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F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM Sec. 181 (Tax Deductible Investments with Principal Protection) Annuity F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM THE DISCLAIMER This presentation is designed to be educational in nature and is not intended to provide tax or legal advice. Consult with your tax advisor and/or legal counsel for suitability for your specific situation. Rates of return assumed in this discussion are hypothetical --as are the related projections implied by these numbers. Rates of return are not guaranteed and are for illustrative purposes only. Projected rates do not reflect the actual or expected performance within any example or financial product. Disclaimer F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM TAX DEDUCTIBLE INVESTMENTS WITH PRINCIPAL PROTECTION UNDER IRC Sec. 181 Intro F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM THE CLIENT PROFILE • High Net Worth Family with need for long-term passive income protection or tax deductions --against real estate rentals, intellectual property, patents, residuals or bonds • Estate Planning Prospects looking for long-term assets acquired thru deductible investing for future heir’s benefit • Business Owner with C-corporation profits, earnings (or retained earnings) that need shelter from potential taxation • Benefactors of the arts looking for high quality projects to fund outside of charitable endeavors in theatre or music Statistics F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM THE MARKET • Private Placements (unregistered S.E.C. Reg D) will often have substantial risk of loss for the investor’s principal outlay • Start-ups and Angel investors (equity position) may risk balance sheet “bloodletting” for only partial ownership stake • Equity Portfolios uncertain global / domestic times (drops in US dollar, foreign oil prices, recessions and climate change) • Hedge Funds are a misnomer, as many are not “hedged” and have substantial leveraging, short-selling risk, emerging market risk, and volatility that can cause losses to investors Statistics F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM THE CHALLENGE • Financing of feature films comes with a high degree of uncertainty. Can the investor profit? Will their principal be protected? What amount of profit is expected –and paid? • Many factors determine commercial success for films; including public taste, artistic merit, execution, competition, screenplay quality, casting of stars, direction, and budget • Films may lose money, due to high production costs, interest accumulations and major studio’s debt financing Statistics F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM THE FUNDING SOURCES • Government grants (foreign film councils, as well as states such as Louisiana, New Mexico, and Oklahoma) • Tax deductions with right-offs of up to $20M of personal passive income (residuals, real estate, patents, etc.), and closely held C-corporation profits. (IRS code Sec. 181 ) • Pre-sales or pre-payment for the right to distribute on US TV or in European theaters (paid “before” film production) • Debt financing (foreign and domestic gap & supergap) Statistics F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM THE PROPERTY • Motion picture and TV productions have a high degree of risk, but offer artistic and cultural merits • Media content is most profitable during difficult economic times (or during new technology booms) • Audiences have a cyclical desire to discover past film and television programming with every new generation. This allows redistribution of film and television titles approximately every 10 to 12 years Statistics F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM THE ALTERNATIVE • Tax Credit (not a deduction) against personal passive income • Tax Credit for C-corporation profits and earnings (but may exclude some “investment income” for closely-held entities) • Unlimited carry-forward (up to $20M) on future tax returns • Enduring Profits (unlimited future sales) on theatrical films • Low tax on profits (a max Federal capital gains rate of 15%) • Direct ownership (not equity share) of property and rights Statistics F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM THE BENEFITS • Utilize legal tax incentives to deduct passive income (or C-corporation profits), using federal / state tax credits • Provide immediate returns (no debt financing), and limit profits to a maximum tax rate of 15% capital gains • Protect 181 participants from loss (of production costs), with 10 year milestones, when major film profits are made • Maximize TVM by deducting the investment, paying 15% tax on profits, and deferring taxes on the insured principal Statistics F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM THE TORONTO BERLIN EXAMPLE (#1) INDIVIDUAL Film’s Budget is C-CORP Invested “owner” of the film’s rights, receives tax credit Tax credits (35%) saves investor $3.5M over 10 yrs $10M Allocated $3.5M Tax Saved CANNES Pre-sell 50% of film’s distribution rights for $5 million $10 million Studio buys film for $10M outright --or-“owner” earns fees from DVD/CATV sales and licensing ($1M yr for 10 yrs) 10 yrs = $10M profit -15% tax (nets $7M) $5M becomes $10M $5M funded Bonus fixed equity indexed annuities protect $5M fund Tax-deferred earnings up to 9% $5M grows in 10 yrs TOTALS $7M Net Earnings $10M Protected F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM THE DIRECTOR PRODUCER ACTOR Part of film budget pays premium on above-line talent EXAMPLE (#2) INDIVIDUAL Film’s Budget is C-CORP Invested “owner” of the film’s rights, receives tax credit Tax credits (35%) saves investor $3.5M over 10 yrs $10M Allocated $3.5M Tax Saved $10 million Studio buys film for $10M outright --or-“owner” earns fees from DVD/CATV sales and licensing ($1M yr for 10 yrs) 10 yrs = $10M profit -15% tax (nets $7M) Death benefit $10M $5M funded Insurance on the producer for $10M death benefit $5M grows inside tax-free life policy over the next 10 yrs TOTALS $7M Net Earnings $10M Protected F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM THE DIRECTOR PRODUCER ACTOR Life premiums are bank financed for above-line talent EXAMPLE (#3) INDIVIDUAL Film’s Budget is C-CORP Invested “owner” of the film’s rights, receives tax credit Tax credits (35%) saves investor $3.5M over 10 yrs $10M Allocated $3.5M Tax Saved $7M Net Earnings $10M Protected $10 million Studio buys film for $10M outright --or-“owner” earns fees from DVD/CATV sales and licensing ($1M yr for 10 yrs) 10 yrs = $10M profit -15% tax (nets $7M) Death benefit $10M $5M funded Insurance on the producer for $10M death benefit $5M grows inside tax-free life policy over the next 10 yrs TOTALS F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM THE FILMMAKERS & DISTRIBUTORS • Film production can be underwritten by independent and award-winning producers (ex., IndieVest LLC, Civilian Pictures, Four Boys Films, DreamWorks SKG, Handmade Films, etc.) • Film Distribution can be underwritten by industry leading sources (Lionsgate, New Line, Universal, Warner Brothers, Sony Picture Classics, United Artists, Samuel Goldwyn, etc.) • DVD distribution can be underwritten by top marketers (Screen Media Ventures, Televista, MVD Entertainment, Universal Home Video, Freestyle, Overture / Liberty, etc.) F1rst F1nanc1al Resources Twenty-First Century Trusted Advisor SM THE FINAL THOUGHTS • Tax Credit must be taken before year end (Dec, 31 2009) • Profits enhanced by the Time Value of Money factor with tax credits, immediate profits and no film financing charges • Owner’s profits are taxed at a maximum 15% capital gains • Carry forward and time frame can benefit individuals and businesses by eliminating passive income taxes indefinitely • Film Projects are made for profit and artistic merit, and can be both a family legacy, and “perpetual” income source