Not an American so a bit unsure, why does voluntarily choosing to destroy this IP create a tax advantage? If this is not the intended behaviour, why does the IRS not come out and say ‘we will not accept this loss, please revise your return’?
Could they not do the same if they donated it to the Library of Congress? They did intend to make a profit, but they are now destroying the value of the copyright by donating to the public domain due to updated market information.
Possibly, however, these are the same kinds of people who supported copyright length becoming 100 years. To them the public domain is a threat on their billions of dollars.
There is some value in not having a "Coyote vs. Acme" film released this year (either by Netflix or the Library of Congress) because they could try to make a profitable version soon but people may not give a new version a fair chance if a really bad version was released recently.
If they want to delay release to wait for better market conditions, absolutely understandable. But if they’re just going to destroy culture out of tax code mechanics, doesn’t hurt to be noisy. At least give it a chance to be preserved with some sort of arrangement.
What I mean is this movie is so bad it will ruin it for the next "Coyote" movie, so they don't want anyone to see this movie. Maybe the only compromise that works is to put it in a time capsule and not open it for 100 years.
I’d have expected you would need to demonstrate an attempt to generate income from an asset before the government would effectively give you a write off of the whole value. Anyway, thanks, hadn’t thought of it that way.
This is not a problem if you are still making a profit and not an obvious tax shelter. After all, how would the IRS know which business expenses are intended to make a profit vs investments that didn’t pan out? There is obviously room for abuse there but it is for company ownership to deal with not the government.
By this logic isn't it still better to make whatever profit they can by releasing it? Yes they would increase their net income (and thus tax burden), but they should still end up ahead (it's not like they're paying >100% marginal tax rate on those dollars). It must be more complicated somehow, right?
It's slightly more complicated than that due to accruals/amortization. Suppose you started making a movie in January and released in in January the next year. The movie cost $1M to make. For accounting reasons you can't claim that in the first year you took a loss of $1M. Sure, that's what your bank statement says, but at the same time you're spending the money, you're also building up a movie, which has value. So your balance sheet would show you losing money from all the expenses in making a movie, but also gaining value from the movie being produced. If you expect the movie be worth more than $1M, your balance sheet might even show you turning a profit in year 1. If in year 2 you decide to shred it, you're technically not deducting the expenses paid into the movie, you're deducting the value of the movie on the balance sheet, built up from the previous year.
They haven’t paid for marketing yet, which can be a significant portion of a film’s budget (like half). You’re taking risk and at least fronting money, so a small win of taking the loss (expenses with no revenue) may look better to finance.
It almost always has to do with the details of EBITDA [1], in this case depreciations/writeoffs and amortized costs, especially if/when a bunch of funding may have been subsidized by governments along with healthy tax breaks [2].
EBITDA is nonsensical and it makes my brain implode when I realize how many investors utilize the metric. My brain turns into a black hole when I realize how many companies use it as an internal metric!
>EBITDA is nonsensical and it makes my brain implode when I realize how many investors utilize the metric
From wikipedia:
"EBITDA is widely used when assessing the performance of a company. EBITDA is useful to assess the underlying profitability of the operating businesses alone, i.e. how much profit the business generates by providing the services, selling the goods etc. in the given time period. "
There's plenty of ways that EBITDA can be misleading, but so can net income. Same goes with other statistics like the unemployment rate or GDP. They have flaws, but that doesn't mean they're "nonsensical and it makes [your] brain implode"
Yeah. It's a useful statistic in certain limited applications, but that is NOT how it's employed. It's grossly overused. Ignoring amortization and depreciation is like ignoring salaries, and the overuse of EBITDA can be directly traced to chronic and pathological underfunding of maintenance and supportability.
A good red flag for a statistic is when you see a couple dozen variants of the statistic being used interchangeably. Often at each All Hands Meeting. Oh, this month they're using EBITDA. Next month we're talking up EBITDAR. Who knows what the Overlords will be talking up four months from now? Something that makes the line go up, doubtless. Hopefully no one notices that barring buybacks, EPS has dropped under the table like a soused homecoming queen.
Amortization is incredibly important in a software company. Most software is going to be basically useless in 10 years time. Your company's Android app? There might not even be smartphones in 10 years.
And for something as complex as making software it papers over almost any meaningful understanding of how well a firm is operated.
