In Uncategorized on 04/19/2012 at 17:40

Judge Kroupa blazes a trail through the tangle of Section 181 election to expense filmmaking costs in Lee Storey and William Storey, 2012 T.C. Mem. 115, filed 4/19/12. The decision is so fact-driven, with facts unlikely to be encountered by the average preparer-in-the-trenches that I won’t be going into much detail here. My interest stems from the buzz the case has gotten in the independent film production world as it wended its way to Tax Court.

A lot of the indie producers filed briefs amici, a thing rarely allowed in Tax Court. More usually, the amici are told to craft a joint brief with the taxpayer to raise whatever arguments they may have. See my blogpost “A Joy Forever”, posted 4/4/11.

Briefly, Lee worked her way up from a Detroit assembly line to a specialization in Indian water rights law, while directing community theater and sculpting bronze on the way. Her husband William was a member of the 1960s group Up With People, a counter to the counter-culture. When Lee found out about Will’s musical past, she decided to make a movie, and called it “Smile ‘Til It Hurts”. She did all the right things–took courses, consulted with experts, hired bookkeeping help to keep careful records, got tax counsel and campaigned her documentary at all the right festivals.

IRS called it a hobby or a labor of love to celebrate her husband’s youth (although he got a big 4 minutes out of the 79 in the final cut), and disallows Lee’s deductions.

Judge Kroupa blows off the hobby and labor of love arguments with a lengthy recounting of the facts and applying the Section 183 laundry list to show Lee’s serious moneymaking intention.

Now for the Section 181 election. The statute grew out of the runaway film producers who had to capitalize production expenses if they shot in the USA, but got favorable tax treatment and even subsidies if they shot overseas. To bring them back, Congress allowed them to expense production costs in the 2004 American Jobs Creation Act.

As usual, it took IRS a while to catch up with Congressional largesse, and IRS’ arguments ignored its own guidance and temporary regulations. IRS’ post-trial brief sported a 314-page appendix itemizing Lee’s variances from the substantiation requirements of the regulations, but Judge Kroupa doesn’t look at it, as “(S)tatements in briefs do not constitute admissible evidence and may not be considered by the Court. Respondent’s 314-page appendix, even if it were argument instead of evidence, causes the brief to exceed the page limits the Court established at trial. We will not consider respondent’s appendix as either evidence or argument and therefore we hold that respondent has not met his burden of proof on the substantiation issue.” 2012 T. C. Mem. 115, at p. 45. (Citations omitted.)

The point is substantial compliance. Lee’s paperwork meets the test of conforming to the statutory requirements, albeit without every last detail required by the regulations. “Close enough”  can apply to a Section 181 election as well as to horseshoes and hand grenades.

So Lee can smile, and feel good about it.

Takeaway- Sometimes close enough is good enough.


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