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The law firm of Ballard Spahr is crowing about a legal victory last week at the United States Tax Court that, had it gone the other way, would have led to a “chilling impact to the documentary film industry,” it says.
The case involved one of the firm’s partners, Lee Storey, who was making a documentary on the singing group, Up With People. Storey attempted to deduct her filmmaking losses from income she earned as a lawyer, but the IRS argued her documentary was merely a “hobby” and at a hearing last year, Judge Diane Kroupa stated, “By its very nature, a documentary to me means that it’s not for profit. You’re doing it to educate.”
Judge Kroupa then received an angry amicus brief from The International Documentary Association warning about making any determination that “could have a devastating impact on documentary filmmakers,” and now, the judge has come out with a decision that will prevent a scene of angry tax-paying documentary filmmakers with pitchforks outside the IRS’ headquarters in Washington D.C.
Storey’s documentary was titled Smile ‘Til It Hurts: The Up With People Story, about the singing group of international students founded in the 1960s that performed at four Superbowl halftime shows, has been parodied on The Simpsons and South Park, and has been seen as a response to the liberal counterculture. The filmmaker, who has previously done theatrical work including a production of Give a Dog a Bone, has been married to one of the group’s singers for more than 30 years.
The IRS determined deficiencies of more than $250,000 in the 2006-2008 income tax returns of Storey, who, when she’s not making documentary films, focuses on environmental litigation at Ballard Spahr. The attorney reported more than $1 million in income during those years for her work as an attorney.
Storey filed a petition against the IRS, and the primary issue in the case became whether she was involved in the trade of film production under section 162 of the tax code and whether she was eligible for a film financing tax deduction under section 181 of the tax code.
In looking at the case, Judge Kroupa makes a “fact-intensive analyses” of Storey’s situation, including the fact that she took a sabbatical as a lawyer to learn filmmaking at the New York Film Academy and at Scottsdale Community College, negotiated rights for archival footage and music of the singing group, worked nights and weekends to make her documentary, conducted 400 hours of interviews, was accepted into the Sundance Institute’s Independent Producers Conference, attended film festivals around the country, and according to the judge, “sought to tell a compelling, credible story that would serve as a foundation for her career as a credible filmmaker.”
For the documentary, Storey received a Special Jury Prize at Michael Moore’s Traverse City Film Festival, received the best director award at the First Glance Film Festival in 2009 and was among 18 films selected that year by the International Documentary Association for qualification for Academy Award consideration.
Nevertheless, the IRS argued that the film was a “labor of love,” and that the film was motivated by Storey’s desire to describe her husband’s experience.
Judge Kroupa looks at several different factors to determine whether her activity was engaged in for profit activity and ultimately hands Storey a victory over the IRS. “We find that petitioner’s efforts to make Smile ’Til It Hurts a financial success show a profit objective,” writes the judge.
The judge further notes that this is the “first time” that Section 181, meant to spur tax and other incentives to entice production of U.S. motion pictures and television programs, has been reviewed in this context, and that the documentary filmmaker’s tax elections are adequate.
Wayne Strasbaugh, a partner at Ballard Spahr, writes about the result:
“While the IRS has not indicated whether it will appeal, the documentary film industry took a big sigh of relief last Thursday and is hopeful this decision is the final act.”
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