That's what I mean about my head turning into a black hole. Management using such metrics internally is basically saying that they don't give a rat's ass about how much anything really costs.
As we've seen over the last year and a half, the chicken's come home to roost at some point. Rosy pictures are ripped to shreds by the actual cash flows.
Financial accounting is about where you've been for the last three months. Managerial accounting is about where you're going in the next three years. Our industry is firmly set on driving while only looking out the rearview mirror. I expect this to be changing rapidly at most software firms.
EBITDA says something about the profitability of the company's current offerings if all the corporate bullshit were amortized over time. It's a useful lens if you have a wildly profitable offering that doesn't look like it in a given accounting regime (Amazon for 10-20 yrs, intentionally), and it's a deceptive ploy to part investors from their money in other contexts.
No metric is perfect; in addition to asking how well a company meets a metric, take the time to ask what "meeting that metric" might mean and how that relates to your goals.
>especially if/when a bunch of funding may have been subsidized by governments along with healthy tax breaks [2].
Does it matter? Realistically speaking the state only cares about the jobs that are created. Whether the movie is destroyed or not, the jobs have been created regardless. There's arguably the aspect of [famous movie] was made shot/produced/edited in [state], but I doubt many people care about where an animated comedy is produced.
It's related to a 1979 IRS case that says you have to destroy unsellable merchandise before you can write it off as a loss. This is why a lot of paperback books get shredded instead of sitting on a backlist.
https://en.wikipedia.org/wiki/Thor_Power_Tool_Co._v._Commiss...
This movie is IP, not a physical thing. Which leads to my question: suppose someone does leak it and the studio “destroys” it. Then the studio sues for copyright infringement and wins. Did they just commit retroactive tax fraud?
I hope so; the dump site will surely be found, and the movie will be rescued. I'm reminded of someone digging up a trove of ET cartridges for the Atari 2600 from the dump where they were disposed of.
That's not how fraud works and that's not what the IRS is trying to do
Fraud: you have to knowingly misrepresent your position aka lie about something. Making a mistake on your taxes is not fraud (source - I am a US citizen and have received letters from the IRS for making a mistake). It is definitely not fraud to be caught in unexpected IP theft.
IRS: they are not trying to get people in "gotcha" situations. They just want to collect the fair amount of revenue that people owe the federal govt and their punishment is proportional.
It's not absurd though. It actually works. Is it suboptimal and a bit confusing at times? sure. But man these internet people sure are watering down the meaning of the word "absurd".
It's like a tax lawyer saying that computer programming is "absurd". No sir, computer programming is based on sound principles of mathematics and linguistics.
The hypothetical that GP comment posed demonstrated that they didn't understand how tax collection and the IRS works.
That is a phrase that doesn't mean much when it comes to tax legislation. The only consensus position people have ever managed to come to consistently on taxes is "someone else should be paying".
The tax office has to enforce the law as written. It isn't reasonable for the IRS to start making policy decisions like that [0] - it'd lead to the absolute worst form of central planning. Tax agents are not competent actors to assess whether IP policy objectives are being achieved. Any discretionary power given to the tax office is an open invite for corruption. Rest assured that if people can get out of their taxes by inviting tax assessors to dinner they're going to be quite plump.
[0] They can probably get away with it in the most obvious cases, but this doesn't sound like one of them.
> Any discretionary power given to the tax office is an open invite for corruption.
As opposed to the corruption, hollywood accounting, and tax dodging that goes on currently? A little bit of sanity in the system to close up loopholes and prevent tax avoidance seems like the ideal situation. What we have now is clearly broken. It should never be profitable to just burn money for a tax credit. I don't even see why it would need to be discretionary, it could be a fairly simple rule change to forbid exactly this kind of practice.
That doesn't seem entirely unreasonable since our government is explicitly supposed to work for the people while corporations should be expected to do everything and anything they can to exploit us if doing so will make them more money. It's for that reason companies will always need to be constrained by strong laws and regulations with teeth.
When the government screws us over it's a betrayal. When a corporation screws us over that's just what they do (and a sign that we need stronger protections against whatever they just did)
> why does the IRS not come out and say ‘we will not accept this loss, please revise your return’?
