In 2009, Lee Storey made the documentary Smile ’Til It Hurts: The Up With People Story after finding out that her husband had been involved with the 1960s musical/ethical group. It played at Slamdance and several other festivals.
Last March, US Tax Court Judge Diane Kroupa researched the film and its production with an eye to rule on whether or not Storey owes thousands in back taxes and penalties. The reason? Kroupa is determining whether making a documentary is a hobby or not.
If she finds that it is, it could have a profound effect on documentary filmmaking.
IndieWire has the full story, but it’s hard to find any real details about the case anywhere. Probably because this whole thing is so moronic that it hurts to think about. Apparently during the hearing, Judge Kroupa claimed that documentaries are meant more for education than entertainment – which would mean that documentary filmmaking is officially a “hobby” according to the IRS. As such, it would be taxable in a different way than for-profit ventures. The deductions would be different as well.
The IRS has a clear distinction between hobbies and businesses, and a few of the questions they use to determine status come directly into play here.
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
- Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
There are other issues about losing money and why money was lost, but these three stand out when considering documentary filmmaking at that level. It seems reasonable that the professional result of the film proves the knowledge needed to carry on the activity as well as its inclusion in festivals. Those fests also prove an intention to make a profit (not to mention the time and effort that goes into making any movie). It may not be ideal, but as it stands, festivals are the main avenue for finding distributions and making money off of a labor of love. As for the third question, it seems reasonable that any film might be able to secure some kind of release (even if it takes years) and seek a profit from DVD sales or VOD interest.
Here are some things that don’t add up about this case’s central question:
- Why is the artistic pursuit of education somehow mutually exclusive to entertaining or making money? How does one determine whether a documentary is more interesting than it is fun? Was Man on Wire a delivery system for information, a means to entertain, or both? Who would make that distinction?
- If doing something purely (or foremost) for educational purposes is a hobby, what about teachers? Is their profession a hobby? For a less obtuse comparison – what about companies that make educational videos? Why is their content considered different? Is it?
- How does one go about proving they intended to make money? Do any filmmakers not intend to make money?
- If this ruling goes in the idiotic direction it might, does that mean filmmakers like Michael Moore and Morgan Spurlock owe a disgusting amount of money to the IRS? Why or why not? This may seem obvious, but what’s the true delineation between their films and other documentarians? Should restaurants or tanning salons that don’t make money be considered hobbies too? They aren’t currently, so why wouldn’t a documentary feature be considered a “start-up”?
- If the film is ultimately considered a not-for-profit venture, wouldn’t it be tax exempt anyway? Should future documentary (or fictional) filmmakers create their businesses as 501(C)(3) compliant ventures so that they’ll be tax exempt from the beginning?
All of these questions are for someone who knows the case and law better than a simple caveman like me.
Regardless, this entire situation is sickening. I don’t need to know anything about Smile ’Til It Hurts to know that it took a ton of time and energy. Filmmaking is brutal, and it’s condescending and ignorant to claim that what they’re doing is somehow a “hobby” and not a legitimate means of attempting to spread entertainment as far and wide as possible while making money off of their endeavors.
The International Documentary Association isn’t taking the situation lying down, and they’ve so far written an open letter to supporters and filed an amicus brief (a fancy term for a letter from a party not directly related to the case) to Judge Kroupa.
Hopefully the judge will see the pure inanity of the case, but until then, documentarians might want to hold off on production until the decision comes down at the end of the summer. That, or they should write “I can’t wait to make a ridiculous amount of money off this thing!!!” several times in their production diary.
What do you think?