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by Eric Kohn
June 3, 2011 9:00 AM
23 Comments
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If You're a Documentary Filmmaker, You Could Owe the IRS a Whole Lot of Money

Documentary filmmakers, beware: A US judge thinks your life's work is a hobby. And hobbies aren't tax deductible.

In a March 9 Arizona trial, US Tax Court Judge Diane Kroupa examined filmmaker Lee Storey's production of her 2009 feature "Smile 'Til It Hurts: The Up with People Story." If she determines in a ruling later this summer that the film is not a for-profit venture, Storey will owe hundreds of thousands of dollars in back taxes and penalties.

At the trial, the judge broadly stated that documentaries mainly served to educate rather than make money. That assertion relegates documentary filmmaking to the status of hobby in the view of the IRS.

The International Documentary Association is fighting back, with plans to file an amicus brief June 8. A reply brief will be filed within 30 days, at which point the judge will issue a response.

In an open letter published this month in Documentary magazine and excerpted earlier this week on the IDA's website, executive director Michael Lumpkin expressed his disdain and outlined the association's intent:

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.

By doing so we hope to ensure that all filmmakers receive the respect they deserve, and that the many sacrifices they make in the pursuit of their art and livelihood will not be made in vain.

In the meantime, Storey plans to sell DVDs of "Smile 'Til It Hurts," which traces the history of the 1960's-era conservative Moral Re-Armament movement, on the website for the film starting next week.

"I need people to buy the DVDs so I can fight the IRS," Storey, an attorney at the Phoenix offices of law firm Ballard Spahr Andrews & Ingersoll. "The IRS is essentially bankrupting my finances by doing this. I've had to wage war with them."

Lumpkin said that Storey's trial came to his attention the same week that "Restrepo" co-director Tim Hetherington was killed in an incident in Libya.

"It really jumped out at me," Lumpkin said. "On the one hand, you have this determination that documentary filmmaking is a hobby, and then this thing happens to a documentarian, and it's like, 'No, this is not a hobby.' We just felt this would have really devastating implications for documentary filmmakers."

indieWIRE made note of the documentary, which participated in IFP's Narrative Rough Cut Lab in 2008, when it premiered at the Slamdance Film Festival in 2009. More information can be found at the film's website.

23 Comments

  • BusyBoy | September 22, 2011 5:34 AMReply

    The Government has gone MAD! What is America coming to???

  • Big Joe | June 15, 2011 5:51 AMReply

    @ Ron Merk

    Considering the courts are mostly manned by left wing, radical, activist judges, and that the government is currently run by a left-wing, radical, activist President, and that the DoJ is run by an equally left wing, radical, activist Attorney General, I'd say it was the left that was pushing this case, not the right.

  • WS | June 13, 2011 5:21 AMReply

    Kate C is completely right. You can always write off expenses from your doc against income from your doc. You can't write of expenses from your doc against other income unless it's a bona fide for-profit business venture performed in the normal course of your business.

    Without this "hobby loss" rule you could, for example, buy $1000 worth of DVDs, sell two for $10 and claim a $990 deduction against your income from working at the Apple Store as a business loss as a "DVD dealer."

    I don't know the facts of this particular case and I'm not a tax professional, but nobody out there should worry about jackbooted IRS thugs breaking down your door to seize your doc. "Hobby income" is an unfortunate misnomer in this particular case. I think it's fair that doc makers are upset about their work being construed as a "hobby," but that really has nothing to do with the facts of this case.

  • John | June 8, 2011 11:53 AMReply

    I figured this story would get into Political nonsense land and that's where the filmmaker wants to it to. These documentary producers are owing hundreds of thousands of dollars in back taxes and penalties. How do you owe the IRS that kind of money unless the film is grossing millions? You don't

    What's probably happening is they're writing off their film expenses against their other income (Lee Storey is a water rights attorney). That's the issue.

  • Zan Zhin | June 6, 2011 1:13 AMReply

    @Ron Merk: "This is just another attempt by the conservative right and their followers to squash comment, criticism and opposition, and force those of us who carry the torch of enlightenment into a cave, to be sealed up forever."

    Um, the IRS operates under the rules approved by its Commissioner, who reports directly to Treasury Secy. Timothy Geitner, who was appointed by and advises Pres. Barack Obama. Not exactly a chain of command built from the "conservative right."

  • Ron Merk | June 5, 2011 6:21 AMReply

    Have we entered the New Dark Ages? This is just another attempt by the conservative right and their followers to squash comment, criticism and opposition, and force those of us who carry the torch of enlightenment into a cave, to be sealed up forever. The idea that all effort in order to be valid needs to be "for profit" just shows us who's writing the laws and who's being hurt by those same laws. Profit can be measured in many ways. We pay for college educations and the results cannot be counted in dollars. The profit is to our minds, to our communities and to our country. The country is due for another revolution, but it must be an economic one. We need to fight this fight or enlightenment will be lost, and indeed we will be forced into a feudal society, with no ability to fight back against "our masters."

  • Negrodamus | June 5, 2011 4:26 AMReply

    No matter how u pin this or the legal terminology, its just another way those in power try to step on the lil guy. Ron is right, "A NEW DARK AGE HAS COME UPON US!"