Because the company never earned any money from the movie. The whole notion of a "tax write-off" is misunderstood, in part because journalists mention it casually and inaccurately. The company isn't "making" money by not doing anything with the movie. They are just taking the deductions attendant to creating the film, but then not bringing in any revenue along with it. If you lose money, you get to save on taxes.
In rare circumstances, it can be advantageous to make slightly less money so that you don't trigger some tax disadvantage (e.g., phase-out of some benefit). But in general, it's better to make more money and pay taxes on it than to not make money at all. From reading the articles linked here, it seems like what happened was that there's a new executive team, and they decided not to release a film that was green-lit by the previous executives. Not really about taxes at all, IMO (I am a former tax lawyer, FWIW).
I had a small business in Germany which I never managed to get off the ground and turned a loss three years in a row.
And every year I would do a tax return saying “hey, this is what I spent, this is what I earned” and every year they would give back to me about a quarter of what I was in the negative with.
I always saw this as a “hey we’re in it together, thanks for trying” and motivated me to try harder or try again
TL;DR- the studio is able to make a convincing case (and the IRS have a very low standard for making this case) that they had a for-profit motive for making this movie, therefore the expense of making it was a "business expense". If they never had intended to make a profit on it, then it would constitute a "hobby loss", i.e. the same kind of "loss" you incur when you spend money on a hobby, and the studio would not be granted a write-off on such a hobby loss.
This, plus (as another commenter mentioned) the fact that about half a movie's expenses come as a result of promotional / marketing activities (performed after the production expenses have already been incurred), mean the studio likely thought that releasing the movie would cost more than it would be worth.
Movie is created, but not marketed. The whole tax break thing is way over blown. It changes the numbers slightly, but doesn’t help them come out ahead of never having made this.
Using made up (but plausible numbers):
Movie costs $100m to make. Plus $100m to market. You predict it will only make $120m.
You haven’t spent that marketing money yet, so you have two options:
* Throw the movie out, with the $100m it cost to make. A percentage of that reduces your taxable income by making you have less profit from your good movies. You loose $80m.
* You take it to market. You have to do at least some sort of marketing, otherwise it will be a complete flop. You blow another $100m. Make $120m. You still loose $80m, but you tied up your capital for months and risked loosing it all if this actually went bust.
Therefore, you choose option 1. It cuts the losses and allows you to immediately start on something else.
——-
People love to throw around write offs like companies somehow make a profit off of a loss. In reality, a write off is only partially reducing a loss. It’s still a loss.
You left out the case where Netflix, Amazon and Paramount offer maybe $40m to buy it from them and they decline because they'd rather get the tax write off.
That's the broken part.
"Here's tens of millions of dollars for this project you're about to toss."
"No I'd rather destroy it and get paid tens of millions from the govt instead".
I don't get why we couldn't, as an example, get together and offer to buy the property for some non-token amount of money. Say I raise a million bucks to buy this film and submit formal outreach.
Can they still write it off as a loss? If there is a buyer standing by? This loophole is bizarre to reason about. Shouldn't you have to prove that something is worthless?
As I understand it, there is no loophole here. They’re not getting any discount on their taxes for writing it off.
They’re just not going to make any money to be taxed on. If you paid them $1m for it, they’d have to pay tax on that million. And that’s all they’re trying to avoid.
Personally I wager the film doesn’t actually exist and was a way to launder money out of the company. If all they wanted to do was use the expenses of the movie as expenses write-offs while not making any money it makes far more sense to leverage it in other ways, such as showing it for free.
> They’re just not going to make any money to be taxed on. If you paid them $1m for it, they’d have to pay tax on that million. And that’s all they’re trying to avoid.
That doesn't sound like a reasonable explanation. Yes they would have to pay tax, but they would still be left with majority of it.
From my understanding, taxes are not in any way a judgement of how you conduct your business. The IRS can't have an opinion on the fact that throwing away this movie makes absolutely no business sense.
It's a property of the company that legally made expenditures to produce it. If the company decides to trash it, it could be the stupidest business move ever, but as long as the expenses filings are legal and proven, the books are fine.
It's not even a loophole, really.
So, in the end, it's not about the system. It's just about how bad it gets when a creative company is run by soulless Excel people.
