Hollywood Tax Epic Ending Quietly

After nearly 14 years, the credits are finally quietly rolling on one of Hollywood’s largest, longest and most bitterly fought tax disputes.

Winding down is an Internal Revenue Service probe into the byzantine financing structures and liberal executive loan practices used by defunct big-budget filmmaker Carolco Pictures, maker of such hits as “Terminator 2: Judgment Day,” “Total Recall,” the “Rambo” series and “Basic Instinct.”

That investigation started with company audits as far back as 1988, eventually extending to the personal tax returns of two of Hollywood’s most flamboyant producers, former Carolco principals Mario Kassar and Andy Vajna.

Although the case still hasn’t completely wrapped yet, documents filed so far in U.S. Tax Court suggest it’s ending with a whimper for the government. At one point in 1996, the IRS was seeking $109.7 million in back taxes and penalties from the two men--$68.6 million from Kassar and $41.1 million from Vajna--with both men the subjects of a criminal investigation by federal authorities.

According to recent U.S. Tax Court documents, Vajna has agreed to pay more than $6.5 million in back taxes but no penalties. His tax lawyer, Ronald L. Blanc, says the case is now history.

Kassar’s lawyer, Steven Toscher, confirmed only that “we’re working toward a resolution” with authorities before Kassar’s appeal is scheduled to be heard in court in May. IRS officials won’t comment, citing agency policies prohibiting the revealing of details on individual cases.

Also dying is the criminal probe, with lawyers for both men saying authorities have pulled the plug. Thom Mrozak, a spokesman for the U.S. attorney’s office in Los Angeles, wouldn’t comment directly on the case but said the government won’t dispute that the investigation is closed.

Kassar and Vajna were partners until Vajna left Carolco in 1989. Carolco filed for bankruptcy protection in 1995, eventually liquidating. Vajna then formed Cinergi Pictures, which also is defunct.

The two have since reunited as partners in C2 Productions, announcing earlier this month that their long-awaited Arnold Schwarzenegger sequel “Terminator 3: The Rise of the Machines” is finally on track, with Warner Bros. planning to distribute the film in summer 2003.

The voluminous and convoluted tax case centered on such things as income earned by Kassar and Vajna from a web of offshore companies with ties to the two men and their relatives, and loans and company-paid expenses the IRS argued were really income.

In the case of Kassar, the IRS contended loans used for art, real estate and, in one case, to pay gambling losses, were income, according to court records. The IRS also alleged that such compensation as $410,732 spent to improve security at Kassar’s home after Carolco board member Jose Menendez and his wife, Kitty, were slain also should have been reported as income.

In Vajna’s case, the IRS argued that $11 million in loans was income.

But the investigation had the wind knocked out of it when federal authorities failed in 1997 to convict former Carolco executive and veteran film financier Peter Hoffman on four felony tax fraud charges. Hoffman’s lawyers successfully fought the case, with a federal jury acquitting Hoffman of two counts and deadlocking on the other two.

Hoffman eventually settled the case by pleading guilty to one misdemeanor charge of sending a false tax return to the IRS, paying a $5,000 fine with no agreement to cooperate in the investigation of Kassar and Vajna, which the government badly wanted from him. A federal judge even rebuked the government sharply, saying Hoffman “suffered more than an individual should over a tax dispute” and called the prosecution “misguided and doomed.”

The case against the two men was part of a larger, sweeping tax probe the IRS launched a decade ago that had Hollywood sweating. Forming a special entertainment task force, the agency publicly put the industry on notice that it would look at some of its fast and loose practices, from unorthodox financing schemes used by companies such as Carolco to the widespread use of personal corporations to write off seemingly frivolous expenses such as workouts and masseuses.

Because most audits are private until a taxpayer appeals, it’s impossible to gauge exactly how successful the IRS crusade has been because most cases are settled before they hit that stage. Just a few celebrities, among them actor John Travolta and singer Stevie Nicks, ever appealed. But according to tax lawyers, the kind of nervous frenzy the probe created is long over.

“It really disappeared off the face of the Earth,” said entertainment tax lawyer Mitch Miller.