Even with Large Losses, a Ranch in Texas is not a Hobby
The Tax Court ruled in favor of a taxpayer with large ranch losses offset by oil and gas income
The recent U.S. Tax Court decision in Kolar v. Commissioner (T.C. Memo. 2026-15) provides a critical examination of the “hobby loss” rules under Section 183 of the Internal Revenue Code. The case centered on Kenward F. Kolar, Jr., who managed an 836-acre ranch in south-central Texas that had been in his family since the late 1800s.
Following the death of his father and the illness of his mother, Kolar took over the management of the property in 2016, a year in which the IRS determined a tax deficiency of $292,247. The IRS argued that Kolar’s ranching activities were not conducted with a primary motive for profit, particularly given the substantial losses reported alongside significant royalty income from oil and gas extraction on the same land.
The Nine-Factor Analysis
To determine whether an activity is engaged in for profit, the Tax Court applies the nine non-exhaustive factors set forth in Treasury Regulation § 1.183-2(b).
1. Manner of Carrying on the Activity: A profit motive is supported when a taxpayer operates in a businesslike manner and maintains accurate records. The Court found Kolar operated professionally, utilizing a separate checking account for ranch operations. His wife served as the bookkeeper, maintaining a multi-step system that included a check register, a “category” book for daily entries, a “weekly book” for review, and monthly and year-end Excel spreadsheets.