So, in the end, it’s not about the tax system, but about the market system and how it prioritizes soulless short term gains and monopolizing (while paying off governments to avoid anti-monopoly laws) rather than creativity and long term growth?
They aren’t turning it into any more of a write off than it was before. It’s only the expenses being written off, which are ALWAYS written off because that's how business tax law works. So as long as it’s a business expense and not a hobby loss then it’s essentially no different than them releasing it and no one watching it.
Personally I believe any and all projects that fail to enter the marketplace should be given to the public domain instead, however I am also of the “extreme” notion that copyright should exist for only around 10 years.
But they don't have losses. They have expenses. They converted dollars into an asset, the movie.
Just because you spend $1 million to build a factory doesn't mean you get to run to the IRS and claim $1 million in losses. You still own the factory. Its up to you to run it to get your investment back.
If a disaster destroys the factory, it can be a writeoff. But yeah, you can't claim an intact factory as a loss and continue to use it as an asset.
Warner Brothers has made the business decision that the movie is not valuable. Releasing a bad product can do harm to a business, so the movie isn't an asset that can automatically be assumed to have positive value.
And there is a cost to releasing a movie, even if minimally marketed, there's opportunity cost if nothing else to getting it out the door.
Right or wrong, it's their decision to make that their investment has more value as a writeoff. They just can't write it off and then change their mind and decide to release it next year. (Unless they amend the return that declared it a writeoff.)
The IRS would definitely investigate fraud if that was suspected.
But this is a pure judgment call. The IRS will only be concerned that they don't use the movie as an asset, it's not their place to take a position on the business strategy. Tax laws can be pretty friendly to businesses. Whether we like it or not.
>Just because you spend $1 million to build a factory doesn't mean you get to run to the IRS and claim $1 million in losses. You still own the factory.
Right, that's why they're destroying it so it's not sitting on their balance sheet, and can claim it as a loss.
> Why do they get to instantly claim it as a loss with no proof?
Is your concern that they claim they destroyed the movie, but really kept a backup somewhere?
>Can I just destroy the factory on a whim and then write it off too?
I don't see why not. It's not any different than companies destroying inventory and claiming a write-off. The supreme court even affirmed it. See sibling comment:
When your house burns down, you get to tell your insurance that you suffered a loss.
When you burn your own house down, you don't.
I can only assume that WB's lawyers know things and there must be technicalitioes and discrepencies such that you CAN effectively do that with the IRS even though your would go to jail for trying that with insurance.
But in a sane world...they're burning their own asset, and they should be legally allowed to do that, but just not claim it as any sort of misfortune to any party, private insurance or public taxes.
> When your house burns down, you get to tell your insurance that you suffered a loss.
>When you burn your own house down, you don't.
That's not how it works at all. The reason why you can't collect your insurance policy when you burn your house down is because it specifically says it doesn't pay out if you intentionally set it on fire. No such clause exists for the tax system. Companies destroy inventory all the time to get write-offs on them.
Exactly. And rightfully so! The tax system can't be opinionated, or it would be extremely legally unstable. Unfortunately, for this reason, it's also a system that can't bake in any level of morality on the way legal tax loopholes are exploited, even when there's a clear moral downside in burning an asset that's the byproduct of intellect.
They’re not claiming insurance though. The question you should ask is whether burning your own house down is considered a loss on your tax returns? I don’t see why not.
They made a token attempt to sell it, but then rejected reasonable offers from Netflix, Amazon, and Paramount which were likely north of 40 million dollars at least.
The writeoff is reported to be $35-40m. Which I believe means that selling the film for $40m would be a big loss because that's taxable income whereas the writeoff is a straight up $40m net gain.
So they might need a $70-80m offer for it to be worthwhile.
a $35-40M write-off doesn't mean you save $35-40M in taxes. It means you don't have to pay taxes on $35-40M worth of income. If the corporate tax rate is 30%, you're only really saving $12M.
Doesn’t the write off just reduce your taxable earnings by $40million? Are you saying that their tax bill will actually go down by that much instead of some fraction of it?
The actual budget of the movie was higher than $40m. This is just the number that's been reported as the net value of the writeoff. But I have no real info, it's possible this has been reported vaguely, incorrectly, or based on rumor.
