Andrea Alvarez J

Professor Solcher
ACCT 3350.001
19 April 2016
The Unforeseen Tax Issues Behind Toy Storys Characters
The magical and unquestionable happiness that comes from watching a movie comes from the idea
that watching a movie, animated or not, takes you away from the less desirable aspects of life and
submerses you into a perfect, idyllic storyline where you can finally forget about the mundane troubles of
real life. However, for this particular assignment, the challenge was to find as many mundane tax issues
relevant to the characters and storyline of Toy Story 2s Fixing Woody video clip.
It is important to note that before this scene, Woody had been kidnapped from his owners yard sale
by Albert Al McWhiggin (a.k.a. The Chicken Man) and taken to his penthouse to be kept in a glass
case along with his other collectibles. Woody is then taken out of the glass case for a photo-shoot with the
rest of the Roundup Gang, when his arm unexpectedly falls of, prompting a panicking al to call The
Cleaner over the phone. Although the cleaner states that he is too busy to come over right that minute, he
finally agreed to come over first thing the next morning. During the Fixing Woody scene, Al excitedly
opens the door to The Cleaner, an old man of about 65, who asks Is the specimen ready for cleaning?
and looks incredibly serious and determined to get Woody all fixed-up (Pixar Wiki). The scene depicts the
professional and passionate process of restoring Woody, a collectible, to prime condition for Al to sell to a
museum in Tokyo, Japan. In the scene, you see an impatient Al ask how long it will take to get Woody
ready for shipping and the cute, old man respond with You cant rush art!. The old man then continues on
to delicately paint over all of Woodys defects and expertly sews back Woodys severed arm, the most
intricate and difficult part of the restoration, reflecting the Cleaners unique skill. Once Woody was
completely museum-ready, the old man gave Al strict instructions that Woody is for display only, and that

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he would not last if played with (Padnick). Too excited to care about this advice, Al pushes the old man to
the ground and looks lovingly and proudly at his prized possession and the rest of the movie continues to
the Disney-required happy ending.
Although not visible to the naked eye or naked movie-watching mind, there are several tax issues
outlined in the characters storylines in this specific scene from Toy Story 2. The tax issues relevant to the
scene are most clearly outlined when directly connected to each of the three characters involved in the
Fixing of Woody movie clip. First, Woody as a character in the film ultimately represents an inanimate
object, although sometimes taking on a life form when not in the presence of humans. Therefore, he nor the
other collectible dolls could qualify as a dependent to Al, even though they might have met the Support
Test, the Gross Income Test, the Member of Household relationship test and the Joint Return Test. The
rationale behind the must-be-an-actual-human requirement goes back to the equitable framework of tax:
inanimate objects, and pets for that matter, do not pay taxes or file tax returns, so why should the
government provide tax incentives to the owners of these adorable freeloaders? The IRS does not
specifically spell it out but it is tacitly implied that dependents- at least for taxation purposes- must be
human (TurboTax Blog Team). Woody also is not subject to the, rather-new, Affordable Care Act
requirement to report an individuals insurance status or offer of coverage for the year because he is not
required to file a tax return. Woody will also not be liable to pay the penalty of not having health insurance,
even though it would have been quite useful in the reattachment of his arm to his body; if he was human of
course. Second, Al McWhiggin is portrayed as a collector in this scene with an obsessive hobby of
collecting (and sometimes stealing) original and valuable toys that he later sells to private buyers and
museums. A key feature in identifying a business is the purpose and intent of making a profit. Although in
this movie Al is selling his collection of the Roundup Gang, it does not seem to be his number one priority
or purpose; seeing as he has an entire collection of less-valuable posters and other knick-knacks with
Woodys face all over his penthouse. Al is in the business of selling toys at his toy store and collecting the

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special toys on the side is merely his hobby. Al must report all income incurred during the year,
including the earnings he receives from owning Als Toy Barn and the income he makes from his hobby
of collecting vintage toys (TurboTax Tips and Videos). Al will have to itemize his deductions on his
Federal tax return if he wants to deduct any hobby expenses, specifically the expense of having Woody
almost-completely renovated by The Cleaner, who did not seem cheap. His hobby expenses are limited
to the amount of his hobby income. In this situation, Als expenses for cleaning up Woody are most likely
considerably less than the income he will receive from selling a collection of dolls with high demand in
Tokyo, Japan. In the case that the amount he receives from the seller is high enough to trigger an audit, the
IRS will need legitimate evidence that the intention of your hobby is not to make money and was merely a
byproduct of a successful hobby (IRS Tax Tip). Also, it is very important that Al, as messy as he seems
with Cheetos all over his hands, constantly updates his bookkeeping records on QuickBooks or any other
tool to keep extensive and accurate records of his expenses and income activity from his hobby in the case
of an Audit. Another important tax issue that comes up with Al is the income he needs to report from an
illegal activity. Al is required to report the income he makes from stealing and selling Woody (stolen
property) on Form 1040, line 21 unless he was to kindly return Woody to Andy, his rightful owner. IRS
Publication 17 also states: If you steal property, you must report its fair market value in your income in the
year you steal it unless in the same year, you return it to its rightful owner (IRS Publication 17). The IRS
is primarily concerned with collecting income tax as opposed to enforcing criminal law so the likelihood
that Al will get audited from reporting illegal taxable income is not too high. Third, The Cleaner, or the
cute old man as many like to refer to him as, has the most tax implications relevant to his actions in the
scene but also the most straightforward tax issues that can be resolved simply by filing the correct Federal
Tax Return. The Cleaner seems to be a sole proprietor who owns his own art business and is willing to be
contracted out by individuals to do work at their homes but bringing his own tools and assets to get the job
done, making him a true contractor (IRS Instructions). He seems to be a little bitter of an old man and one

