Tax Case Against Producer Isn’t What It Seems

When it comes to Hollywood on trial, it’s not unusual for some court cases to get the kind of advance billing and hype reserved for a movie opening. Former Walt Disney Co. studios chief Jeffrey Katzenberg’s upcoming $250-million lawsuit against his old employer for money he claims he’s owed is the latest case in point.

Which is why the United States of America vs. Peter Miles Hoffman is a bit unusual. The criminal tax evasion case against the well-known producer and president of big-budget movie producer Carolco Pictures lurks quietly in the federal courts in Los Angeles, with the trial scheduled to start this morning.

On the surface, the case involves what appears to be mundane allegations such as misreporting income and signing false tax returns stemming from a decision by Hoffman to tap into more than $1 million in deferred compensation he accumulated in a Carolco account in the early 1990s, money that was eventually deducted from the final payments he received after leaving Carolco in December 1991.

Hoffman and his lawyer say the payments were loans, that Hoffman never received W-2 forms from Carolco indicating the payments were considered income and that whatever beef the Internal Revenue Service has over taxes that may be owed should be debated in a civil tax case, not a criminal one. The government alleges that Hoffman received the money via sham borrowings that weren’t loans at all and that Hoffman should have treated the money as if it were income.

*

What’s really going on here, according to sources close to the case, isn’t so much about whether Hoffman improperly tapped into his deferred income or signed a bogus tax return, but more about a time-honored government practice called “flipping.” That’s where the government uses the leverage of a criminal conviction--even over charges that may seem rather technical--to get a defendant to squeal on bigger fish it wants to land.

Government prosecutors won’t comment on the case or their strategies, but in court papers they insist that Hoffman clearly violated tax laws.

*

In this case, the marlins are two of Hollywood’s most flamboyant producers, Andy Vajna, producer of such films as “Evita” and “Die Hard With a Vengeance,” and Mario Kassar, producer of such films as “Terminator 2: Judgment Day” and the “Rambo” series. Both worked with Hoffman at Carolco and are subjects of an intense criminal tax fraud investigation, primarily focusing on whether they used a complex web of offshore companies to improperly avoid taxes. Both Vajna and Kassar are expected to testify in defense of Hoffman, who is vehemently fighting the case and whom sources say has spurned any overtures to cooperate.

“The case against Mr. Hoffman is an effort by the government to criminalize what would ordinarily be handled as a civil dispute over the amount of taxes owed by a taxpayer. We intend to present a compelling defense at trial,” Hoffman’s lawyer, Thomas Pollack, said.

Last year, a filing by the IRS in U.S. Tax Court alleged that Kassar and Vajna owed a combined $109.7 million in back taxes and penalties. While most tax cases are settled before they become public, it’s a safe bet that this is one of, if not the biggest, tax disputes involving Hollywood executives.

Brian O’Neill, Kassar’s lawyer in the criminal tax investigation, said he believes the government is clearly aiming higher, but that the technical nature of the Hoffman charges indicates the cases are growing thin.

“It appears to me what they are aiming to do is pressure Hoffman for purposes of assisting the government in the larger investigation [of Kassar and Vajna] that began two years ago and which does not appear to be bearing fruit. My understanding is that this was a perfectly lawful tax plan,” O’Neill said. Vajna’s criminal defense lawyer, Brad Brian, declined to comment.

Hoffman, a graduate of Yale Law School who once served as a clerk for a federal appeals court judge, was a partner at Los Angeles law firm Irell & Manella, where he specialized in tax law for the entertainment business. He later formed the law firm Gipson, Hoffman & Pancione, where his clients included Kassar and Vajna. They persuaded him to join Carolco in 1986 as president and chief executive.

While at Carolco, Hoffman made an annual salary of $750,000 but also accumulated substantial deferred compensation, a common tax-planning technique used by senior executives at companies.

According to government filings, Hoffman allegedly tapped into the money in two ways: getting Carolco’s accountants to issue him checks as “advances” and loans, deducting the amount from the deferred compensation on the company’s books. The government also suggested that Hoffman had Carolco pay for his car, his wife’s car and the fees of his personal accountant, again deducting the amount from Hoffman’s deferred-compensation account.

In court papers filed last week, Assistant U.S. Attys. Monica Bachner and Patrick Fitzgerald argued that Hoffman “did not intend to repay this money to Carolco and [that] his description of the payments as loans was a sham to justify his receipt of over $1 million in tax-free income.”

Despite the court case, Hoffman continues to arrange movie financing and was active at this year’s Cannes film festival. He has said that the criminal case hasn’t affected his ability to get deals done.

If the prosecution is successful, the bigger question is how big a shiver it will send through Hollywood, where the IRS for some five years now has been specifically auditing and, in nearly all cases, quietly settling tax cases involving Hollywood’s unorthodox accounting and business practices. To some, it’s clear that’s another goal of the case.

“The IRS always considers the public impact on any case, whether civil or criminal, when they undertake them. They always hope to send a message,” said Mitchell R. Miller, a Beverly Hills tax attorney who represents entertainment clients.