Sorry I was asking about how taxes worked. Your comment made it sound like they can subtract $40million off of their tax bill because they lost that much to this movie but maybe you didn't mean that. I imagine the write off means their revenue is considered to be $40 million less and so they're taxes on a lower number, meaning selling a movie for $40million could still be worth it.
IANAL, but the way this works, to my understanding, is basically that you turned a pile of money into an asset worth that pile of money, which in theory may slowly lose value over time, so they can either pull more out of the pile of money to promote/release/etc it and then maybe that will make it back and then some, or they can just justify writing the value off to 0 instantly by saying it was worthless and wouldn't sell, and then they can eat some taxes that would have been assessed against some other profitable venture.
So even if they released it for free with no ads tomorrow, it would not become worth $0 by doing that, even if they're not paying anything to release it, so they don't get the tax break, I think.
In theory, them selling the thing for $1M when it's worth $70M on paper should be a $69M loss to write off, but it's possible the burden of proving the value pre-sale changes given that someone was willing to buy it for that little?
Also ofc then you're paying taxes on that $1M sale or w/e, versus just the full writeoff.
An interesting question is, would Warner Bros attempt to sue a leaker and claim damages, if by definition a written-off movie has no value (and thus no revenue potential to claim damages against)?
Doesn't copyright apply the moment of release? Since it's not released, it's not copyrighted. The rest would indeed apply, of course, but I'm not sure about copyright.
No. In the US, at least, copyright law applies as soon as an author fixes the work in a tangible form of expression.
Per the Copyright Office[1]:
A work is fixed when it is captured (either by or under the authority of an author) in a sufficiently permanent medium such that the work can be perceived, reproduced, or communicated for more than a short time. For example, a work is fixed when you write it down or record it.
Do you own your trash after you throw it away? I think it could be argued that trashing something means you're giving up your ownership rights.
It sounds like the ideal solution would be to shore up the tax law to prevent this situation in the first place, but if that's not possible and it will continue to be profitable to create art just to trash it then the works should at least be released to the public domain so that we're not losing the art.
In a similar story that’s the center point of the lost Doctor Who episodes case.
BBC literally throw away the reels > workers saved them from thrash > BBC now looking for the lost episodes, everyone knows who has them but they are reluctant to give it back in fear of prosecution (BBC can’t grant
clemency)
X Mutants eventually came out and it was crap. “Rare for a reason” applies to a lot of collectible things. Perhaps we adopt it to “unreleased for a reason.”
They should just do what they did with Pantheon. Release it only in NZ. The revenue will still be close enough to zero for the write off & the rest of the world can pirate it.
For the handful of people here in the comments doubting that the movie was made or it was some sort of scam, here is a copy of the crew reel from the filming in New Mexico (that WB has since been trying to copyright strike on every platform)
People (including the journalists who wrote this article and the ones it links to) seem to misunderstand how "tax write-offs" work. For example, the article linked to by TFA says:
> But Warner Bros., which stood to make $35 – $40 million on the tax write-down, wanted something in the ballpark of $75 – $80 million from a buyer.
In order to make $35-40 million on a tax write-down, the deduction itself would have to be a multiple of this figure. WB's effective tax rate is 17%, which means that the deduction would have to be more than 5X the amount they would "make" from the tax write-down. But that isn't what the movie cost, according to estimates.
If you read TFA and the linked articles, you can see that this movie was green-lit by a prior executive team. The reason it is getting trashed is probably because the new executives don't want to put it out there and potentially take the flak for it (if it's not good). There may also be financial account issues at play. For example, if you trash the movie you can blame your predecessors and call it a one-time cost. OTOH if you release the movie and it underwhelms, then the bad performance sticks with you for a while.
FWIW, I was a tax lawyer before I turned to entrepreneurship. I don't know all the ins and outs of entertainment law/taxation (there are a lot of credits that local jurisdictions offer to woo studios to film there), so it's possible I'm missing something here. But these articles read like so many pieces I've read, that are written by folks who don't understand the difference between a deduction and a credit.
People seem to think that the government simply gives you money for things you decide to “write off”. They completely fail to understand how companies end up with a tax burden (essentially by making money) and these write offs can only reduce the amount owed.
It’s really not much different than the “standard deduction “ most people take on their taxes. It reduces your tax burden, but you have to have income to have a tax burden.
