There's No Business Like Oil Business: The Allure of Tax Sheltered Oil Income to Hollywood's Wealthy

Abstract

Hollywood’s greatest stars did not only produce blockbusters, but were savvy businessmen who also produced oil gushers. These stars invested in oil interests in order to shelter a large part of their income from the rapidly rising income tax rates of the 1930s. The unique tax benefit they used was the percentage oil depletion allowance, part of the Revenue Act of 1926, which allowed an oil company to reduce its taxable income by 27 ½ percent. By the 1950s, many Hollywood individuals and corporations extensively invested in the oil business which made the allowance an important component of their financial portfolios. Meanwhile, rich oilmen were also attracted to Hollywood to capitalize on a big hit, or use the losses on a money losing movie to offset their taxable profits from oil. Thus, in the mid-twentieth century, the American oil industry and Hollywood formed a close, mutually reinforcing relationship, and one that academic historians have largely overlooked. After the 1973 oil shock, the percentage depletion allowance came under threat as it was repealed for major integrated oil companies. To protect the allowance for the non-integrated independent producers, Hollywood found their political patron in the famous Hollywood actor and Republican president, Ronald Reagan. As president, Reagan ardently defended the retention of the allowance during his term in the 1980s. Hollywood’s role in the oil industry developed from being a few casual investors using the oil depletion allowance into a substantial oil industry participant and a major political defender of oil-specific tax provisions.