Ranching Activity Was Not Operated for Profit; Losses Disallowed

(Parker Tax Publishing November 2025)

The Tax Court held that a couple's ranching activity was not an activity engaged in for profit and thus the couple could not deduct the losses claimed on their tax returns for the years at issue. Applying the nonexclusive list of factors in Reg. Sec. 1.183-1, the court found that the taxpayers did not have a profit motive, given the absence of a business plan, the occasional small profit from an activity that generated large losses, and the personal pleasure the taxpayers derived from the activity. Young v. Comm'r, T.C. Memo. 2025-95.

Background

In 2013 and 2014, Wesley Young and his wife, Janet, (the Youngs) operated the Pecandarosa Ranch in Oklahoma. The farm had been purchased in 2008 by Janet and her husband at the time, Dale Todd, for $2 million. The ranch comprised 82.7 acres of real property and included a residence, a guest house, and a native pecan grove consisting of about 490 mature pecan trees.

Dale died in 2011, but before his death, he operated ETI, Inc (ETI), an S corporation that manufactured and refurbished airplane parts. Janet also worked at ETI and after Dale died, she became the sole shareholder of ETI. In 2012, Janet married Wesley Young. Both Wesley and Janet were physically active on Pecandarosa Ranch, provided manual labor for it, and sometimes worked after dark. Other qualified laborers assisted in carrying out this activity. Wesley resigned from a job at Hughes Cattle Co. to start work at Pecandarosa Ranch.

At all relevant times, Janet handled the business and administrative aspects of Pecandarosa Ranch. She did not make or keep a formal written business plan during 2008-2012 and neither she nor her husband tracked expenses relating to the operation of Pecandarosa with the goal of evaluating whether they could make a meaningful profit from the ranch. Although Janet provided invoices, receipts, and statements relating to the ranch to accountant Kathy Burch, who prepared the Youngs' income tax returns, the Youngs did not maintain a general ledger for Pecandarosa Ranch during 2013 and 2014.

On their joint federal income tax returns for 2013 and 2014, the Youngs reported that Pecandarosa Ranch's principal crop or activity was pecans. The 2013 Schedule F reported gross income of $11,677, total expenses of $269,333, and a net loss of $257,656 from Pecandarosa Ranch. Upon an audit of the Young's 2013 and 2014 tax returns, the IRS determined that the Pecandarosa Ranch activity was not engaged in a business for profit under Code Sec. 183. The Schedule F income was reclassified as other income and the Schedule F expense deductions were disallowed in their entirety for each year at issue, except for some miscellaneous expenses that were allowed. The IRS also asserted accuracy-related penalties for 2013 and 2014.

The Youngs petitioned the Tax Court for a review of the IRS determinations. Among other arguments, the Youngs disputed whether the Pecandarosa Ranch activity should be grouped together with the holding of the land on which activity occurs for purpose of Code Sec. 183.

Analysis

The Tax Court concluded that the Youngs were not engaged in the Pecandarosa Ranch activity for profit within the meaning of Code Sec. 183 and thus were liable for the IRS assessments.

To decide the issue of whether, for purposes of Code Sec. 183, the Pecandarosa Ranch activity should be grouped together with the holding of the land on which the activity occurs, the court looked at whether the general rule concerning the grouping of undertakings applied, or the special rule in the last two sentences of Reg. Sec. 1.183-1(d)(1) pertaining to farming applied. Under the general rule, the court considers the degree of organizational and economic interrelationship of the undertakings, the business purpose served by carrying on the undertakings separately or together, and the similarity of the undertakings. Under the special rule, the farming and holding of the land is considered a single activity only if the income derived from farming exceeds the deductions attributable to the farming activity which are not directly attributable to the holding of the land. The court agreed with the IRS that these were separate undertakings and that the Youngs' attempt to integrate the ranching activity with the assumed landholding activity was artificial and not reasonably supported by the record.

The court then addressed whether the Youngs engaged in the ranching activity with the intent to make a profit. The court observed that in the Tenth Circuit, the court to which this case would be appealable, profit must be the dominant motive. The court reviewed the following nonexclusive list in Reg. Sec. 1.183-1 of nine factors that should be considered in determining if the taxpayer had a profit motive: (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 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.

The court found that the couple had not established the existence of a business plan before or during the years at issue and did not conduct a feasibility study regarding pecan harvesting before purchasing the property and there was no evidence that the pecan operation of the prior owners was profitable. Further, the court said, while Mr. Young was an experienced ranch manager, there was no clear indication that he applied his expertise to improve profitability or conform any aspect of Pecandarosa Ranch to accepted business or technical practices during the years at issue. The court did find that the time and effort expended by the taxpayers in carrying on the activity was a factor that favored the Youngs, but their expectation that the assets used in their activity might appreciate in value was speculative and did not weigh in the Young's favor.

With respect to the success of the taxpayers in carrying on on similar or dissimilar activities, the court found this factor to be neutral. The Youngs' history of losses, the court said, weighed against them and favored the IRS. Finally, the occasional profits (if any) reaped by the Youngs, the financial status of the Youngs, and Mr. Young's enjoyment of participating in team roping were all factors that the court said weighed in favor of the IRS. After weighing the factors and the facts and circumstances, the court concluded that the Youngs did not have an actual and honest objective to operate Pecandarosa Ranch for a profit during the years at issue.

For a discussion of the rules for determining whether or not an activity is engaged in for profit, see Parker Tax ¶97,505.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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