Storey v. Comm'r

Rule of Law:

An activity, such as filmmaking, will be considered a 'trade or business' engaged in for profit under IRC § 162, rather than a hobby, if the taxpayer's primary purpose and dominant objective is to make a profit. This is determined by analyzing all facts and circumstances, with objective evidence of businesslike conduct weighing more heavily than the taxpayer's enjoyment of the activity or substantial income from other sources.

Facts:

• Lee Storey, a successful water rights attorney and law firm partner, had a long-standing interest in the arts, including directing theatrical productions.
• After her children left for college in 2003, Storey educated herself in filmmaking by taking a course at the New York Film Academy and attending community college classes.
• Storey's interest was sparked in the youth group 'Up With People' after learning her husband had been a member, and she negotiated the rights to its archival footage.
• In 2005, she formed Storey Vision, LLC, for her film production activity, maintaining separate bank accounts, a business credit card, and obtaining various forms of commercial insurance.
• During the years at issue (2006-2008), Storey developed a formal business plan, created budgets, obtained significant business loans, and hired a professional team including an award-winning producer and director.
• Storey dedicated substantial time to the project, including nights, weekends, and sabbaticals from her law practice, to conduct research, interviews, and oversee production.
• To enhance commercial viability, Storey conducted test screenings, changed the film's title based on market feedback, and attended industry conferences like the Sundance Institute's conference to network and promote the film.
• The final cut of the documentary, 'Smile 'Til It Hurts: The Up With People Story,' was completed in December 2008.

Procedural Posture:

• The Commissioner of Internal Revenue audited the joint tax returns of Lee and William Storey for the years 2006, 2007, and 2008.
• The Commissioner issued a notice of deficiency, determining that Lee Storey's filmmaking activity was not engaged in for profit under IRC § 183 and thus disallowed the expense deductions claimed on Schedule C.
• The notice of deficiency also determined that the petitioners were liable for accuracy-related penalties under IRC § 6662(a) for each of the years at issue.
• The Storeys timely filed a petition with the United States Tax Court, challenging the Commissioner's determinations of tax deficiencies and penalties.