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Documentary Filmmakers vs. the IRS

Documentary filmmakers across the United States should be turning their attention to the U.S. Tax Court of Arizona where filmmaker Lee Storey awaits a verdict on whether documentary filmmaking can be considered a “for profit” endeavor. This idea may sound crazy, but as director Paul Devlin wrote in a piece for Filmmaker Magazine:

Unfortunately the unfair and incorrect perception that documentary filmmakers are not interested in profit has resulted in unsettling scrutiny of our industry by the U.S. Internal Revenue Service. In a case now in U.S Tax Court in Arizona, the IRS has been asked to demonstrate whether or not the primary purpose of documentary filmmaking in general is “to educate and to expose” and is thus “an activity not engaged in for profit.”

Devlin, in fact, had his own run-in with the IRS based on his tax filings. He details the ordeal (and the subsequent lessons learned) in his piece. It’s worth noting, in Devlin’s case the IRS suggested filmmaking was, for him, a hobby, not a for-profit endeavor, based on losses he reported. Part of the IRS’s concern stemmed from his deducting filmmaking expenses from his other sources of income on his tax returns. The judge in Arizona is trying to go several steps further and re-define the purposes of documentary filmmaking.

Devlin notes:

The U.S. Tax Court in Arizona seems determined to target aggressively all documentary filmmaking as an activity not engaged in for profit. If this opinion is memorialized in a ruling against Storey, documentary filmmakers may no longer be able to deduct business expenses associated with filmmaking from other sources of income…The precedent could provide incentive for individual IRS agents to audit any documentary filmmaker who has ever reported losses going back three years (or more, depending on the circumstances).

Storey, a practicing attorney, released her first film, Smile ‘til it Hurts: the Up With People Story, in 2009. She made the film after learning her husband was, at one time, a member of Up With People. Critics received the film as a scathing critique of the organization and its agenda.

The International Documentary Association filed an amicus brief in support of Storey. In the brief, Michael Donaldson quotes the Center’s director, Pat Aufderheide when he notes the definition of a documentary as a film that “tells a story about real life, with claims to truthfulness.”

While we anxiously await the Arizona court’s ruling, Devlin shares some good insight for documentary and/or independent filmmakers:

  • Set up an S-Corporation rather than an LLC. It will require a separate tax return filing on your part but will draw a clear line between or among your business endeavors.
  • Keep good – even impeccable – books, should the IRS audit you, you will be prepared to prove your for-profit ambitions.
  • Operate like a business – complete with revenue projections and expenditure examination.

Those interested in supporting Storey can contribute to her legal defense fund on her website.

(Photo from filmmaker's blog.)