Paul L. Caron

Wednesday, June 15, 2011

Tax Court to Decide: Are Documentaries Hobbies for Tax Purposes?

The International Documentary Association has filed this amicus brief in the Tax Court in Storey v. Commissioner, No. 10230-10, involving the IRS's treatment of losses incurred in making the documentary film Smile 'Til It Hurts: The Up With People Story as hobby losses under § 183.

The case was tried before Judge Kroupa in Phoenix on March 9, 2011.

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I dont think so, look at the 2010 Burma documentary Nickel City wasn't for tax purposes by any means!

Posted by: NickelCitySmiler | Jul 7, 2011 6:00:55 PM

There is clearly a bundle to identify about this. I assume you made certain good points in features also. Could you update me with your next post please?

Posted by: Hobbies That Pay | Jun 22, 2011 7:33:54 PM

Yeah, there is a 9 factor test which serves as a guide for the courts (they can look at other factors and considerations too). There is also the 3 out of 5 rule and 2 out of 7 rule which automatically deem you for profit (2 out of 7 for horses). And there are some circuits where the standard is pretty strict (primary, predominant purpose).

in reality, most of these people do not operate in a businesslike manner, and flunk most of the 9 factors. If they didn't, the RA would have seen all the documents, and the business model, that there was no personal pleasure in the activity (well, almost none), etc. and would not have sent it forward. sure, it is not a 100% guarantee that cases that move forward shouldn't. and there are judges who are willing to give some taxpayers the benefit of the doubt (not gifts or giveaways, well maybe a few) but believe the taxpayer and see enough of the 9 factors (even if it is less than half) and have the guts to make the judgement that the activity was engaged in for profit.

Posted by: tax guy | Jun 18, 2011 10:01:04 PM

All this discussion about Hobby Loss Rules is one more reminder that Ron Paul is Right. Abolish the federal income tax!

Posted by: Mark from Minnesota | Jun 17, 2011 5:30:52 AM

I am a CPA with many entertainers as clients. I also have an entertainment background myself. The issue here isn't so much specific to the indie film industry as a whole or the documentary world in particular. The hobby loss rules have been around for a very long time and have been applied to many different types of activities. The IRS has several tests that they use to determine if an activity is a business or a hobby. Profit motive is one - not the expectations of profit or the success of earning profits - but that earning a profit is the goal. The other tests can be summarized as follows: does the person comport themselves in a business-like manner? Do they keep a set of records, a separate checking account? If they are not profitable, do they make plans to change course to become profitable? Is this their sole activity (a "day job" usually suggests hobby - but not always). If the activity doesn't pass the tests, then it's a hobby; and why should all the rest of us have to foot the bill for someone else's pastime?

Posted by: MD CPA | Jun 16, 2011 8:03:38 PM

I always thought they were a little "too" happy. Up with People -- a CIA attempt to counter the counter-culture? That looks hilarious. I'd actually pay to watch this. I thought I had read the CIA used Up With People at Guantanamo and that's how they got the house address for Osama.

Posted by: Big Bomb | Jun 16, 2011 11:09:19 AM

Is there a transcript? (Sorry, but I watch clips all day, and sometimes I just don't want to watch video on the internet.) This isn't the poster child for documentary tax issues, I'm afraid. In almost every interview she gave, Lee Storey talked about making the film "just for fun" or "for her husband" which pretty much meant she wasn't ditching her law job.

Posted by: Frank | Jun 16, 2011 8:53:46 AM

tax guy: "you do not get business deductions for enterprises entered without an expectation of profit"

The business just needs the "expectation of a profit," even if the officers are too stupid, too inexperienced, or too idealistic to know that their project is not going to work. Are the judges mind readers? Oh, it's easy AFTER THE FACT to know if something worked or not, but those with a dream might have believed that it couldn't fail. (Kind of reminds me of Obama's stimulus program.)

If this sets a standard for disallowing deductions, then most artists might as well check "hobby" next to their enterprises and forget claiming losses on their tax returns, as they're dreaming if they think that they can sell so-so art at a profit...unless it's paid for by the NEA and our taxes.

Posted by: Woody | Jun 16, 2011 7:38:16 AM

So many wonderful cases: the great steak case, the research on prostitution (so I need to fly to NV and pay for the services), and so on.

And if you haven't ever had the privilege of seeing Up With People, you probably are not qualified to know how much of a "hobby" (in every sense, including the 183 sense, of the word) Up With People is.

As for the documentary on Up With People, it was bound to fail. It would be like making a documentary about a tax attorney who gave up his job to become a NBA athlete. Both the pursuit of "the dream" and filming it and thinking you will make a dime off either are ludicrous.

It is not about whether or not whether you make a film that makes a profit, it is whether the filmmaker had a realistic possibility (or higher standard depending on the circuit) or making a profit. I fail to see how anyone making a film about Up With People had a realistic possibility of making a profit.

This is not the end of documentaries or indie film. Its the law -- you do not get business deductions for enterprises entered without an expectation of profit. You can still make films that will lose money; it is just not a given that you get a deduction for the loss. It is a business, and no business model (well, virtually none) is operated on the basis of losing money.

Posted by: tax guy | Jun 15, 2011 6:28:12 PM

If "Up with People" is a hobby, then Michael Moore represents a political action group.

Posted by: Woody | Jun 15, 2011 8:22:45 AM

In my lay opinion, all ideological activity is self-entertainment. That self-entertainment motive makes it a hobby unless you somehow make a profit. The tax code should not subsidize political or ideological activity in any way. It currently does so in many cases, but that's a defect, not a desirable feature.

I fail to see how this situation is fundamentally different from any other person whose hobby returns a small fraction of the money put into it. Hobbyists want the taxpayers to subsidize their amusement, and Congress long ago said no to that.

Posted by: AMTbuff | Jun 15, 2011 8:11:46 AM