Passion Assets, Hobby Losses, and the IRS: Lessons From a $200,000 Horse Case
If a passion activity is going to be treated like a business, it has to be run like one. Structure and administration decide the outcome.
The Wall Street Journal's Laura Saunders recently told the story of a Nebraska couple who bred and trained horses, deducted their horse-related losses as business expenses, and reduced their taxes by nearly $200,000.1 The Tax Court disallowed the deductions. The couple had not shown that the activity was carried on with a real profit motive, which is the test under the hobby loss rules of section 183 of the Internal Revenue Code.
The warning signs in the case were familiar to anyone who has read a hobby loss opinion:
- No formal business plan
- Inadequate books and records
- Personal and business expenses not cleanly separated
- No formal tracking of asset values
- A long history of losses
- Substantial outside income that the losses offset
- Significant personal enjoyment of the activity
The lesson is not "do not love horses"
The regulations under section 183 list nine factors, and none of them says a taxpayer has to dislike the activity. Plenty of successful businesses are built on things the owner loves. The lesson is simpler and harder: if a passion activity is going to be treated like a business, it has to be operated like one. That means a written plan, separate accounts, real books, periodic appraisals, a record of changes made to turn losses around, and advisors who are consulted and listened to.
Where planning fits
No trust or entity can turn a hobby into a deductible business. What good structure can do is support the governance that makes a profit motive credible and that protects the asset for the long term. For serious passion assets, whether horses, ranches, vineyards, aircraft, classic cars, collectibles, conservation land, or an operating company built around any of them, the right structure can provide:
- Professional governance, with managers, budgets, and reporting
- Clear ownership, so that the family and the IRS can see who owns what
- Asset protection against lawsuits and other creditor claims
- Fiduciary oversight by a trustee with a duty to act prudently
- Family succession, so the activity does not die with its founder
- Charitable planning for assets the family wants to give away over time
- Long-term administration that outlasts any one generation
The tools
Depending on the asset and the family's goals, the planning may involve a South Dakota domestic asset protection trust or dynasty trust to hold the entity that owns the asset, a charitable lead or charitable remainder trust for a family that wants philanthropy to be part of the plan, an irrevocable life insurance trust to provide liquidity, a GRAT or sale to an intentionally defective grantor trust to move appreciation out of the estate, a community property trust for married couples focused on basis, or a nongrantor trust designed for state income tax or qualified small business stock planning. Which of those fits depends on the facts, and the facts have to be documented.
The practical takeaway
The couple in the Journal story did not lose because they loved horses. They lost because, when the IRS asked for the records that a business keeps, the records were not there. If you own a passion asset of real value, the time to put the structure and the administration in place is before the first return that claims a loss, not after the first notice from the IRS.
Notes
- Laura Saunders, "Why a Couple Lost a $200,000 Tax Battle Over Their Horses," The Wall Street Journal (2026). The hobby loss rules are in I.R.C. section 183 and Treas. Reg. section 1.183-2. ↩
Terry L. (T. L.) Turnipseed, J.D., LL.M., CTFA, is a tax, trust and estate attorney in Fort Lauderdale, Florida, and Head of Estate and Tax Planning at Alta Trust Company. He is a former tenured professor of law at Syracuse University. Reach him at tl@turnipseed.law or on LinkedIn. This article is general information, not legal advice.