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who is very devoted to his work as an artist so he will most likely be filing his tax return as single. While
being a sole proprietor entails certain freedoms, it also creates added responsibilities. One of the main tax
advantages of running a sole proprietorship is that he will be able to deduct the cost of his health insurance
and can be taken off your gross income even if he decides not to itemize deductions on his tax return. Every
business has operating expenses, and a sole proprietorship is no different. As long as his expenses are
"ordinary and necessary," in the words of the Internal Revenue Service, you can claim them on your tax
return (IRS Publication 17). In addition to health insurance, common deductions include equipment, travel,
capital assets and meals. From this scene in particular, it can be concluded that the Cleaner will be able to
deduct his inventory and supplies expenses and receive a deduction from the depreciation of his largervalue tangible assets, such as his advanced glasses, portable workstation, and spray-paint pump and the
amortization of his intangible assets, such as client goodwill. He will report the income and expenses from
his business on Schedule C of his Form 1040 (Tax Laws). However, the added tax liabilities he is
responsible for include self-employment taxes, which are the equivalent of the employers portion of the
Social Security and Medicare taxes that all workers have to pay in addition to regular income tax.
Depending on the state in which he conducts business, he might also have to pay yearly Business Personal
Property Tax on his tangible assets found on his depreciation schedule (TurboTax). The IRS tends to take a
closer look at tax returns filed by sole proprietors because it can be easy to blur the line between business
and personal expenses. Even though your business and your personal tax return are combined, the IRS still
expects you to keep accurate and distinct business records. Therefore, the main impact this would have on
the Cleaners actions is a stricter push towards better bookkeeping of his expenses and cost of goods sold to
make sure that his expenses are not surpassing his income in the case that he might be using more or less on
a specific client and not charging enough.
Schedule C has long been a hot topic for the IRS code and in tax law in general because of the
extended benefits and burdens it creates for self-employed taxpayers (Tax Laws). Each year, sole

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proprietors have the dreadful task of preparing and filing the extremely-detailed Schedule C with their 1040
to show the IRS whether their business had a taxable profit or a deductible loss. However, if the taxpayer
had business expenses at or below $5,000, they might qualify for the much shorter form, Schedule C-EZ
(IRS Instructions). Schedule C can seem a little daunting the first couple of years of preparing it yourself (if
you are brave enough), but filing will be easier if you plan ahead and keep good records, especially for
someone like The Cleaner whose service constantly uses up supplies and inventory. Another debated
aspect of the Schedule C is the wrongful deductions that are sometimes taken by taxpayers who want to
lump their home, vehicle and personal expenses along with their business expenses because they work at
home and do not know where to draw the line (TurboTax). If The Cleaner tends to do most of his client
work at other places other than his home, it will be in his benefit (and legal and accepted under the IRS
code) to deduct those miles as business expenses. The lines drawn between the deductible and the nodeductible for self-employed taxpayers will most likely continue to be a huge topic of discussion for the
IRS as more and more people become entrepreneurs.
Overall, the fact that you can do something as fun and delightful as watching a childrens movie and
expand your knowledge and application of tax concepts makes the Accounting career seem a little less
daunting and less predictable. Thanks to the detailed information and helpful instructions that have risen
along with the confusion and inconsistencies of filing a Schedule C, it seems that less and less tax evasion
and fraud will go unnoticed. As a result of stricter instructions, the basis of the tax structure will be
reinforced once again: creating an equitable economy in which people only pay what they are able to pay
and pay for the profits they have received or will receive from the cooperation of an entire nation. Tax is
that incredible; that even from the perspective of one section of a Federal tax return, Schedule C, you can
see the positives and negatives that interlace a simple sole proprietorship to a multinational corporation to
give us the prosperous matrix of businesses working together and succeeding together.

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Bibliography
IRS Instructions. "IRS Form 1040 Schedule C - Internal Revenue Service." Web. Apr. 2016.
<https://www.irs.gov/pub/irs-pdf/f1040sc.pdf>.
IRS Publication 17. "Your Federal Income Tax." Instructions on Your Federal Income Tax. Web. Apr.
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IRS Tax Tip. "Five Basic Tax Tips about Hobbies." Web. Apr. 2016.
<https://www.irs.gov/uac/Newsroom/Five-Basic-Tax-Tips-about-Hobbies>.
Padnick, Steven. "Love and Sacrifice: An Appreciation of Toy Story 2." Torcom Love and Sacrifice an
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TurboTax Blog Team. "How Much Does That Pet Cost in The Window?" TurboTax Blog. Web. Apr. 2016.
<http://blog.turbotax.ca/are-pets-tax-deductible/>.
TurboTax Tax Tips & Videos. "When the IRS Classifies Your Business as a Hobby." Web. Apr. 2016.
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