The Producer – a cautionary tale for capturing travel and expenses for business projects...
Gus tried to take expenses associated with an on location business project, but didn't have the records to back up his business use, an all-too-common conundrum faced by many taxpayers who fail to keep proper records.
The ExpensesIn Constantine Gus Christo v. Comm*r Internal Revenue, T.C. Memo. 2017-239 (2017), a movie producer got jammed up over travel expenses.
Constantine *Gus* Cristo formed a company called *Desperado, LLC* on January 8, 2002 to produce movies. Throughout 2002, he worked on securing funding for the film *Walking on Water* which eventually got released in 2007 under the title *The Deep Below.* As far as I can tell, this was Constantine*s only production! It does not appear to have done well. Oops.
Constantine spent most of 2002 travelling to raise money for the film. Rather than ponying up for hotels, he stayed with his ex-wife in Phoenix, Arizona and Aspen, Colorado. He also stayed with his Aunt in Tulsa, Oklahoma and Dallas, Texas. What was the deal? Constantine had to cover groceries and housekeeping supplies in barter for room and board. Pretty sweet. Right? But, also a little strange* I feel like there*s a good story in there somewhere. And there is!
From his father*s immigrant story of being a shoe cobbler, to Cristo*s trajectory from college athlete to running a successful Jersey City restaurant, to testing out the world of film production, to engineering corporate turnarounds*it is an exciting story ultimately reduced to a book.
The Hidden Benefits and the VerdictTurns out, Gus*s son Alex was taking English classes (later to become a jazz musician) and in his divorce Constantine picked-up the obligation to pay for Alex*s education and he did so partially by working with him on these films and this was to pay for the 28-credits he convinced Alex to take in film-related subjects. So, that was another benefit of the trips to stay with his ex-wife.
During 2002, the Gus stayed with his ex-wife for 167 nights and 21 spent nights at his aunt*s place. He claimed to have spent over $4,400, which was essentially his cost of lodging. Finally, he also said that he was entitled to deduct per diem meals and incidentals (*M&I*) expenses of more than $8,300 using the per diem rate in effect for 2002.
Constantine reported $300,000 of adjusted gross income offset by $267,521 of deductions across 27 categories. Originally, the IRS disallowed $119,395 of deductions, but then through the work of his tax counsel, this was reduced to a disallowance of only $29,871. After dismissing his counsel, Gus convinced the IRS to give him an additional $4,885.67 of expenses. An actual trial was held on the remaining balance.
Ultimately, Gus couldn*t take the expenses for the meals and lodging expenses because he failed to keep receipts * so the lesson here is to *keep good records!!!*
What about the $28,377 of his son*s college education he put on the Company tab --- creative!! While the Tax Court found the payments to be a *kind gesture* the Judge did not allow the expenses because taking a few introductory courses didn*t add up to Alex having an *established trade or business.* Moreover, though not discussed, even were Alex considered a partner in the business the ability to deduct these expenses would be very narrow indeed.