If it is destroyed without anyone seeing it, how does the IRS verify that it was indeed a loss? Couldn’t a studio lie about making a film, then simply say they destroyed it?
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[ 3.1 ms ] story [ 184 ms ] threadThey presumably value that option more than whatever Netflix et al. offered.https://www.theverge.com/2024/2/9/24067496/coyote-vs-acme-am...
The writeoff is apparently immediate--they will book the writedown this quarter. Revenue, however, will stretch out across a couple of quarters.
So, the accountants are making this quarter look better at the cost of future quarters looking worse.
1: https://en.wikipedia.org/wiki/Earnings_before_interest,_taxe...
2: https://en.wikipedia.org/wiki/Movie_production_incentives_in...
From wikipedia:
"EBITDA is widely used when assessing the performance of a company. EBITDA is useful to assess the underlying profitability of the operating businesses alone, i.e. how much profit the business generates by providing the services, selling the goods etc. in the given time period. "
There's plenty of ways that EBITDA can be misleading, but so can net income. Same goes with other statistics like the unemployment rate or GDP. They have flaws, but that doesn't mean they're "nonsensical and it makes [your] brain implode"
It is also batshit insane to manage a company based on this metric.
A good red flag for a statistic is when you see a couple dozen variants of the statistic being used interchangeably. Often at each All Hands Meeting. Oh, this month they're using EBITDA. Next month we're talking up EBITDAR. Who knows what the Overlords will be talking up four months from now? Something that makes the line go up, doubtless. Hopefully no one notices that barring buybacks, EPS has dropped under the table like a soused homecoming queen.
And for something as complex as making software it papers over almost any meaningful understanding of how well a firm is operated.
That's what I mean about my head turning into a black hole. Management using such metrics internally is basically saying that they don't give a rat's ass about how much anything really costs.
As we've seen over the last year and a half, the chicken's come home to roost at some point. Rosy pictures are ripped to shreds by the actual cash flows.
Financial accounting is about where you've been for the last three months. Managerial accounting is about where you're going in the next three years. Our industry is firmly set on driving while only looking out the rearview mirror. I expect this to be changing rapidly at most software firms.
No metric is perfect; in addition to asking how well a company meets a metric, take the time to ask what "meeting that metric" might mean and how that relates to your goals.
Does it matter? Realistically speaking the state only cares about the jobs that are created. Whether the movie is destroyed or not, the jobs have been created regardless. There's arguably the aspect of [famous movie] was made shot/produced/edited in [state], but I doubt many people care about where an animated comedy is produced.
This whole area of law seems utterly absurd.
Only if you don't understand it
> Did they just commit retroactive tax fraud?
That's not how fraud works and that's not what the IRS is trying to do
Fraud: you have to knowingly misrepresent your position aka lie about something. Making a mistake on your taxes is not fraud (source - I am a US citizen and have received letters from the IRS for making a mistake). It is definitely not fraud to be caught in unexpected IP theft.
IRS: they are not trying to get people in "gotcha" situations. They just want to collect the fair amount of revenue that people owe the federal govt and their punishment is proportional.
Presumably understanding it is the basis of its being referred to as absurd.
It's like a tax lawyer saying that computer programming is "absurd". No sir, computer programming is based on sound principles of mathematics and linguistics.
The hypothetical that GP comment posed demonstrated that they didn't understand how tax collection and the IRS works.
That is a phrase that doesn't mean much when it comes to tax legislation. The only consensus position people have ever managed to come to consistently on taxes is "someone else should be paying".
The tax office has to enforce the law as written. It isn't reasonable for the IRS to start making policy decisions like that [0] - it'd lead to the absolute worst form of central planning. Tax agents are not competent actors to assess whether IP policy objectives are being achieved. Any discretionary power given to the tax office is an open invite for corruption. Rest assured that if people can get out of their taxes by inviting tax assessors to dinner they're going to be quite plump.
[0] They can probably get away with it in the most obvious cases, but this doesn't sound like one of them.
As opposed to the corruption, hollywood accounting, and tax dodging that goes on currently? A little bit of sanity in the system to close up loopholes and prevent tax avoidance seems like the ideal situation. What we have now is clearly broken. It should never be profitable to just burn money for a tax credit. I don't even see why it would need to be discretionary, it could be a fairly simple rule change to forbid exactly this kind of practice.
