Texas Cattle Ranch Was Operated For Profit Despite Significant Losses

(Parker Tax Publishing March 2026)

The Tax Court held that the deductibility of a cattle ranch owner's farming losses was not limited by Code Sec. 183 because he engaged in the ranch activity for profit. After applying the nine-factor test in Reg. Sec. 1.183-2(b), the court concluded that the businesslike manner in which the ranch was operated, the taxpayer's experience and educational background, the long hours he devoted to the ranch, and fact that he did not run the ranch as a hobby all weighed in the taxpayer's favor; the court also found that the ranch's lengthy startup period and long path to profitability justified its significant losses. Kolar v. Comm'r, T.C. Memo. 2026-15.

Background

Kenward Kolar's ranch (Kolar ranch) was first purchased by Kenward's ancestors in the late 1800s. The Kolar ranch is composed of multiple, noncontiguous tracts of land in south central Texas between Houston and San Antonio. In total the Kolar ranch spans approximately 836 acres. Kenward, his wife Rhonda, and, before their deaths, his parents, at various times owned, operated, managed, or otherwise worked on the Kolar ranch and participated in its various enterprises.

Throughout its long history, the Kolar ranch's ventures have included agricultural and nonagricultural operations. On the agricultural side the Kolar ranch maintained dairy cattle, beef cattle, egg and poultry production, catfish raised in tanks, hay crop production, and a pecan orchard.

Kenward lived on or near the Kolar ranch for most of his life. He received his bachelor's degree in animal science and biology from Texas A&M University and a master's degree in water supply and wastewater disposal from Sam Houston State University. After college, Kenward returned to work the Kolar ranch with his father. His father died in 2010, and Kenward became owner of the Kolar ranch land, while his mother inherited the financial assets associated with the Kolar ranch and managed ranch operations. After his mother passed away in 2017, Kenward took full ownership of the ranch's various enterprises and financial assets.

In 2016, while his mother was infirm, Kenward managed and operated the Kolar ranch. By this time, the ranch had fallen into disrepair. Upon taking over, Kenward needed to restore much of the Kolar ranch's infrastructure; he needed to restore fences, replace old equipment, clear overgrown pastures, and rebuild the beef cattle herd. In addition, portions of the ranch had become overgrown with huisache, a small, thorny bush-like tree that had made vast tracts unusable for raising cattle and other endeavors. Kenward had to clear the land of this nuisance tree.

Even after clearing the land and restoring the Kolar ranch's physical infrastructure, breeding a sustainable and profitable beef cattle herd (as opposed to buying and bringing in mature, market-ready cattle) can take many years. At the time he began managing the Kolar ranch, Kenward anticipated that returning the cattle-raising portion of the Kolar ranch to profitability would take five to six years.

Kenward worked long hours every day of the week on the Kolar ranch. He did not have time to attend cattle shows or similar ranching-related recreational activities, although he had participated in rodeos as a younger man. Kenward's goal was to increase his herd size to around 250 head of cattle. He believed the herd size could be increased even further if his son eventually took over the ranching operation. Kenward felt sentimentally attached to the Kolar ranch and desired that his son eventually take over.

During this period, Kenward's wife Rhonda served as the bookkeeper for the Kolar ranch and kept records that the couple would report to their CPA. The Kolar ranch had a separate checking account for ranch operations and Rhonda had a multistep recordkeeping process. She maintained a check register along with a "category" book for recording daily income and expenses. She also had a "weekly book" which she would prepare and use to go over the numbers with Kenward. She then prepared a monthly Excel spreadsheet and a final year-end spreadsheet documenting Kolar ranch income and expenses.

The Kolar ranch offered sources of revenue beyond its agricultural activities, including significant rents and royalties for extracting oil and gas from the Kolar ranch. From 2017 through 2022, Kenward reported royalty income of $2,349,780. The Kolar ranch also sold water extracted from artesian wells on the property. Not all the water from these wells was sold. Some of it was used to provide potable water to the Kolar ranch's cattle herd and to irrigate pastures upon which that herd could graze. In 2016 and 2017 Kenward was able to generate revenue by selling Kolar ranch well water. He sold water to the oil companies working on the Kolar ranch and to neighboring properties that grew and harvested pecan trees. Income from these water sales ranged from $500 to $40,000.

