Aegis For Dreams sounds like it will be a great movie. It is about the relationship between Alexander Hamilton and George Washington and that relationship’s importance in the American struggle for independence. Lafayette another surrogate son of the childless Washington also plays an important role, which makes this member of the American Friends of Lafayette long to see Aegis made. As about the only person I know who can’t stand the musical Hamilton, I am glad that Aegis will not be a musical, although music, specifically that of Mozart, is an important element of the film.
What Is Stopping Aegis?
So what is stopping Aegis For Dreams ? Right now it is the IRS. On August 10, 2021 IRS issued PLR 202144028. The ruling informs Aegis For Dreams Foundation, Matthew W. Ryan, Trustee that IRS has determined that the Foundation does not qualify for exemption under IRC Section 501(c)(3).
Matthew W Ryan is the sole contributor to the Foundation and its sole trustee. As you can see from the most recent Form 990, not very much is currently going on. That is because the plan is dependent on obtaining exempt status. The idea is that the Foundation will be able to attract deep pocket contributors to raise $30 million. Then a qualified production company will produce the film based on Mr. Ryan’s screenplay. Any profits from the film will be donated to charities dedicated to children or soldiers.
Citing Revenue Ruling 77-4 and Revenue Ruling 60-351, the IRS indicated that the Foundation was not engaging in an exempt activity. Rather just as the organizations in the rulings were producing a magazine and a newspaper in the same manner as a for profit organization would have done so, the Foundation will be making a movie. And the plan, as the IRS sees it, is to produce, distribute and promote the film in the same manner as a commercial company.
The profits going to the charities doesn’t make the activity exempt. The other concern is that Mr. Ryan retains some rights on the screenplay and that he would personally benefit from the production and distribution of the film.
You get to appeal an IRS denial of exempt status to Tax Court and that is what the Foundation is doing. Mr. Ryan drafted the petition himself.
The arguments he makes are very interesting. First off, by distributing Aegis in a manner similar to other feature films, the Foundation will achieve its educational purpose by reaching more people. If you want to educate people, don’t offer them something that you label as educational.
The most telling part of the argument is a little subtle. Even though the Foundation will produce and to some extent distribute like a commercial producer, it is not competing with them. As it happens, films set in the American Revolution are few and far between compared to, for example World War II or even the Late Unpleasantness (i.e. Civil War, War Between The States, War of Northern Aggression, Slaveholder’s Rebellion), whatever you prefer to call it.
Further distinguishing Aegis is its uncompromising accuracy, which a commercial filmmaker would never be able to achieve. The petition quotes Thomas Rothman of Sony Pictures:
For those of us in the theatrical business, every creative decision is a financial decision, every financial decision is a creative decision and you have to marry those two things, right, so we can’t make movies independent of the potential return on that movie
For the Foundation, the accurate film is the thing. If financial returns are not great that is unfortunate for the children and soldiers charities but the Foundation will still have achieved its educational purpose. The petition notes that the reason for seeking extended theatrical release is a desire that the public view the film in a communal setting. If you were ever at a showing of Lincoln where everybody applauded at the end, you would get that point.
Clearly I am rooting for the Foundation. But how good is its case and how good are its chances? It took me a bit to find the right Matthew W Ryan. He is Head of US Trust Advisory HSBC Private Banking. He has a legal and Big 4 accounting background, but there is no indication of Tax Court practice or not for profit expertise. A lot of people will tell you partnership taxation is the toughest thing going in tax, but I would argue that exempt organizations are the most arcane and Tax Court practice is different from other courts.
Lew Taishoff, who blogs the Tax Court with incredible intensity wrote me on how long the case might take:
Mr Reilly, Petitioner pleads ” 4. Petitioner has exhausted its administrative remedies within the Internal Revenue Service.” Statement is conclusory, as it does not set forth to which branch or division of IRS administrative appeal might be taken, or that no such branch or division exists.
So assuming IRS doesn’t move to toss for want of exhaustion (either because petitioner did exhaust, or because there’s nothing to exhaust), and if IRS did so move it would be quick, maybe six months, the next thing would be summary J. There are no facts at issue; the only question is a question of law: Does the application state sufficient legal grounds to permit exemption per §501(c)(3)?
Could be done in less than two years’ time, maybe even less than a year, in ordinary times. But with 35,000 petitions this year? Who knows?
I also wrote to Paul Streckfus, who as it turns out was covering the petition in his EO Tax Journal. EO specialists have Streckfus’s journal which comes out as a daily email with breakfast as reliably as I have coffee. With the recent passing of Bruce Hopkins, Streckfus may now be the top source in the EO Tax world. His analysis is a little lengthy, but the conclusion is telling.
In the case of Aegis, if you accept the available guidance, all of the relevant facts and circumstances must be considered. Are profits being made and who profits appear to be important considerations. Does the organization have for-profit competitors, which may be a factor?
Taking all these factors under consideration, I find the Aegis case a close case. The IRS may want to settle rather than lose the case and have it as precedent.
They read the EO Tax Journal at the IRS, so that is encouraging.
Why This Is Important
Mr. Ryan gave me a brief statement:
Making this film in a charity means that historical accuracy will be paramount, free of the conflict of profit goals. This creates a unique opportunity for those who care deeply about this story, and who have the wherewithal to make this film a reality. Great pains have been taken to tell this story of our shared history in a compelling, historically accurate way. Prominent Revolutionary War-era historians and Hollywood writers have embraced this script. Once the charitable foundation is in place, this film is ready to be made.
Clearly, any media effort that educates the public about the time of the American Revolution is a worthy endeavor. The nation was forged by war (the Articles of Confederation) and solidified in its aftermath (the Constitution). Many political, economic, and societal roadblocks might have led to the failure of the world’s first “modern” republic, a republic that embodied the practical application of enlightenment principles. The relationship between George Washington and Alexander Hamilton was critical to both the war effort and the founding of a stable, enduring nation. A film portrayal of this sometimes heated relationship provides unique insight into how ideas and ideals mean little if good people won’t work together to implement them.
A Practical Point
If you are sitting out there with your screenplay and know people just dying to contribute to the making of your film which might otherwise be commercially infeasible, starting a new not-for-profit is not the only way to go. A common technique, which is not without its perils, is to find a fiscal sponsor. A fiscal sponsor is an already recognized not-for-profit that will run the contributions for your project through its own books. That is a rather crass way of putting it. Of course it will cost you and there is risk to the sponsor. Also there are some attractive tax incentives to making a film on a for-profit basis.