End of a Honeymoon

The news that Hollywood's harassed major studios had prayed for--and which Hollywood's fast-growing independent producers had dreaded--came last week. It was in the form of a letter from the Commissioner of Internal Revenue to a money-making independent (his name was withheld). The letter said, in effect, that the "collapsible corporation," which had lined the pockets of Hollywood's independent producers and free-lance actors, was out.

It was an illegal tax dodge, said Internal Revenue.

The collapsible corporation, supposedly invented by Sam Goldwyn, had looked like a shrewd device to get around sky high taxes. A producer simply set up a corporation, made a picture and either sold it to a major studio at a fat profit or made the profits by arranging for distribution himself. Profits in pocket, he then dissolved the corporation. Instead of paying income taxes, which ran up to 90%, the producer paid only a capital gains tax of 25% (TIME, Nov. 5, 1945). Result: independent producers had sprouted so fast that by last week, when the blow fell, almost half of all Hollywood pictures were being made by independents.

Those which had used collapsible corporations, said Internal Revenue, must pay income and not capital gains taxes. If this ruling sticks, Hollywood guessed that independents might have to pay up as much as $50,000,000 in back taxes for the last three years (Goldwyn alone might be tapped for $10,000,000).

This was a fair estimate of the golden lure that had led so many high-salaried (and high-taxed) stars--e.g., Gary Cooper, Paulette Goddard, Bing Crosby--into the ranks of the independents.

Few had baited the hook with capital gains more skillfully than bald, smart Charlie Einfeld, onetime exploitation "genius" at Warner Brothers. In less than six months he had formed Enterprise Productions, signed up enough big name stars for six super epics. Typical was his deal to make Eric Remarque's Arch of Triumph. He landed Actress Ingrid Bergman with a promise of $175,000 in salary, plus half the profits; he promised Remarque 15% of the profits, Director Lewis Milestone and Producer Davis Lewis 10% each.

Most independents would be affected. Many of the deals which the major studios had made with their stars, permitting "outside" independent productions on their own lots, were suspect. It would probably make little difference to Internal Revenue that majors had virtually been forced into these deals--1) to keep their stars, and 2) to get good pictures for distribution.

For example Hal Wallis, onetime production boss at Warner Brothers, had made a deal to use Paramount's studio facilities for his independent productions, and sold Paramount some stock. Hal Wallis did not collapse his corporations after every picture. But some of those set up by Leo Spitz, of International Pictures, Inc., (which grossed $24,000,000 on its first six productions) were suspect.

For the fly-by-night independents as a group, the honeymoon was over. From now on, it looked as though they would operate under the same tax laws as the major studios, or not at all.

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