June 4, 2011
IRS: “Making documentaries is a hobby.”
The International Documentary Association has filed a friend of the court brief in this case.
In a US Tax Court trial held in Arizona on March 9, Judge Diane Kroupa made a statement that, if memorialized in a ruling, will have a devastating impact on independent documentary filmmakers across the US. Judge Kroupa questioned whether a documentary could be “for profit,” since by its nature it is designed “to educate and expose,” and she invited the parties to present case law on the issue.
Judge Kroupa’s speculation came in a case in which the IRS argued that filmmaker Lee Storey could not deduct business expenses pertaining to her film Smile ’Til It Hurts: The Up with People Story because the primary purpose of her film (and by inference all documentary films) is to educate and expose, not to make profit, and that therefore documentary filmmaking is a not-for-profit activity. The IRS believes that if the person has no intent to make a profit, then the activity is a “hobby.” Therefore, they claim that Storey owes hundreds of thousands of dollars in back taxes and penalties for the business deductions she took.
The potential affirmation of Judge Kroupa’s statement could have a serious impact on documentary filmmaking in America by creating federal case law precedent that could be used against filmmakers, bringing about audits and demands for back taxes because of a characterization of documentary filmmaker as meriting nonprofit status. To support Storey, IDA has filed an amicus brief in the case, urging the US Tax Court to recognize that the production of a documentary film is, at its core, a “for profit” business such that business expenses are deductible for tax purposes.
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Holy cow. Like it wasn’t hard enough to begin with.
I can’t imagine that there will be an actual ruling that makes its way into case law, but still.
Sounds as though Storey needed a better tax accountant.
Interesting that director Lee Storey is herself an attorney. But not a tax attorney.
I mean, if a huge cohort is using documentary filmmaking as a default tax write off I might understand it.
Right. And in truth, although the IRS makes errors and misuses its power, I’d not be surprised to learn that Storey simply screwed up.
But it takes quite a leap to arrive at generalizations about the nature of documentary filmmaking.
Yes.
‘The IRS believes that if the person has no intent to make a profit, then the activity is a “hobby.”’
Or maybe, a nonprofit organization? I’m confused. United Way gets to deduct business expenses, is community service a “hobby”?
Tax law is complex, which is why there is always plenty of work for tax lawyers and accountants.
Last I checked, if on your tax returns, you claim business deductions in connections with work you do as a sole proprietor, you cannot do so beyond five years without the activity being judged a “hobby,” hence ineligible for claiming business deductions. Actually, I believe things have improved in that I recall the time period was once three years.
And you can set up a not-for-profit, but other rules apply.
The issue in this case may well be that Storey might (and I stress might) have been trying to offset losses (film production
incomeexpenses) against other income. (She does not earn her living by making documentary films. She is first and foremost a water-rights attorney.)I apologize if I did not provide enough context for my post. In truth I do not know all that much about the case.
But the Tax Court judge’s speculation (so far, not a ruling) is worrisome in that if enshrined in case law it could set a precedent.
I hope that clears up some of the confusion I may have created.
Thanks for explaining. Makes a little more sense now.
Good. I don’t want to be babbling to myself and making no sense!
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