## Facts

- Lee Storey was a law firm partner and full-time attorney.
- She produced a documentary film, “Smile ’Til It Hurts: The Up With People Story,” examining the history and cultural context of the performing group Up With People.
- For 2006–2008, she treated film production as a trade or business and claimed substantial deductions and losses related to production.
- She operated the activity in a businesslike manner, including organizing the production through a separate entity structure and accounts, keeping records, and using professional bookkeeping/accounting support.
- She prepared a written business plan, sought guidance from experienced film and industry professionals, and marketed the film to festivals and distributors; the film received festival recognition, though it had not generated substantial profits during the years at issue.
- The Commissioner issued a notice of deficiency determining income-tax deficiencies for 2006–2008 and accuracy-related penalties under I.R.C. § 6662(a), primarily by disallowing losses/deductions tied to the film activity and challenging her expensing of production costs under I.R.C. § 181.
- Petitioners Lee Storey and William Storey timely petitioned for redetermination in the U.S. Tax Court.

## Issues

1. Whether the film production activity constituted a trade or business carried on for profit under I.R.C. § 162 (and not an activity subject to limitation under § 183).
2. Whether the taxpayer made adequate elections under I.R.C. § 181 to currently deduct qualifying film production costs for the years at issue.
3. Whether certain claimed film-related expenses should be disallowed for lack of substantiation.
4. Whether petitioners were liable for accuracy-related penalties under I.R.C. § 6662(a) for the years at issue.

## Decision

- The court held the taxpayer was engaged in the trade or business of film production during each year at issue and had an actual and honest profit objective.
- The court held the taxpayer’s § 181 elections were adequate, permitting current deduction of qualifying production costs.
- The court declined to disallow the challenged expenses, finding sufficient substantiation.
- The court held petitioners were not liable for § 6662(a) accuracy-related penalties.

## Legal Principles

- Whether an activity is engaged in for profit is determined from objective facts and circumstances, commonly evaluated using the factors in the § 183 regulations; the inquiry is fact-intensive and no single factor is determinative.
- Conducting an activity in a businesslike manner (formal organization, separate accounts, recordkeeping, planning, and consultation with professionals) supports a finding of a profit objective and a § 162 trade or business.
- The absence of current profitability, particularly in an industry with long development and monetization cycles, does not by itself negate a profit motive where the taxpayer pursues realistic avenues for future revenue.
- A taxpayer may expense qualified film production costs under § 181 if the statutory and reporting requirements for a valid election are satisfied.
- Deductions are allowed where the taxpayer substantiates expenses with adequate records; where strict documentation is not required and records support it, the court may accept reasonable amounts.
- Accuracy-related penalties under § 6662(a) are not imposed where the Commissioner fails to establish a penalty basis or where the record shows reasonable, non-negligent reporting.

## Conclusion

The Tax Court rejected the IRS’s hobby-loss and procedural challenges to a documentary film project, finding the activity was a for-profit trade or business, the taxpayer properly elected § 181 expensing, the expenses were adequately substantiated, and accuracy-related penalties did not apply.


Storey v. Comm’r, T.C. Memo. 2012-115 (T.C. 2012)