Tax Issues Get the Spotlight in Entertainment Settlements

With its unlikely plotlines, beautiful faces and glamorous red carpet premieres, the entertainment industry offers an escape from the everyday.

But when it comes to settling disputes unique to Hollywood, there’s no escaping the reality that even the most basic tax issues must be considered every time cash or intellectual property changes hands.

JAMS mediator and arbitrator Joel Grossman—a former in-house studio attorney—and prominent tax lawyer Robert Wood of Wood & Porter recently co-authored an article for Westlaw Journal explaining the tax implications stemming from the settlement of several types of show business disputes.

“Laying the groundwork should start early,” Grossman and Wood wrote. “It is clearly better to deal with tax issues at the time the other issues are being resolved so that the parties end the mediation with a binding and enforceable agreement.”

When a person claims that a studio made a film or television show substantially similar to his or her own work, a settlement can involve intellectual property recoveries that can be categorized as capital gains and taxed at 15 percent, lower than the 35 percent tax on income.

In disputes over profit participation situations—where an actor, writer or director gets a share of the profits from a film or television show rather than all in an upfront payment—the difference between paying a settlement to a person or their production company can have different tax implications.

So does the timing of a settlement payment. Money put toward a participant’s share can sometimes push the person closer to receiving his or her share of a work’s profits, but not translate into an immediate payment. Often, these types of settlement payments are tax-neutral, but will affect taxes on future gains.

As part of a settlement in a profit participation case, a defendant may also pay what’s known as a “gross up” to help cover future taxes the plaintiff will face, but the gross up itself is often subject to taxation.

At JAMS, we’re making sure that parties involved in entertainment industry disputes understand these tax implications early in order to reach quick and cost-effective settlements.