  • McGuffin | June 5, 2011 4:17 AMReply

    Well I certainly didn't mean any disrespect to Mr. Tom or his family. The lack of details of these extraordinary claims puts everything in a cloud.

  • peacock | June 5, 2011 3:41 AMReply

    This censorship!

  • jemerson | June 5, 2011 2:09 AMReply

    The attorney didn't exactly quit, he died. Go to Docket, from Rodney above, and click on the March order.

  • McGuffin | June 4, 2011 12:56 PMReply

    ^^^ Hobbyist^^^

    Anyway....

    Kate is right about needing to know the circumstances. Although, you can deduct losses from other income if the production company is a flow through entity, like a S-Corp or LLC (in most States). A sole proprietorship is also a flow through entity, but as in the story a using a sole proprietorship and not incorporating can cause accounting and liability nightmares.

  • RS | June 4, 2011 10:36 AMReply

    Does KateC just write to see herself write? Who the F asked for a thesis paper? Geez.

  • Rodney | June 4, 2011 10:09 AMReply

    After looking around, I found the Tax Court docket:

    https://www.ustaxcourt.gov/UstcDockInq/DocketDisplay.aspx?DocketNo=10010230

    I am going to agree with McGuffin here: this story seems a little thin. I would like to see what the judge actually said. Maybe the judges arguments will be specifically addressed when the opening briefs are filed next week. Maybe.

  • McGuffin | June 4, 2011 9:24 AMReply

    This sounds like b.s. reporting to me.

    First, they are the ones suing the IRS. So, even if the judge said what they claim, she was not the first one from the IRS to rule against her.

    Second, the briefs have not been filed yet.

    Third, one of their attorneys quit the case on March 8th a day before the trail on the 9th. Not sure what that means, if anything.

    Can someone supply any documentation of what the judge said, if anything?

  • John Vizzusi | June 4, 2011 6:50 AMReply

    Simple conclusion; "If you have a Distributor and even if you are Self-Distributing your Doc. and you show proof of annual sales, then its a for-profit venture!

  • KateC | June 4, 2011 5:49 AMReply

    I think the issue here is whether Lee can deduct losses against OTHER income. I believe you can always deduct hobby losses against hobby income. But Lee might have been trying to offset her film production expenses against her other income. Without knowing the facts in this case, it is not hard to imagine a filmmaker-lawyer/doctor/CEO/investor with significant income from other sources running up costs on a film production (buying expensive cameras, traveling to festivals--and spending much more on production and promotion than a filmmaker who is actually profit-motivated, but doesn't have significant income from other sources, might spend) and a judge looking at that situation and seeing someone who is not really trying to make a profit from the film, but rather is trying to get a tax break against other income from activities that are fun and possibly a little overboard in the circumstances.
    Anyway, even if the IRS says your filmmaking is only a hobby, the only limit is that you can't carry over all your losses to get a break on your income from your trust fund or your law or medical practice or your CEO job (you do get to carry over some expenses, but there are limits). Even then, I believe if you are getting money from selling DVDs or from grants to pay your salary while making films, you will still be able deduct your costs, because you can deduct hobby expenses from hobby income (...definitely consult your own accountant or tax lawyer and don't rely on tax advice from semi-anonymous people on the Internet!).



    In any event I think it is important to have this limit because, without it, you'd create a huge tax incentive for people with a lot of wealth from other sources going crazy making and promoting docs that nobody really wants to see and having the tax base eroded as a consequence (i.e., having working people who disproportionately bear the tax burden subsidize that activity). Without this tax rule we might see a lot of 3D docs at festivals in great vacation spots about how great investment bankers are!

  • scott | June 4, 2011 5:44 AMReply

    Wow think how much Water World must owe! ;~) Actually if you believe the big studios they are all not for profit ventures.

  • Ben | June 4, 2011 5:24 AMReply

    Wait a minute: They want people dedicating their time and energy to educate the public via non-profit film projects to pay taxes, but global corporations making obscene profits are not only tax-free, but are actually getting money from the government?

    Something is not right here.

  • Rodney | June 4, 2011 3:03 AMReply

    So, what is the actual legal status of this case? I can't find a related opinion in any legal searches. Tax courts issue different types of opinions, some of which have no value has precedent. However, this discussion of amicus and reply briefs imply an appeal is happening. Some clarification, perhaps with pointers to documents, would be useful in understanding what is specifically going on here.

  • MadazzHell | June 4, 2011 2:14 AMReply

    By that logic, teachers are also just hobbyists...

  • Kissthiz | June 4, 2011 2:01 AMReply

    Why isn't she after those rich sexually-perverted, strong illegal and legal drug addicted, thievin' fraudin' stock traitors on wall street that doesn't pay THEIR taxes????? Is she paying for bjs too??

  • Ambivert | June 4, 2011 1:40 AMReply

    March of the Penguins raked in over $100 million. Bowling for Columbine, over $58 million. Super Size Me, $11.5 million. Fahrenheit 9/11, almost $120 million! In fact, the top 100 Documentaries in earnings have all made more than $1 million each.

    If documentaries "mainly serve to educate", it appears Judge Kroupa can stand to watch a few herself.

  • ChezCerise | June 3, 2011 11:53 AMReply

    Wow! So I guess that journalists write as a hobby too?