One of the biggest misconceptions in tax enforcement is the idea that a serious business must look profitable right away — or look traditional from the start.

That assumption fails a growing share of today's economy.

Modern entrepreneurs often build businesses while still working full-time jobs. That is especially true in creative and knowledge-based industries, where founders spend years developing products, building audiences, securing financing, hiring experts, and testing market demand before they ever see meaningful revenue. In those industries, early losses do not automatically signal a hobby. They often signal a startup.

That is exactly why Storey v. Commissioner remains such an important case.

What the Court Actually Decided

In Storey, the Tax Court considered whether attorney Lee Storey's documentary film production activity was a legitimate trade or business or merely a personal passion project. The IRS took the position that it was essentially a labor of love and sought to disallow the related deductions. The court rejected that argument. It held that Storey was engaged in the trade or business of film production, that she pursued the activity for profit, that her Section 181 elections were valid, and that she was not liable for the accuracy-related penalties the IRS asserted.

The decision deserves renewed attention because it reflects a much more realistic understanding of how modern businesses are actually built.

Founder Behavior, Not Hobby Behavior

Storey was not casually experimenting with film. According to the court, she educated herself in filmmaking, attended formal training, formed a production company, maintained separate business accounts, created budgets and a written business plan, hired a bookkeeper and accountants, retained experienced industry professionals, secured insurance, obtained rights and releases, sought outside investment, borrowed funds, revised the film based on market feedback, and actively marketed the completed work through festivals and other distribution channels.

“That is not hobby behavior. That is founder behavior.”

And that distinction matters far beyond documentary filmmaking.

The Creator Economy Parallel

The creator economy — and the broader entrepreneurial economy — does not always follow a linear path. A consultant may launch a digital education company while still employed. A lawyer may produce media. A physician may build a wellness brand. A software executive may develop a product on nights and weekends for years before monetization catches up. These ventures may begin as side businesses, but many are operated with the same strategic discipline, capital risk, and professional seriousness as any conventional startup.

The problem is that tax scrutiny can lag behind that reality.

When an activity produces losses, especially in its early years, the IRS often looks to whether the taxpayer is truly operating with a profit motive. That inquiry is legitimate. But it can become distorted when examiners place too much weight on optics: the taxpayer has another source of income, the field appears glamorous, the project seems personally meaningful, or revenue has not yet materialized. Those facts can create suspicion, but they should not end the analysis.

How the Court Got It Right

The Tax Court in Storey got that right. The court acknowledged that Storey earned substantial income as a lawyer and that she enjoyed the filmmaking process. It also recognized that she had a history of losses during the years at issue. But it did not stop there. Instead, the court looked at how she actually operated: whether she approached the activity in a businesslike manner, whether she developed expertise, whether she devoted real time and effort, whether she used advisers, whether she tracked finances, whether she adjusted strategy, and whether the venture reflected a bona fide profit objective. On balance, the court found that it did.

That framework remains highly relevant.

Startup Losses Are Not Proof of Unseriousness

In many startup environments, losses are not evidence of unseriousness. They are part of the business model. Creative ventures, in particular, often involve long development cycles, significant upfront costs, uncertain distribution timelines, and delayed monetization. The court expressly recognized that startup periods in the arts may be longer and treated the years in question as part of a reasonable startup phase because the film had to be completed before it could realistically generate revenue.

“That is a practical and economically literate view — and one that applies directly to the modern creator economy.”

The High-Income Taxpayer Problem

The decision also sends an important signal about high-income taxpayers launching new ventures. There is often an unstated assumption that when someone with substantial earnings starts a second activity that generates deductions, the activity must be suspect. But financial capacity alone should not discredit entrepreneurial intent. The ability to fund a startup from existing income is not evidence of a hobby — it is often evidence of a founder who is serious enough to self-finance.

What This Means for Modern Entrepreneurs

If you are building a business alongside a professional career — whether in content creation, consulting, media, technology, or any other field — the Storey decision is worth understanding. It establishes that the IRS cannot simply point to losses, dual income, or personal enjoyment to disqualify a legitimate business. What matters is how you operate.

• Maintain separate business accounts and financial records
• Document your business plan, budgets, and strategic decisions in writing
• Hire qualified professionals — accountants, advisers, industry experts
• Track your time and effort devoted to the activity
• Adjust your approach based on market feedback and business results
• Pursue revenue actively, even if it takes time to materialize

These are not just good business practices. They are the exact factors courts and the IRS examine when evaluating whether an activity is a legitimate trade or business.

The decision also sends an important signal about high-income taxpayers launching new ventures. There is often an unstated assumption that when someone with substantial earnings starts a second activity that generates deductions, the activity must be suspect. But financial capacity alone should not discredit entrepreneurial intent. In fact, many successful founders fund early-stage ventures with income from another profession. That is not evidence against a business. Often, it is what makes the business possible.

The Lesson for Taxpayers and Practitioners

This is where Storey offers a useful lesson for both taxpayers and practitioners.

The strongest defense against a hobby-loss challenge is not a taxpayer's subjective statement that they hoped to make money. It is operational credibility. Separate entities and accounts. Clean books and records. Written plans. Industry-specific expertise. Professional advisers. Strategic changes based on feedback. Clear attempts to market and monetize. Real economic risk. Those were the kinds of facts that moved the court.

“Intent matters — but execution matters more.”

For founders, creators, and professionals building a second business, that lesson is hard to ignore. If you want your venture treated like a real business, run it like one. Treat your records, structure, and strategy as if they may someday be reviewed line by line — because they might be.

A Message for the IRS, Too

For the IRS, the lesson should be equally clear. The economy has evolved. Serious businesses do not always begin in office parks, factories, or storefronts. Sometimes they begin after hours, funded by personal risk, built through expertise, and operated in industries where profitability takes time. Tax administration should be sophisticated enough to recognize that.

Storey v. Commissioner did.

And in a world where more Americans are building businesses on the side before they build them full-time, that insight feels more current than ever.

Source: Storey v. Commissioner, T.C. Memo. 2012-115.