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Doc Filmmakers Win Fight Against I.R.S.; Work Not Hobby, But Profit-Losing Biz?

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by Anthony Kaufman
April 22, 2012 11:44 AM
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"Smile Til It Hurts"
It's a pyrrhic victory for documentary filmmakers eveywhere. Last Thursday, a U.S. Tax Court judge ruled that filmmaker Lee Storey could write off hundreds of thousands of dollars in losses from the making of her film "Smile `Til It Hurts: The Up with People Story" (see picture below). Documentarians--including some who are currently under audit by the I.R.S.--were watching the case closely, as the outcome severely impacts their bottom line. But while the Storey case has effectively shifted the government's view from considering the profession a mere hobby, which would not allow a right-off, it also highlights the money-losing nature of the form.

According to the Forbes article that broke the news, the case had set off alarm bells among filmmakers because the judge had questioned whether doc filmmaking could be considered a for-profit business, saying at one point in the trial, “By its very nature, a documentary to me means that it’s not for profit. You’re doing it to educate. You’re doing it to expose."

A brief on the part of the filmmaker argued the contrary: “A judicial pronouncement that documentary filmmakers are not engaged in a profit-making activity would have a chilling effect on the documentary filmmaking industry, as documentarians would no longer be able to claim deductions for their business expenses.”
 
According to Forbes, the verdict allowed for documentary filmmaking to be considered a legitimate business, and also recognized it as one where the unprofitable start-up phase may be longer than normal and allowed Storey ever penny of her claimed losses. 
 
More specifics about the IRS's rules for new business and start-up losses can be found in the Forbes story.


“We said, hey, even if it takes six years, the making of a documentary, in spite of educational and public good, is also a business,’’ attorney Michael C. Donaldson, who wrote the brief for the film industry, told Forbes.

But is it a good business?

"Smile ‘Til It Hurts" received a Special Jury Prize at Michael Moore’s Traverse City Film Festival in 2010 and while the movie has been shown on cable TV in Canada, the film received no U.S. sale. Storey is now selling copies of the movie on DVD for $19.99 to raise money for legal fees. She told Forbes she has run up $120,000 in tax lawyers’ bills.

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