California Ranch With Few Cattle Found to be Farming Business, Not Hobby

January 26, 2023 | Jennifer Harrington

The case is Wondries v. Commissioner, T.C. No. 2023-5 (U.S. Tax Court, Jan. 9, 2023).

On January 9, 2023, the Tax Court found that a ranch-owning couple was entitled to $421,503 in deductions over three years for expenses claimed on their Schedule F, even though they had sold most cattle associated within a few months after the purchase of the property. The IRS had also assessed § 6662(a) accuracy-related penalties for the years, but those were not upheld since the Court determined the taxpayers were entitled to the deductions.  


Taxpayers were experienced car dealership owners who had successfully converted at least twelve unprofitable dealerships into profitable enterprises. They had income from other sources ranging from $9.2 million to $12.3 million for the years examined. Taxpayers had multiple vacation homes and traveled abroad routinely.

In 2004, they decided to diversify their business. They bought a 1,100-acre ranch in California for $2,000,000. They funded this purchase with a bank loan and mortgage. In the business plan supplied to the bank, the taxpayers intended to generate a profit through cattle sales and guided hunting expeditions. Since the taxpayers did not have farming experience, they hired an experienced foreman. This foreman had two decades of experience and managed two profitable 1,000+ acre ranches nearby.

Unfortunately, their business plan encountered difficulties. Raising cattle became cost prohibitive due to low beef prices and high feed prices. A drought prevented the land from producing enough grass to feed the herd. Guided hunting was not profitable because the ranch was too small to sustain trophy animals. Further, the insurance requirements and liability risks associated with hunting significantly outweighed the profit potential.

With these discoveries, the taxpayers pivoted their business plan towards an investment strategy. They improved the property by hiring individuals to repair the fencing and irrigation system, clear brush, and renovate housing structures. Taxpayers would come to the ranch six days per month to help maintain the property. Since acquiring the ranch they have not realized a profit or broken even.

The taxpayers were audited, and the IRS determined that the ranch and its expenses were “activity not engaged in for profit” as defined by §183. Therefore, the taxpayers were not entitled to deduct the expenses associated with the ranch.


Taxpayers had the burden of proving their activities on the ranch were primarily for profit, and not done as part of a hobby. There are 9 factors the Court examines to ensure the taxpayer is conducting the activity “with the actual and honest objective of making a profit.” The Court examined all nine factors in this case.

The first factor is “the manner in which the taxpayer carries on the activity.” The court found that hiring an experienced foreman, maintaining complete and accurate books, and changing the plan upon discovering the unprofitability of raising cattle all weighed  towards a profit motive.

The second factor is “the expertise of the taxpayer or the taxpayer’s advisers.” Here, the argument rested on the foreman’s expertise since he was the taxpayers’ advisor. The IRS argued that ranch’s failures contradict the claim that the foreman is an expert at running a ranch. The Court disagreed, and found the foreman to be a knowledgeable advisor. Hiring him showed the taxpayers’ profit motive. 

The third factor is “the time and effort expended by the taxpayer in carrying on the activity.” The taxpayers did not spend a lot of time on the ranch, which usually shows a lack of profit motive. However, a profit motive was found since they hired competent and qualified people to work on the ranch.

The fourth factor is “the expectation that assets used in the activity may appreciate in value.”  Under Treasury Regulation § 1.183-2(4), a profit motive can be found when the profit will occur from the “appreciation in the value of the land used in the activity” even if there is no profit in the operation of the activity. The appreciation of the land must be sufficient to “recoup accumulated losses of prior years.” The taxpayers bought the ranch for $2 million and estimated its current value at $6.7 million. Using these numbers and the deductions already taken, the Court found that a profit could still be earned when the ranch sold. Therefore, the court found that this factor supported a profit motive. 

The fifth factor is “the success of the taxpayer in carrying on other similar activities.” The court looked at the taxpayers’ history of successfully making non-profitable car dealerships profitable and found that the taxpayers’ business experience indicated a profit motive for this factor.

The sixth factor is “the taxpayer’s history of income or loss with respect to the activity.”  The ranch has never produced a profit or broken even. Unforeseen circumstances can excuse a lack of profit and still allow the Court to find a profit motive.  The taxpayers argued that the 2004 drought made the ranch unprofitable, but the Court determined this was a poor excuse for continued losses in 2015, 2016, and 2017. Further, the initial plan to have guided hunts failed due to lack of planning, not unforeseen circumstances.  This factor indicates there was no profit motive.

The seventh factor is “the amount of occasional profits, if any, which are earned.” The ranch has never produced a profit or broken even. This factor indicates there was no profit motive.

The eighth factor is “the financial status of the taxpayer.” The taxpayers had substantial income from other activities. The ranch’s financial losses allowed them to reduce their income, and therefore created a personal tax benefit to the taxpayers. This factor indicates there was no profit motive.

The ninth factor is “whether elements of personal pleasure or recreation are involved.”  The Court found that the taxpayers did not use the ranch for personal pleasure. The Court cited the numerous other houses the taxpayers owned which allowed them to engage in “true recreational activities.”  This factor indicates the taxpayers activities on the ranch were done with a profit motive.

Ultimately the Court determined that the taxpayers’ activities with the ranch were done for profit, and were not a hobby. The Court emphasized that this situation was “a close case.” Since the Court determined that the ranch deductions were allowed, the accuracy-related penalties associated with the ranch’s deductions were rejected.