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Taxes in Your Practice: Tax court allows deductions for cattle ranch despite ongoing losses

Vol. 79, No. 2 / March - April 2023

Scott VincentScott E. Vincent

Scott E. Vincent is the founding member of Vincent Law, LLC in Kansas City. 


The tax court recently held that taxpayers were entitled to deductions related to their ranch property despite ongoing losses relating to the activity. In Wondries v. Commissioner of Internal Revenue1 the tax court found that the taxpayers had engaged in their ranching with an expectation for profit rather than as a hobby, despite never having a profit.


Paul and Patricia Wondries operated several successful business enterprises, including multiple car dealerships. Around 2004, the taxpayers acquired a cattle ranch to diversify their interests. The 1,100-acre ranch in California included main and guest houses, a pool, a foreman’s house, wells, springs, storage tanks, and about 30 miles of roads for access. The ranch purchase was financed through a bank and was supported by a business plan indicating the mortgage would be serviced through cattle sales and guided hunting activities within a few years, with a secondary plan to hold the property for investment. The taxpayers hired a foreman with extensive ranching experience to manage the ranch. The foreman oversaw operation of the ranch, including property oversight; repairing and replacing equipment and infrastructure; hiring and overseeing laborers; and managing cattle, crops, and expenditures.

After acquiring the property, the taxpayers determined income from ranch operations was not sufficient to cover the mortgage payments, particularly when feed prices increased and periods of drought limited the ability of the ranch to support the cattle. Guided hunting also failed to generate profits due to limited wildlife and high insurance costs. As a result, the taxpayers pivoted to an investment focus, working to improve the property and eventually sell at a gain. Improvements included fencing and irrigation work, renovating housing, clearing brush, and maintaining the grounds. The foreman and contractors did the bulk of this work, but the taxpayers performed tasks around the ranch a few days per month when they visited. Paul Wondries also performed the payroll and accounting functions for the ranch, and he had an accountant periodically review his accounting work for the ranch. The court also noted the taxpayers had several other residences and vacation homes, presumably an indication that the ranch was not just a vacation property.

Despite their efforts, the taxpayers realized a net loss for every year relating to the ranch and claimed corresponding deductions. The IRS audited the taxpayers and determined that the ranch property was not engaged in for profit, disallowing the taxpayers’ loss deductions with respect to the ranch for 2015, 2016, and 2017.  

Tax court opinion

Under the hobby loss rules,2 deductions attributable to an activity that is “not engaged in for profit” are allowed only to the extent of income from the activity or to the extent deductions are allowable regardless of any profit-seeking motive, whichever is larger. Treasury Regulations § 1.183-2(b) requires all facts and circumstances be considered in determining whether a taxpayer has a profit objective and enumerates nine non-exhaustive factors for consideration:

1.       manner in which the taxpayers carry on the activity; 
2.       expertise of the taxpayers or their advisors; 
3.       time and effort expended by the taxpayers in carrying on the activity; 
4.       expectation that assets used in the activity may appreciate in value; 
5.       success of the taxpayers in carrying on other similar or dissimilar activities; 
6.       taxpayers’ history of income or losses with respect to the activity; 
7.       occasional profits, if any, are earned from the activity; 
8.       financial status of the taxpayers; and 
9.       elements of personal pleasure or recreation involved in the activity.

No specific factor, nor the number of factors, is determinative. The regulations also acknowledge that courts may consider other factors in determining whether a taxpayer has the requisite profit motive for the activity in question.

In Wondries, the tax court reviewed the ranch activity under these factors. While acknowledging this is a “close case,” the court held that the taxpayers did engage in the activity with intent to make a profit as required by § 183 and the regulations. The court’s review of several key factors is outlined here:

  • Manner in which activity carried on. The court found that the taxpayers’ hiring of an experienced foreman for the ranch property and keeping complete and accurate books and records for the ranch indicated the activity was conducted in a businesslike manner. The court also noted the taxpayers’ shift to an investment focus after operations were not profitable indicated intent to make a profit from the ranch and property.
  • Expertise of taxpayers or their advisers. Although the taxpayers in Wondries did not have ranching experience, the court found that hiring an expert foreman and relying on his knowledge of best practices for running the ranch indicated a profit motive.
  • Time and effort expended by taxpayers. The taxpayers only spent a few days a month on the ranch. However, the court noted the ranch foreman and his wife lived and worked on the property year-round and credited the taxpayers with hiring numerous other individuals to perform work on the property. The court found this factor weighed in favor of profit motive.
  • Expectation that assets may appreciate in value. The taxpayers testified that they purchased the ranch to profit from operations and as an investment. The regulations confirm that “profit” can include appreciation in the value of land, since this can result in an overall profit on the activity when appreciation is realized, even if the taxpayers do not profit from current operations. In this case, the court noted credible testimony that appreciation of the ranch property value would more than recoup operational losses if the ranch were sold. The court found this factor was in the taxpayers’ favor but noted the potential for profit could be dwindling each year if continuing losses exceeded future appreciation.
  • Taxpayers’ success in similar or dissimilar activities. The taxpayers had no prior similar activities. However, the court found Paul Wondries’ success in multiple automotive dealerships, including multiple dealerships that were acquired at a loss and made profitable, weighed in the taxpayers’ favor.
  • Taxpayers’ history of income or loss; amounts of occasional profits. The Wondries’ ranch never produced a profit, either from ranching activities or guided hunting expeditions. The court noted challenges like drought and feed prices were foreseeable circumstances or customary business risks. These factors weighed against the taxpayers’ profit motive.
  • Taxpayers’ financial status. Substantial income from sources other than the activity in question may indicate that the activity is not engaged in for profit, particularly if the losses from the activity generate tax benefits. In this case, the taxpayers had substantial income from other sources, and losses from the ranch during the years in question generated significant tax benefits for them. This factor weighed against a profit motive and favored the IRS.
  • Elements of personal pleasure or recreation. The taxpayers did not spend substantial time at the ranch property. When they did visit, they primarily checked with the foreman and helped him with repairs. The court found this indicative of profit motivation. The IRS argued the taxpayers occasionally invited guests to the ranch and generally enjoyed enhancing the property, but the court stated this did not undercut the taxpayers’ position. The court also noted the taxpayers had numerous desirable properties other than the ranch where they engaged in “true recreational activities such as hiking, biking, and boating.” Based on these facts, the court found the taxpayers’ primary motivation for the ranch property was to earn a profit.

After weighing all the facts and circumstances under these factors, the court concluded the taxpayers engaged in the ranch activity for profit, and the activities could not be characterized as a hobby. Accordingly, the IRS disallowance of the taxpayers’ loss deductions relating to the ranch activity was not sustained.


Wondries provides a good outline of the key factors to consider in establishing a for-profit ranching or farming activity and avoiding the hobby loss rules that limit deductions to the income earned from those activities. Importantly, the court ruled in favor of the taxpayers in this case, providing a precedent for taxpayers in future hobby loss limitation cases.


1 T.C. Memo. 2023-5 (2023).

2 26 U.S. Code § 183.