Big Tax Trouble for Ex-Carolco Pair

As two of Hollywood’s splashiest movie producers over the last decade, Mario Kassar and Andy Vajna rarely settled for anything less than the biggest.

They have used some of the biggest international stars in their movies, as Kassar did with Arnold Schwarzenegger in “Terminator 2: Judgment Day” and as Vajna is doing with Madonna in the upcoming film of the musical “Evita.” They’ve enjoyed big fees and perks, including use of the largest yachts anchored off the Cannes International Film Festival. Movie budgets were big as well, pushing the limits of what Hollywood spent on special effects and action scenes.

Now the two former business partners in producer Carolco Pictures Inc. have another distinction, albeit a dubious one. They are involved in what undoubtedly is one of the biggest tax cases ever with the Internal Revenue Service involving Hollywood executives: a combined $109.7 million in back taxes and penalties the feds claim they owe.

The amounts are contained in U.S. Tax Court records reviewed by The Times that were recently filed quietly in Virginia. Both men are disputing the IRS’ claim, with their lawyers filing extensive petitions challenging the amounts owed. Attorneys for both executives were unavailable for comment.

Where a case of this size ranks in entertainment industry history is unknown. It isn’t exactly the kind of thing the Guinness Book of Records keeps track of, and an IRS spokesman says the agency doesn’t rank its cases, either. What’s more, big tax disputes involving wealthy individuals are often settled quietly before details are made public.

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Nonetheless, the case involving Kassar and Vajna is clearly a whopper, according to Hollywood lawyers and tax experts. Kassar’s share of the bill is $68.6 million--$55.7 million in tax increases the IRS says he owes and $12.9 million in penalties. Vajna and his wife, Cecilia, are on the hook for $41.1 million--$33.7 million in back taxes and $7.4 million in penalties, the IRS says.

The Tax Court papers provide the first detailed peek at the kind of disputes Kassar and Vajna are currently knee-deep in with the IRS. In January, The Times reported that a federal grand jury is looking into possible criminal violations surrounding transactions by the two men, who were partners in Carolco until Vajna left the company in 1989. After the disclosure about the investigation, Cinergi Pictures Entertainment, the publicly held company Vajna now heads as chief executive, issued a statement acknowledging that Vajna is the subject of a criminal tax investigation.

The Tax Court papers don’t lay out any specifics of the government criminal investigation. But they do show that much of the IRS dispute over taxes with Kassar and Vajna stems from income the IRS claims was earned by some of the intricate web of offshore companies they did business through in making such hits as the “Rambo” films.

Other areas of dispute involve loans the IRS claims should be income because they allegedly weren’t arms-length deals, as well as compensation issues that include $410,732 Carolco spent to improve security at Kassar’s home prompted in part by the highly sensationalized murder in 1989 of Jose Menendez, a former Carolco director with close business ties to Kassar, and Menendez’s wife, Kitty.

The papers note that those safety concerns stemmed from initial speculation that the Menendez slayings were business related. The couple’s sons, Lyle and Eric, were convicted this year of first-degree murder and sentenced to life in prison. The papers say, however, that fears about the safety of Carolco officers dated back to 1987, two years before the murders.

Vajna, whose recent productions at Cinergi include “Nixon,” “The Scarlet Letter” and “Die Hard With a Vengeance,” is a major supplier of films to Walt Disney Co., which owns a small piece of Cinergi. Carolco filed for bankruptcy protection last year, with its assets sold to French TV producer Canal Plus. Kassar left the company late last year and now has a production deal with Paramount Pictures.

The IRS dispute with Kassar involves a host of issues, including $13.6 million in loans the agency says should count as income, and expense deductions the IRS says were improper, including borrowing $545,555 from Carolco for a real estate investment and $401,238 to invest in art.

In the case of Vajna, the IRS alleges that nearly $11 million should be counted as income instead of loans because they weren’t arms-length transactions.

The biggest chunk the IRS claims for both men involves taxes on $286 million--$179 million for Kassar and $107 million for Vajna--that the agency alleges was earned from 1988 to 1990 by offshore companies linked to the two men and their relatives.

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The numbers appear to be so high because Carolco Investments--a Netherlands company Kassar and Vajna were partners in--sold its 75% stake in the Carolco production company for a $168-million gain as part of a deal that cashed Vajna out of the company in 1989.

That income in dispute is listed as “Subpart F income,” which tax experts say is a complicated section of the tax code that usually refers to income made by offshore companies when those companies aren’t actually doing business in the countries where they are technically based. Companies Kassar, Vajna and Carolco did business through typically were set up in offshore tax havens, such as the Netherlands Antilles.

In a petition challenging the IRS, lawyers for both executives repeatedly question IRS conclusions. In papers for Kassar, his lawyers said the IRS is “proposing additions to income without any meaningful explanations for the adjustments” and also cite a “lack of adequate legal or factual explanation.”

Stars in their eyes: Arizona is the latest state to aggressively go after a piece of California’s entertainment pie with the announcement by Gov. Fife Symington of special tax breaks aimed at getting a major sound stage facility built in the state.

Symington said in Los Angeles that equipment used in sound stages built between next month and 2002 will be exempt from Arizona’s sales and use tax.

Arizona is used frequently in location shooting but isn’t yet the home of major production. Twentieth Century Fox recently built its feature animation unit in Phoenix. Like a lot of other states, Arizona is hoping to get a piece of the film and TV business, as cities such as Vancouver, Canada, have successfully done.