An Oklahoma couple was audited by the IRS for filing a Schedule F in 2017 and 2018 that reported $128,990 and $133,929 in deductions, respectively. Several years earlier, the couple entered into a business arrangement in which the taxpayers would contribute financially to the wife’s mother’s ranch. The couple reported the expenses on their tax return while the cattle sales and income from ranching were reported on the mother’s tax return. The reported income listed on taxpayers’ Schedule F came primarily from the rodeo winnings of the taxpayers’ children, and was minimal in comparison to the expenses of the ranch. 

During the audit and before the tax court, the IRS argued that the Schedule F activity was not a business activity. They determined the activity reported on the Schedule F was rodeoing, not ranching. As a result, the IRS determined that all deductions on the Schedule F should be disallowed.

The tax court disagreed with the IRS. The tax court found that the deductions were associated with the ranching activities, and the IRS failed to directly challenge the profit motive of the ranching. Further, the IRS did not challenge the substantiation of expenses behind the Schedule F deductions. Therefore, the court held that the IRS waived their right to refocus the audit to only rodeo expenses. As a result, the court found that the Schedule F activities were correctly reported as “for profit” activities.

Carson v. Commissioner, T.C. Memo 23086-21S (May 18, 2023).