The cattle industry is cyclical and subject to droughts and other adverse weather events. In 2017 Hurricane Harvey hit the Gulf States, including portions of southern Texas, causing the destruction of many of the Kolar ranch's books and records. In 2020 the COVID-19 pandemic had a significant impact on Kenward's life and his burgeoning cattle ranch activity. Three out of five Kolar ranch employees died from COVID-19. As a result of a severe winter storm in February 2021, the ranch lost electricity for over two weeks and the water wells froze and burst their pipes, eliminating a primary source of water for the cattle. Many cows died from thirst. Around this time, the Kolar ranch's operations were also adversely affected by fire, droughts, grasshoppers, and floods. These setbacks did not entirely upend the operation, which continued to raise and sell cattle in limited numbers. In 2021 Kenward sold 15 head of cattle.

In a notice of deficiency, the IRS determined a deficiency for Kenward's 2016 tax year, which Kenward challenged in the Tax Court. The issue was whether Code Sec. 183, concerning activities not engaged in for profit, limited the deductibility of $205,514 of farm expenses Kenward incurred for 2016.

Taxpayers are generally allowed deductions for business-related expenses under Code Sec. 162 and for expenses paid or incurred for the production or collection of income under Code Sec. 212. Code Sec. 183, however, limits such deductions in the case of an activity engaged in by an individual or an S corporation that is not engaged in for profit, except (1) where such deductions would be allowed without regard to whether the activity was engaged in for profit or (2) to the extent that the gross income from such activity exceeds the deductions allowable without regard to profit motive.

Reg. Sec. 1.183-2(b) provides a nonexhaustive list of nine factors that should be considered in determining whether a profit motive exists: (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. No one factor is determinative.

Under Reg. Sec. 1.183-1(d)(1), the activity at issue must first be ascertained before determining whether a taxpayer had an intent to make a profit. Multiple undertakings may be treated as one activity if the undertakings are sufficiently interconnected.

Analysis

The Tax Court ruled in the Kenward's favor and held that the Code Sec. 183 limit on activity not engaged in for profit did not apply to his ranching activities.

First, the court determined that Kenward's ranching activity, not including land appreciation and oil and gas exploitation, was the relevant activity for purposes of applying Code Sec. 183. The court said that for land appreciation to be grouped with ranching activity (as Kenward asserted), the ranching activity would need to be independently profitable, excluding deductions relating to holding the property (such as rent and depreciation of improvements to real property0k, such that the ranching activity supported the holding of the land for appreciation. In the court's view, that was not the case with respect to the Kolar ranch, given that the ranching activity for the year at issue was not profitable. The court also found that the royalty income earned for extraction of oil and gas was a separate activity. The court reasoned that, other thang geographic proximity, oil and gas extraction was a fundamentally different enterprise from cattle ranching. The fact that both activities shared some roads and fences was, in the court's view, insufficient for them to be combined for purposes of applying the Code Sec. 183 limitation. The court nevertheless agreed with Kenward that the ranching activity at issue extended beyond just cattle ranching and included the development of well water on the Kolar ranch that, while generating some separate revenue, was used to provide potable water to the cattle herd.

Of the nine factors listed in Reg. Sec. 183-2(b), the court found that four factors favored Kenward, two were neutral, and three weighed against a profit motive. The court found that Kenward operated the ranch in a businesslike manner, noting the Kolars' use of separate bank accounts and Rhonda's multistep recordkeeping process. The court also thought Kenward's strategy for running the ranch were sufficient to constitute a business plan. Kenward's decades of experience working on the ranch and his educational background also weighed in favor of a profit motive. The court noted that Kenward's full-time occupation for many years, including the year at issue, has been managing and working on the Kolar ranch. In addition, the court found that Kolar worked long hours on the ranch, and his physical appearance and demeanor at trial suggested he was not a hobbyist who enjoyed recreational ranching. The court observed that, when scheduling trial days, Kenward credibly expressed concern that he had be back to tend to his cattle herd.

The largest factor weighing against a profit motive was the financial status of Kenward. The court said the fact the Kenward had substantial oil and gas royalty income, which could be offset by ranching losses, weighed in the IRS's favor. But the court concluded that the factors weighing in favor of a profit motive outweighed those against. The court thought that Kenward provided credible explanations justifying the lengthy startup period and long path to profitability.

For a discussion of determining whether an activity is engaged in for profit, see Parker Tax ¶97,505.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

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.