Peter Hoffman Tax Fraud Trial Gets Underway in New Orleans

Jury selection began today in federal court in New Orleans for the trial of Seven Arts Entertainment founder Peter Hoffman and two others accused of defrauding Louisiana’s film incentive program. Hoffman, his ex-wife and producer Susan Hoffman, and actor and film producer Michael Arata were indicted last year for conspiring to defraud the state of $1.13 million in tax credits. The charges are related to their plan to turn a rundown mansion into a state-of-the-art post-production house and residence for visiting film crews.

At the heart of the case is a once-elegant three-story mansion at 807 Esplanade Avenue that had been abandoned for years and fallen into a severe state of disrepair when Seven Arts bought it in 2007. After obtaining Louisiana tax credits to perform major repairs and restoration, it opened in July 2012 as Esplanade Studios.

In February 2014, federal prosecutors indicted the Hoffmans and Arata – whose wife is the deputy mayor of New Orleans – for filing “materially false and misleading film infrastructure tax credit applications and supporting documents” with the state of Louisiana “that fraudulently claimed that certain expenditures had been made relative to 807 Esplanade when, in truth and in fact, the expenditures had not been made as claimed.” The indictment charged that in order to conceal their alleged fraud from state auditors, the trio “conducted circuitous bank transfers to create the appearance of payments” for construction work that was never done and for film equipment that was never purchased.

Hoffman denies the charges, saying that the tax credits had in fact been used to restore the mansion. In their defense, Seven Arts offered its 15-page brochure for Esplanade Studios as “Exhibit 1,” which contains numerous photos appearing to show that the mansion has been restored, with modern editing bays and production offices, sound mixing and recording studios, and elegant residences for cast and crew. The brochure states that the crew of HBO’s True Detective spent five months at the Esplanade Studios in 2013 using its digital dailies services, editorial suites, offices and residences.

“What’s fraudulent about doing exactly what we said we were going to do?” Hoffman asked in an interview with Deadline last May. “It’s been in business for two years. We were doing great. These charges have scared some people away, but we’ve still got people working there. This is really crazy. The U.S. Attorney’s office does not like state tax credits. They think they know better than the state of Louisiana. They don’t get it.”

Hoffman maintains that it is the government, not he, that is involved in a conspiracy, and that he is being “targeted” because he beat federal prosecutors in 1997 on felony tax fraud charges brought against him by the U.S. Attorney’s Office in Los Angeles.

“My belief is that they are targeting me because of my prior tax case,” he said. “They believe I was improperly acquitted. These guys have said repeatedly that although I won my last case, I’m ‘the one who got away.’ They are convinced that I am a bad guy, and that I’m some Hollywood sharpy who came to Louisiana to take advantage of the poor Louisiana taxpayers. It’s a complete fantasy.”

In the late 1980s, Hoffman was Hollywood’s guru of off-shore tax havens, including the “Dutch Sandwich,” a legal method of tax avoidance involving Dutch and Netherlands Antilles shell corporations “sandwiched” together to shelter foreign income generated by American movies. During Hoffman’s tenure as president and CEO of Carolco Pictures, the “Dutch Sandwich” was used by the company to avoid or defer taxes on foreign revenues from such films as Total Recall, The Doors, Rambo III and Terminator 2: Judgment Day.

In 1988, the same year Hoffman joined Carolco, the IRS launched a probe into its byzantine financing structures and generous executive loans made to Hoffman and Carolco founders Andy Vajna and Mario Kassar. At one point, the IRS was seeking more than $41 million in back taxes and penalties from Vajna, and more than $68 million from Kassar, and all three men became subjects of a federal criminal investigation.

Federal prosecutors put Hoffman on trial in 1997, hoping that he’d be convicted and become a cooperating witness against his two former business partners, but it didn’t work out that way. He was acquitted on two counts of felony tax fraud, and the jury deadlocked in his favor on two others, including a charge that he’d taken more than $1 million in loans from his deferred-compensation account at Carolco in order to avoid paying taxes on the money as income.

The case was settled when Hoffman paid a $5,000 fine and pleaded guilty to one misdemeanor charge of sending a false tax return to the IRS that understated his 1989 income by $33,000. In a stinging rebuke to federal prosecutors, a federal judge called the prosecution’s case “misguided and doomed,” saying that Hoffman had “suffered more than an individual should over a tax dispute.”

No charges were ever brought against Vajna and Kassar. Vajna eventually settled his case with the IRS when he agreed to pay more than $6.5 million in back taxes, and the 14-year-long saga finally came to an end in 2002 when Kassar agreed to pay the IRS nearly $45 million in back taxes and penalties.

Hoffman, who sees his current difficulties as just a continuation of that old dispute, believes that he will come out on top this time just as he did before.

“We’re going on the offensive,” he told me back in May, “and at the end of the day, this is going to be as small an item in my rearview mirror as the ’97 case was.”