1) The middle tiers aren't publicly traded companies, often single-member LLCs or small partnerships used as vehicles for funding just a handful of projects. In general, they're not easy to scrutinize.
2) I think most of the accounting magic has to do with deferring income, and attributing and allocating future earnings. The mechanics and guesswork is extremely niche; industry norms set the guardrails for what's reasonable. IOW, Hollywood gets to write the rules.
3) I suspect there's less tax cheating than people cynically expect. Mostly the game is about tax deferral, minimizing the blast radius of projects that tank, and everybody jockeying--and stabbing each other in the back--to maximize their share of the pie. I doubt the government loses much revenue. They might nominally get more revenue for a single cycle if accounting was tightened up, but then you might lose much of the dynamism and risk taking, reducing tax revenue long-term.
Note: I have zero industry insight, though I once spoke with a former LA district IRS tax lawyer who seemed much more cynical about the shenanigans than what I presented above. And I got the sense that, like with Scientology and Donald Trump, the IRS has learned the hard way they don't have the wherewithal to win any serious litigation that threatens the status quo.
> I suspect there's less tax cheating than people cynically expect.
I'm sure there's some tax cheating going on, but I always got the impression that Hollywood Accounting was to reduce royalties for people who negotiated for a % of net profit instead of a % of gross revenue.
What's actually happening is that a lot of the companies used in a Hollywood production are interrelated. The same people own most of the stock so when they’re doing the accounting, they get to set the price they charge for the movie and make their profit on the production side. It’s all legal and GAAP, it’s just the production companies owned by the people who fund the movies making the real profit.
Tyler Perry isn't a billionaire because he's made a bunch of blockbusters. He's a billionaire because he owns the entire film production chain, from studio to productions, and puts his name on all of the credits for good measure such as writer, director, producer, etc.[0].
2) I think most of the accounting magic has to do with deferring income, and attributing and allocating future earnings. The mechanics and guesswork is extremely niche; industry norms set the guardrails for what's reasonable. IOW, Hollywood gets to write the rules.
3) I suspect there's less tax cheating than people cynically expect. Mostly the game is about tax deferral, minimizing the blast radius of projects that tank, and everybody jockeying--and stabbing each other in the back--to maximize their share of the pie. I doubt the government loses much revenue. They might nominally get more revenue for a single cycle if accounting was tightened up, but then you might lose much of the dynamism and risk taking, reducing tax revenue long-term.
Note: I have zero industry insight, though I once spoke with a former LA district IRS tax lawyer who seemed much more cynical about the shenanigans than what I presented above. And I got the sense that, like with Scientology and Donald Trump, the IRS has learned the hard way they don't have the wherewithal to win any serious litigation that threatens the status quo.