1950s Hollywood forged a golden age of tax avoidance by movie stars | Accounting Today

1950s Hollywood forged a golden age of tax avoidance by movie stars | Accounting Today

The oil-depletion allowance, deferred income, collapsible corporations, all provided Hollywood stars and other wealthy Americans a way to dodge the 90% top marginal income tax rate.

"Back then, the wealthiest people in the U.S. were not corporate executives or baseball players. (The latter group made so little they usually had to work during the off-season.) Rather, they were entertainers. In 1958, for instance, the chief executive of U.S. Steel, Roger Blough, made around $300,000. Frank Sinatra made closer to $4 million. (That's $35 million in today's dollars.) Sinatra, Bob Hope, Bing Crosby, Sammy Davis Jr., Joan Crawford, Henry Fonda, Humphrey Bogart -- these were the people who were most concerned with sheltering their income....

"The collapsible corporation was the other tax loophole Hollywood stars relied on. Whenever they made a movie, they would set up a corporation and have the movie producer pay their compensation to the corporation, out of which they would take a small salary and pay all their expenses. Why? Because the corporate tax rate was around 50 percent rather than 90 percent. After the star's fee had been paid out, the corporation would go out of business.

"Once again, [Bing] Crosby was a trailblazer, setting up his first collapsible corporation in 1937. Soon enough, every star in Hollywood was following suit. [Frank] Sinatra gave his corporations British-sounding names, like Essex, Bristol, Kent and Canterbury. Some stars would sell stock in their corporation to the movie company, so they could take their fee in the form of capital gains, which had a maximum tax rate of only 25 percent. At one point, the IRS sued Groucho Marx and his producing partner, arguing that the $1 million they received from NBC, which aired their show, "You Bet Your Life," should be categorized as income, not capital gains. Luckily for Groucho, the courts disagreed.

"In the mid-1950s, Congress did pass a law aimed at putting a stop to the use of collapsible corporations. But the law itself had a loophole: If 25 percent of the corporation's income came from a different industry, then it was legit. You can guess what the stars did. They merged their oil business and their movie business into one corporation."