Not taking a position...just noting
When the government screws us over it's a betrayal. When a corporation screws us over that's just what they do (and a sign that we need stronger protections against whatever they just did)
Because the company never earned any money from the movie. The whole notion of a "tax write-off" is misunderstood, in part because journalists mention it casually and inaccurately. The company isn't "making" money by not doing anything with the movie. They are just taking the deductions attendant to creating the film, but then not bringing in any revenue along with it. If you lose money, you get to save on taxes.
In rare circumstances, it can be advantageous to make slightly less money so that you don't trigger some tax disadvantage (e.g., phase-out of some benefit). But in general, it's better to make more money and pay taxes on it than to not make money at all. From reading the articles linked here, it seems like what happened was that there's a new executive team, and they decided not to release a film that was green-lit by the previous executives. Not really about taxes at all, IMO (I am a former tax lawyer, FWIW).
And every year I would do a tax return saying “hey, this is what I spent, this is what I earned” and every year they would give back to me about a quarter of what I was in the negative with.
I always saw this as a “hey we’re in it together, thanks for trying” and motivated me to try harder or try again
TL;DR- the studio is able to make a convincing case (and the IRS have a very low standard for making this case) that they had a for-profit motive for making this movie, therefore the expense of making it was a "business expense". If they never had intended to make a profit on it, then it would constitute a "hobby loss", i.e. the same kind of "loss" you incur when you spend money on a hobby, and the studio would not be granted a write-off on such a hobby loss.
This, plus (as another commenter mentioned) the fact that about half a movie's expenses come as a result of promotional / marketing activities (performed after the production expenses have already been incurred), mean the studio likely thought that releasing the movie would cost more than it would be worth.
1. https://abovethelaw.com/2023/11/was-the-coyote-vs-acme-movie...
Using made up (but plausible numbers):
Movie costs $100m to make. Plus $100m to market. You predict it will only make $120m.
You haven’t spent that marketing money yet, so you have two options:
* Throw the movie out, with the $100m it cost to make. A percentage of that reduces your taxable income by making you have less profit from your good movies. You loose $80m.
* You take it to market. You have to do at least some sort of marketing, otherwise it will be a complete flop. You blow another $100m. Make $120m. You still loose $80m, but you tied up your capital for months and risked loosing it all if this actually went bust.
Therefore, you choose option 1. It cuts the losses and allows you to immediately start on something else.
——-
People love to throw around write offs like companies somehow make a profit off of a loss. In reality, a write off is only partially reducing a loss. It’s still a loss.
Option 1. Write off $100m. Get 20m off the tax. Net loss $80m
Option 2. Market it. Costs 100m+100m. Income 120m. Pretax loss 80m. Get 16m off the tax. Net loss $64m.
So they'd be better off showing it. Apart maybe for the timing of cashflows.
That's the broken part.
"Here's tens of millions of dollars for this project you're about to toss."
"No I'd rather destroy it and get paid tens of millions from the govt instead".
The market spoke, they didn't want to pay enough to make it more worthwhile than taking the loss. There's nothing nefarious with that.
Can they still write it off as a loss? If there is a buyer standing by? This loophole is bizarre to reason about. Shouldn't you have to prove that something is worthless?
They’re just not going to make any money to be taxed on. If you paid them $1m for it, they’d have to pay tax on that million. And that’s all they’re trying to avoid.
That doesn't sound like a reasonable explanation. Yes they would have to pay tax, but they would still be left with majority of it.
So, in the end, it's not about the system. It's just about how bad it gets when a creative company is run by soulless Excel people.
They shouldn't be able to claim it as a write-off if they destroy their own good before they allow it to sell in the market.
Personally I believe any and all projects that fail to enter the marketplace should be given to the public domain instead, however I am also of the “extreme” notion that copyright should exist for only around 10 years.
Just because you spend $1 million to build a factory doesn't mean you get to run to the IRS and claim $1 million in losses. You still own the factory. Its up to you to run it to get your investment back.
Warner Brothers has made the business decision that the movie is not valuable. Releasing a bad product can do harm to a business, so the movie isn't an asset that can automatically be assumed to have positive value.
And there is a cost to releasing a movie, even if minimally marketed, there's opportunity cost if nothing else to getting it out the door.
