Bustin' Hoffman

Feds lean on Carolco exec as tax trial begins

By JANET SHPRINTZ

The business practices at a famous --- and famously maverick --- indie production company are about to be thrust into the spotlight.

With talk of a Carolco resurrection in the air, that company's original architect, Peter Hoffman, is scheduled to begin his criminal tax trial today. And the proceedings will be watched closely by indies and other operatives here and overseas.

In 1986, Carolco Pictures Inc. principals Mario Kassar and Andy Vajna hired the attorney as chief executive, in large part because of his brilliance in maneuvering through the tax laws.

But his current circumstances have led observers to question whether he ran amok in devising elaborate tax schemes, or whether the government is applying pressure on him in order to reach his former bosses, who are the subject of their own tax investigation.

The jury trial of the former Carolco CEO is skedded for U.S. District Court in Los Angeles.

In a December indictment for tax evasion and filing a false income tax return, the Justice Dept. charged Hoffman treated income of more than $400,000 as "sham loans" to avoid paying taxes. In two counts added this year, the government claimed he misreported personal income of $225,000 received as part of his termination agreement with Carolco as income of his new movie finance company, CineVisions, in order to gain the advantage of offsetting corporate expenses against personal income.

Just a bookkeeping thing

Hoffman and his attorney, Tom Pollack of Irell & Manella (not to be confused with former Universal exec Tom Pollock, who also is an attorney), have claimed that the Carolco payments were intended as loans, and that errors in the way they were handled were essentially bookkeeping mistakes and not willful violations of the tax law.

"The case against Mr. Hoffman is an effort by the government to criminalize what would ordinarily be handled as a civil dispute over the amount of taxes owed by a taxpayer," Pollack said.

"In fact, the additional charges added by the government to the indictment this year would not result in Mr. Hoffman owing any additional taxes."

Several sources have speculated that the purpose of the indictment is to pressure Hoffman to cooperate with the Justice Dept. in its ongoing tax investigation of Kassar and Vajna.

A criminal prosecution in this type of case is unusual; typically, it's handled as a civil dispute, with back taxes and penalties simply paid.

Assistant U.S. attorney Monica Bachner, one of the government lawyers prosecuting the case, declined to comment.

Hoffman faces a maximum penalty on the tax evasion count of five years in prison and a $250,000 fine. The maximum penalty for filing a false tax return is three years in prison and a $250,000 fine.

In its trial brief, the government charges that Hoffman created a "deferred compensation scheme" to obtain more than $1 million in tax-free income.

At Carolco, Hoffman participated in a legitimate deferred compensation plan, under which he put aside a substantial portion of his $825,000 annual salary. However, the government charges he obtained the supposedly deferred money by two illegal methods: The accounting department issued him checks from the deferred account and described them as loans; Carolco also paid personal expenses such as monthly car payments for him and his wife, producer Susan Hoffman, and for limousine services.

Most of the payments, which totaled $1 million, took place between 1986 and 1988 and are time-barred from criminal prosecution, the government claims. Therefore, the charges relate only to $325,000 that Hoffman received from Carolco in 1989, and approximately $100,000 in personal expenses that Carolco paid on Hoffman's behalf in the same year. (Hoffman did report $600,000 in income for that year, and tax treatment of that amount was not contested).

Two-tiered payment plan

According to papers filed by the defense, Hoffman's compensation was to be paid under a complex but legal procedure. A base salary of $300,000 a year was to be paid to his law firm and credited to Hoffman; the remaining salary was to be placed in a deferred compensation account; and any loans from Carolco to Hoffman were to be charged to a loan-receivable account.

However, a brief states, "An after-the-fact review of the Carolco financial records indicates that Carolco accounting and bookkeeping personnel were essentially unable to follow a consistent procedure for accounting for the total compensation," with devastating tax results to Hoffman.

Before he assumed the chief executive role at the now-defunct Carolco, Hoffman --- a graduate of Yale Law School and founder of the entertainment law boutique Gipson, Hoffman & Pancione --- was considered by many to be the pre-eminent entertainment tax lawyer --- a point made by the defense and the Justice Dept. The defense argues that no one with Hoffman's background would knowingly and willfully violate the tax laws.

But the government, describing Hoffman as "the architect of Carolco's ... corporate structure," suggests that his expertise undercuts the defense that his actions were unknowing or the result of a mistake.

In one brief, the government states, "Defendant is free to argue that a person of his education, wealth and sophistication would never stoop to engage in sham transactions with the purpose of evading taxes. ... Defendant's cleverness in creating shams as a cover for his obtaining $1 million in tax-free income does not prove his innocence, it merely proves his deviousness and cunning."

Hoffman's case takes place against the background of a nearly 2-year-old investigation of Kassar and Vajna.

Tax-friendly bases

The IRS audited Vajna and Kassar and made a $109.7 million tax assessment against them. The bulk of the claim is based on earnings by the partners' offshore companies that were set up in tax-haven countries such as the Netherlands Antilles.

A grand jury probe of the financial transactions of the two men was reported in January 1996. According to a brief filed earlier by Pollack, the IRS and the U.S. Attorney's office started to scrutinize Hoffman's tax returns only after Vajna and Kassar advised the government that Hoffman acted as their attorney in devising the company's tax structure and asserted the attorney-client privilege as to all conversations with him.

Some speculate that, on the eve of the trial, Hoffman could work out a plea bargain with the government in exchange for his cooperation. However, both sides remain far apart and that appears unlikely.

Carolco, which had spectacular successes with such movies as "Terminator 2: Judgment Day," "Total Recall," "Cliffhanger" and "Basic Instinct," also was known for its profligate spending. The company filed for bankruptcy in November. Daily Variety reported Sept. 3 that the two Carolco principals are in talks to revive the company.