Filmmaker Lee Storey earned very good reviews and film festival plaudits for her documentary “Smile ‘Til It Hurts: The Up With People Story.” She ran into trouble, she said, for apparently being a bit too happy about the whole process.
Storey just prevailed after squaring off against the Internal Revenue Service in U.S. Tax Court, as Uncle Sam tried to argue that she wasn’t trying to make a movie as a bona fide business but as a hobby, less to make a profit and more as a labor of love. Among the evidence the IRS presented at trial, she said, was a clip of her at a film festival expressing her enjoyment.
“They actually dug up the clips, yes they did,” Storey said this week, still expressing amazement at the whole ordeal.
Last week, U.S. Tax Court Judge Diane L. Kroupa ruled decisively in her favor, concluding that even though her movie has yet to turn a profit, or even win distribution, Storey could still deduct expenses to make it.
The potential for a ruling the other way is what generated alarms in the documentary community, as the Intl. Documentary Assn. and other orgs came to Storey’s side, worried that many more directors and producers could be on the hook if their life’s work was deemed merely a hobby and not a profit-making enterprise.
“Documentary filmmakers can go ahead with more confidence,” said Christopher Perez of Donaldson & Callif, who with Michael Donaldson filed an amicus brief on behalf of the IDA and other orgs.
Two things seemed to rattle the tax collector: Storey had a day job as a water-rights lawyer at Ballard Spahr in Phoenix, and she got the idea to make “Smile ‘Til It Hurts,” about the toothy, cult-like singing group that countered the counterculture, from her husband, William, who was a member in his youth. As Kroupa noted, the IRS argued that the documentary was more a curiosity than a capitalistic enterprise.
But the judge was swayed by extensive evidence from Storey that her undertaking was a professional activity: hiring a crew of established professionals, writing a business plan, enlisting a bookkeeper, licensing footage, taking out loans, launching a marketing campaign and even hiring a publicist, as well as entering the work in festivals. Kroupa concluded that Storey was “engaged in the filmmaking activity with the dominant objective and intent of realizing a profit,” and that her enjoyment of what she did was “not sufficient” in and of itself to classify her filmmaking as a hobby. All that was missing was a substantial financial return for her work, but that’s true for the majority of helmers pursuing nonfiction projects.
“I unfortunately hit the market when nothing was being purchased,” Storey said, referring to the dreaded year of 2009. Her film was in production from 2006 to 2008. “It hit the market at the wrong time.”
The IRS did not respond for comment.
She’s also pleased that the court upheld her eligibility for Section 181, a provision of the tax code designed to keep production in the U.S. by allowing filmmakers to treat production costs as expenses in the year that the cost is incurred rather than capitalizing them or depreciating them. Kroupa seemed to give some flexibility to documentary filmmakers, for whom principal photography isn’t necessarily the first time the camera rolls. Kroupa disagreed with the IRS that Storey’s records were “inadequate,” despite providing a 314-page appendix to prove its point. Nevertheless, Storey does caution that “accountants for the film industry will need to focus on the election requirements more closely than ever.”
Storey still hopes to gain wider release of her project, and perhaps earn a profit, but is embarking on a new documentary, along with C.C. Goldwater, about music producer Peter Asher.
Her advice for filmmakers is to keep the business separate from everything else and to “keep the records, keep the receipts.”
And yes, they can enjoy it.