Right or wrong, it's their decision to make that their investment has more value as a writeoff. They just can't write it off and then change their mind and decide to release it next year. (Unless they amend the return that declared it a writeoff.)
If they claimed the disaster destroyed the factory wouldn't we go and check it was actually destroyed?
But this is a pure judgment call. The IRS will only be concerned that they don't use the movie as an asset, it's not their place to take a position on the business strategy. Tax laws can be pretty friendly to businesses. Whether we like it or not.
Right, that's why they're destroying it so it's not sitting on their balance sheet, and can claim it as a loss.
Can I just destroy the factory on a whim and then write it off too?
Is your concern that they claim they destroyed the movie, but really kept a backup somewhere?
>Can I just destroy the factory on a whim and then write it off too?
I don't see why not. It's not any different than companies destroying inventory and claiming a write-off. The supreme court even affirmed it. See sibling comment:
https://news.ycombinator.com/item?id=39354276
When you burn your own house down, you don't.
I can only assume that WB's lawyers know things and there must be technicalitioes and discrepencies such that you CAN effectively do that with the IRS even though your would go to jail for trying that with insurance.
But in a sane world...they're burning their own asset, and they should be legally allowed to do that, but just not claim it as any sort of misfortune to any party, private insurance or public taxes.
>When you burn your own house down, you don't.
That's not how it works at all. The reason why you can't collect your insurance policy when you burn your house down is because it specifically says it doesn't pay out if you intentionally set it on fire. No such clause exists for the tax system. Companies destroy inventory all the time to get write-offs on them.
So they might need a $70-80m offer for it to be worthwhile.
So even if they released it for free with no ads tomorrow, it would not become worth $0 by doing that, even if they're not paying anything to release it, so they don't get the tax break, I think.
In theory, them selling the thing for $1M when it's worth $70M on paper should be a $69M loss to write off, but it's possible the burden of proving the value pre-sale changes given that someone was willing to buy it for that little?
Also ofc then you're paying taxes on that $1M sale or w/e, versus just the full writeoff.
Per the Copyright Office[1]:
A work is fixed when it is captured (either by or under the authority of an author) in a sufficiently permanent medium such that the work can be perceived, reproduced, or communicated for more than a short time. For example, a work is fixed when you write it down or record it.
[1] https://www.copyright.gov/what-is-copyright/
It sounds like the ideal solution would be to shore up the tax law to prevent this situation in the first place, but if that's not possible and it will continue to be profitable to create art just to trash it then the works should at least be released to the public domain so that we're not losing the art.
In a similar story that’s the center point of the lost Doctor Who episodes case.
BBC literally throw away the reels > workers saved them from thrash > BBC now looking for the lost episodes, everyone knows who has them but they are reluctant to give it back in fear of prosecution (BBC can’t grant clemency)
https://www.theguardian.com/tv-and-radio/2023/nov/11/lost-do...
https://extmovie.com/movietalk/91640620
> But Warner Bros., which stood to make $35 – $40 million on the tax write-down, wanted something in the ballpark of $75 – $80 million from a buyer.
In order to make $35-40 million on a tax write-down, the deduction itself would have to be a multiple of this figure. WB's effective tax rate is 17%, which means that the deduction would have to be more than 5X the amount they would "make" from the tax write-down. But that isn't what the movie cost, according to estimates.
If you read TFA and the linked articles, you can see that this movie was green-lit by a prior executive team. The reason it is getting trashed is probably because the new executives don't want to put it out there and potentially take the flak for it (if it's not good). There may also be financial account issues at play. For example, if you trash the movie you can blame your predecessors and call it a one-time cost. OTOH if you release the movie and it underwhelms, then the bad performance sticks with you for a while.
FWIW, I was a tax lawyer before I turned to entrepreneurship. I don't know all the ins and outs of entertainment law/taxation (there are a lot of credits that local jurisdictions offer to woo studios to film there), so it's possible I'm missing something here. But these articles read like so many pieces I've read, that are written by folks who don't understand the difference between a deduction and a credit.
It’s really not much different than the “standard deduction “ most people take on their taxes. It reduces your tax burden, but you have to have income to have a tax burden.
Deleting and destroying finished movies
https://news.ycombinator.com/item?id=39338989