sept. 26, 1985, and distribution agreements were in place.

Like their counterparts in other industries, producers say they welcome the lowered tax rate, but they mourn the staggered introduction.

“They do away with the goodies on Day One, and they don’t lower the rate until later,” MCA’s Smith said.

Norman Marcus, an Ernst & Whinney tax partner who specializes in entertainment, doubts that tax reform will be a boon for many Hollywood stars or moguls.

“Winners are big income earners who have not been heavily into tax shelters and who have not had substantial investment tax credits flowing to them because of . . . their production companies,” he said.

Are there many such potential winners in Hollywood, where seemingly every performer formed his own company and invested in a myriad of ventures?

Marcus said: “There were a few in this town.”