Storey v. Commissioner - No. 10230-10, 2012 Tax Ct. Memo LEXIS 114 (T.C. Apr. 19, 2012)

Rule:

In the Ninth Circuit, a taxpayer who seeks to deduct expenses under 26 U.S.C.S. § 162 for a particular activity must show that profit was the predominant, primary or principal objective. The U.S. Tax Court considers whether an activity is engaged in for profit on a case by case basis, taking into account the facts and circumstances involved. The taxpayer's expectation of profit need not be reasonable but it must be bona fide, as determined from all the surrounding facts and circumstances. Treas. Reg. § 1.183-2(a).

Facts:

Lee Storey was a law firm partner who decided to make a documentary film about a 1960s youth singing group. Though she admitted that her interest was piqued by her discovery that her husband had participated in the group, the wife insisted that she had a preexisting interest in film-making and believed that the subject might have broad appeal. After respondent IRS determined deficiencies in petitioner taxpayers' income tax for 2006 through 2008 and imposed an accuracy-related penalty per 26 U.S.C.S. § 6662, petitioners sought review.

Issue:

Was Storey involved in the trade or business of film production under section 162 during the years at issue?

Answer:

Yes

Conclusion:

The court sustained petitioners. First, per § 183’s nine-factor test, the court held that Storey’s evidence established that her dominant objective was to realize a profit from filmmaking. Second, noting that the IRS had the burden of proof on a claim that a § 181 election had not properly been made, the court held that the IRS position on that issue was contrary to relevant published guidance and that guidance in IRS publications on the issue was inconsistent. Next, because petitioners had substantially complied with the prerequisites for such an election and had adequately substantiated the questioned expenses, they were entitled to a ruling that the election was valid. Finally, given the court’s other findings, a § 6662 penalty was not proper.