Tax Court Rules Texas Ecotourism Ranch is Hobby, Not Business

July 2, 2024 | Jennifer Harrington

The case is Schwarz v. IRS, T.C. 2024-55 (U.S. Tax Court May 13, 2024).   

On May 13, 2024, the United States Tax Court found that Tecomate Industries, LLC (TI) did not engage in farming and ecotourism activity for profit. Between 2005-2020, TI claimed over $15 million in losses stemming from custom farming, hunting, fishing, and ecotourism. The taxpayers argued the farming activities were profitable because they led to an increase in value of the land, but the court found the real estate activities were separate activities.


Gary and Marlee Schwarz reside in Texas and are the sole partners of TI. Gary is an oral surgeon with a profitable practice. He is also an avid deer hunter. Beginning in the 1980’s Gary started to develop a ranching system that would encourage large bucks to thrive. Since this time, the couple bought and sold over 20,000 acres of land in the name of various entities that they fully or partially owned. Their basic business plan involved buying larger tracts of land, improving it by implementing the ranching practices that would encourage large bucks, and then selling the land in smaller tracts. They leased some of this land to TI, which engaged in custom farming, hunting, fishing, and ecotourism.

From 2005 to 2020, TI filed a Schedule F and claimed over $15 million in losses flowing from the ecotourism activities of hunting, fishing, and hosting events on a portion of the land. The IRS determined that TI’s Schedule F activity was not engaged in for profit and sent TI a notice of deficiency for the years 2015-2017.  The couple contested the determination, and the court case proceeded to trial.


On review, the tax court agreed, ruling that the Schedule F activity was not engaged in with the intent to make a profit. The court explained that businesses are allowed to deduct business-related expenses under IRC § 162. However, IRC §183(a), if the “activity is not engaged in for profit, deductions are generally limited to the amount of the gross income derived from the activity.[1]” Under Treas. Reg. § 1.183-1(d), when a taxpayer is engaging in multiple activities, the activities can each be examined for profit motive separately or they can be combined if the activities are sufficiently connected. The couple argued that their farming activities should be combined with the real estate activities of TI and their other entities to determine whether TI’s activities were a hobby or a business. Treas. Reg. § 1.183-1(d) directly addresses this issue. “Where land is purchased or held primarily with the intent to profit from increase in its value . . the farming and holding of the land will be considered a single activity only if the income derived from farming exceeds the deductions attributable to the farming activity[.]”

Upon examination, the court found that the custom farming and ecotourism were sufficiently connected and could be combined for examination, but the real estate activities were not. In support of their argument that the farming, ecotourism, and real estate activities should be examined together, the couple urged that the ecotourism and farming activities provide “brand and marketing benefits” to the real estate activities. The court rejected this argument, finding the effect to be “minimal”. Further, the couple did not present any information to the court about how the custom farming or ecotourism activities helped accomplish the goals associated with real estate development.  The couple chose to create business structures that separated the real estate activities from farming and ecotourism. The court concluded that all these factors meant that the farming and ecotourism activities were not sufficiently connected to real estate activities to allow the activities to be combined for profit-motive purposes.

After finding the real estate activities could not be combined with the farming/ecotourism activities, the court examined whether the farming/ecotourism activity was “engaged in for profit.” The court examined the nine factors set forth in Treas. Reg. §1.183-2(b) to determine that TI had not engaged in the activity for a profit:

  1. the manner in which the taxpayer carries on the activity;
  2. the expertise of the taxpayer or the taxpayer's advisers;
  3. the time and effort expended by the taxpayer in carrying on the activity;
  4. the expectation that assets used in the activity may appreciate in value;
  5. the success of the taxpayer in carrying on other similar activities;
  6. the taxpayer's history of income or loss with respect to the activity;
  7. the amount of occasional profits, if any;
  8. the financial status of the taxpayer; and
  9. whether elements of personal pleasure or recreation are involved..

After examining all nine factors, the court found that most factors favored the IRS. For example, TI had substantial losses year after year with no clear path to profitability. While the couple spent time managing the farm and had relevant knowledge, they also enjoyed personal benefits from the property like hunting and fishing. In fact, the court concluded that TI's work helped Gary continue his longtime hobby and dream of growing big deer. Considering all the facts and circumstances, the court determined that the couple did not have an actual and honest profit objective, determining that the farming and ecotourism activity was not engaged in with the intent to make a profit.

Because the court reasonably relied on the good faith judgment of their long-time, experienced CPA in treating the farming/ecotourism activity as a business, the court did not impose an accuracy related penalty.

[1] These deductions are miscellaneous itemized deductions, subject to the 2% floor. Because the Tax Cuts and Jobs Act eliminated these deductions from 2018 to 2025, deductions for hobby businesses are presently limited to deductions for the cost of goods sold.