Ferrari Films Issues Formal Rebuttal to Forbes Article Mischaracterizing Section 168(k) as "Worthless" for Film Investors

LOS ANGELES--(BUSINESS WIRE)--Ferrari Films founder, attorney, and producer Stacy Kemp Ferrari today issued a point-by-point rebuttal to a Forbes article asserting that Section 168(k) of the Internal Revenue Code is "worthless as a tax shelter to raise financing for films." Ferrari contends the article contains critical legal oversights that, if left unchallenged, could mislead investors and producers who may have entirely lawful and well-structured grounds to benefit from the statute.

"When an investor attends meetings, appears on set, is copied on every communication, and documents their time — the passive loss rules simply do not apply. That is the critical analysis missing from the Forbes article." — Stacy Kemp Ferrari, Ferrari Films

Share

"This article makes sweeping statements that do not hold up under a careful reading of the law," said Stacy Kemp Ferrari, who practices entertainment law and personal injury in addition to producing films. "Most significantly, the article ignores the material participation exception — arguably the most important variable in this entire analysis — and its conclusion that Section 168(k) is worthless for individuals is flatly incorrect when the investor is genuinely and actively involved in the production."

Point-by-Point Response to the Forbes Article:

On the claim that the deduction "only offsets a narrow category of income" for individuals:

This is the article's most consequential error. The passive loss limitations of 26 U.S.C. § 469 — which restrict deductions to passive income — do not apply when an investor materially participates in the activity. Under § 1.469-5T, an investor who participates in the production for more than 500 hours during the taxable year, or who satisfies other recognized material participation tests, qualifies as an active participant. Importantly, participation by a spouse is attributed to the taxpayer under § 1.469-5T, which can further assist investors in meeting the threshold. Active losses can offset any type of income, including wages and business income. An investor in a Ferrari Films Picture LLC who attends production meetings, is present on set, is copied on all project communications, and maintains contemporaneous records of their participation may well satisfy the material participation standard. In that scenario, a $1 million investment generating a $1 million Section 168(k) deduction can offset $1 million dollars of active income — resulting in zero federal income tax liability for that year.

On the claim that "at least 500 hours of active producing services per year" cannot be satisfied by investors:

Ferrari Films agrees that perfunctory involvement does not constitute material participation. However, the article implies this standard is categorically unachievable for film investors, which is incorrect. Investors who are present on set, attend production and investor meetings, review and respond to production communications, and maintain contemporaneous logs of their time and activities can satisfy the 500-hour threshold or other applicable tests under § 1.469-5T. The question is factual and investor-specific — not a blanket rule that bars all investors as a matter of law.

On the claim that deductions are denied under the "at-risk" rules:

The article is correct that leveraged, nonrecourse debt structures cannot support deductible losses under 26 U.S.C. § 465. Ferrari Films does not use such structures. The at-risk rules under § 465 limit deductible losses to the amount the taxpayer is genuinely at risk in the activity — including amounts paid or incurred in the production or distribution of the film. When investors contribute actual equity capital that is genuinely at risk, § 465 presents no obstacle. The article improperly conflates abusive, debt-leveraged tax shelter schemes with straightforward equity investments by active LLC members. These are fundamentally different transactions.

On the claim that only the "owner" at time of release may take the deduction, and the original use requirement:

Section 168(k) requires both that the taxpayer place the property "in service" and that the original use of the property begin with the taxpayer — or that the property be acquired under qualifying circumstances. 26 U.S.C. § 168(k). For a production LLC that develops and produces the film from inception, the original use requirement is straightforwardly satisfied. Under 26 U.S.C. § 168(k)(2)(H)(i), a qualified film is considered placed in service at the time of initial release or broadcast, which can include a qualifying public screening. A properly structured LLC that retains sufficient ownership interest at the time the film is placed in service satisfies the statutory requirements. This is a structuring question with workable answers, not an insurmountable bar.

On the tax treatment of film exploitation proceeds:

Proceeds from the sale or exploitation of a film by its owner are taxed as ordinary income, not capital gains. Films held for sale or exploitation in the ordinary course of business are expressly excluded from capital asset treatment under 26 U.S.C. § 1221. This is a critical distinction that any Section 168(k) analysis must address honestly: the deduction is front-loaded in the year the film is placed in service, and income realized on the film's exploitation is recognized at ordinary rates on the back end. This does not eliminate the benefit of Section 168(k) for a materially participating investor — the time value of the deferred tax liability and the ability to deploy that capital in the interim represent real economic value — but investors must model their returns with ordinary income treatment on the back end clearly understood.

On the comparison to fraudulent Section 181 transactions:

Ferrari Films strongly agrees that fraudulent, debt-leveraged tax shelters are illegal and harmful to the industry. Section 181, before its expiration, allowed a deduction for qualified film and television production costs up to $15 million (or $20 million for productions in certain low-income or distressed areas), subject to an election and specific requirements. The abuses that led to widespread IRS challenges under § 181 involved leveraged structures, fictitious debt, and investors with no genuine involvement in production — not equity-based investments by active participants. Section 168(k) is a different provision with different mechanics. Responsible, equity-based investment in an LLC with active investor participation, proper documentation, and a clean ownership structure shares nothing in common with the leveraged schemes the article describes.

On the claim that Section 168(k) provides "at best a short deferral of tax":

For an investor who materially participates and is at risk for the full investment amount, Section 168(k) provides a full deduction in the year the film is placed in service, offsetting active income at ordinary rates. When the film generates returns, those amounts are recognized as ordinary income — but the time value of the deferred tax liability, combined with the ability to redeploy that capital during the interim period, represents a meaningful and legitimate economic benefit. The article's dismissal of this benefit as merely a "short deferral" understates the economics for investors who qualify.

Ferrari Films' Commitment to Compliant, Transparent Film Investment

Ferrari Films structures all investor relationships around equity participation, genuine economic risk, active investor involvement, and meticulous documentation. The company works to ensure full compliance with the Internal Revenue Code, Treasury Regulations, and all applicable IRS guidance.

"We welcome scrutiny of film finance structures," said Ferrari. "What we push back against is a broad-brush dismissal of a legitimate federal tax provision that, properly applied, provides real benefits to investors who are genuinely part of the filmmaking process. That is exactly what we do at Ferrari Films, and we will continue to advocate for accuracy in the legal and financial discourse surrounding independent film."

This press release contains general legal and tax information for discussion purposes only and does not constitute legal or tax advice. Producers and investors should consult qualified legal and tax counsel regarding their specific circumstances.

About Ferrari Films Ferrari Films is a motion picture production and entertainment law practice founded by Stacy Kemp Ferrari and Bastiano Ferrari. The company produces independent film projects and is committed to transparent, compliant, and investor-aligned production financing.