You Be the Tax Judge: The Verdict on a Money-Losing Horse Business

If you sided with Frank Chapin and Sydney Gutierrez-Chapin, congratulations! You agreed with the Tax Court.

(This was close, with 59% of you favoring the IRS in the poll.)

In Chapin v. Commissioner, Judge Juan F. Vasquez ruled that the Chapins’ horse-breeding activity was a business, not a hobby, under Section 183. That might seem surprising. After all, the couple reported losses for six consecutive years, filed for bankruptcy, and acknowledged that horse breeding was central to their lives. But the Tax Court wasn’t persuaded that those facts meant the Chapins lacked a genuine profit motive. Here’s why.

What The Tax Court Considered

Under Section 183, the question isn’t simply whether an activity makes money. It’s whether the taxpayer engages in the activity with the required objective of making a profit. In this case, because an appeal would go to the Ninth Circuit, the taxpayers had to establish that profit was their predominant, primary, or principal objective.

Courts consider nine factors under Treasury Regulation Section 1.183-2:

Manner of operation. Did the taxpayers conduct the activity in a businesslike manner, including maintaining records?
Expertise. Did they have the knowledge and experience necessary to operate the activity profitably?
Time and effort. How much work did they devote to the activity?
Asset appreciation. Did they expect the assets used in the activity to appreciate in value?
Past success. Had they succeeded in similar or other business activities?
History of losses. Was the activity consistently losing money?
Occasional profits. Had the activity ever generated profits, and how substantial were they?
Financial status. Did they have other income that could support the losses?
Personal pleasure. Did they enjoy the activity for recreation?

No single factor controls, and the court doesn’t simply count how many favor the taxpayer or the IRS. Instead, the court considers the entire picture.

Why The Chapins Won

The Tax Court focused heavily on the Chapins’ experience, the time and effort they devoted to horse breeding, and the nature of the work.

Both had grown up around livestock and spent decades working with cattle and horses. Sydney had taken veterinary medicine courses and applied that knowledge to caring for their animals. They also belonged to established breed organizations that required them to register their foals and submit annual breeding reports.

And then there was the work. The Chapins fed and trained horses, maintained the property, provided routine veterinary care, and monitored mares during foaling season. Both had sustained injuries while working with horses.

The court also considered Frank’s accounting practice, which provided a steady source of income. That might seem like a point in the IRS’s favor. After all, taxpayers sometimes use losses from activities they enjoy to offset income from more profitable businesses. But the court wasn’t convinced that was happening here.

The Chapins’ reported annual horse-breeding losses ranged from roughly $10,000 to $23,000. The resulting tax savings were modest, and the accounting practice didn’t generate income at a level that persuaded the court the couple was using horse breeding as a tax shelter.

What About The Records?

Frank was an accountant and tax return preparer, yet the Chapins’ recordkeeping wasn’t perfect. The Tax Court acknowledged this. But imperfect records didn’t necessarily mean the couple lacked a profit motive.

The court found that, despite their informal approach, the Chapins conducted their horse-breeding activity in a sufficiently businesslike manner.

Judge Vasquez wrote, “Section 183 does not require that taxpayers operate their ventures with perfect business acumen.” A taxpayer can make mistakes—or simply be unsuccessful—and still have a genuine profit motive.

And What About Their Love Of Horses?

Perhaps the most compelling fact for the IRS was that the Chapins never seriously considered giving up ranching. Even after bankruptcy cost them most of their land, cattle, and equipment, they continued breeding horses. They loved what they did. But enjoying an activity doesn’t automatically make it a hobby. (I can relate.)

The court acknowledged that the Chapins’ persistence might reflect “unusual business judgment.” Still, their determination to continue despite financial and physical hardship didn’t establish a lack of an honest profit motive. Ultimately, the court found that their primary objective was profit.

But The Chapins Didn’t Win Everything

There’s an important distinction between establishing that an activity is operated for profit and proving that every expense claimed on a tax return is deductible. The Chapins cleared the first hurdle, but they still had to substantiate their deductions. The IRS had agreed to allow certain Schedule F deductions if the court determined that the horse-breeding activity was engaged in for profit.

But the Chapins couldn’t substantiate deductions beyond what the IRS conceded (another reminder of the importance of keeping great records). As a result, the court allowed the conceded deductions but disallowed the additional Schedule F deductions they claimed.

The broader case also involved disputes over unreported income, other business deductions, net operating losses, and penalties. They won only on whether their horse-breeding activity was engaged in for profit.

What Does This Mean For Taxpayers Today?

The Chapins’ case covered tax years 2009 through 2014, before the Tax Cuts and Jobs Act (TCJA) changed how hobby expenses are treated. Under the rules applicable to those years, taxpayers with activities not engaged in for profit could generally deduct certain hobby-related expenses up to the amount of income generated by the activity, subject to applicable limitations. Those expenses were generally miscellaneous itemized deductions subject to the 2% adjusted gross income floor.

The TCJA changed that beginning in 2018 by suspending miscellaneous itemized deductions, including the ordinary expenses associated with hobbies. The 2025 tax law, the One Big Beautiful Bill Act (OBBBA), made that disallowance permanent.

That means that under current law, hobby income remains taxable, but taxpayers generally cannot deduct ordinary hobby expenses against that income. Certain deductions that are independently allowable under other provisions of the Tax Code remain subject to their own rules. The distinction between a business and a hobby therefore still matters—a great deal.

The Takeaway

The Chapins’ case reminds us that losing money doesn’t automatically mean an activity isn’t a business. Neither does enjoying the work.

The Tax Court looked beyond the losses and the couple’s attachment to their horses. It considered their experience, the work they performed, their business practices, and their financial circumstances.

The result wasn’t a finding that the Chapins had operated a particularly successful business. It found that they operated a business with a genuine profit motive. For purposes of Section 183, that distinction made all the difference.

Final Note

Frank Chapin died at age 84, before the Tax Court issued its decision. According to his obituary, Frank worked in his accounting practice for 66 years, right up until his final days.

The case proceeded in the names of Frank L. Chapin, Deceased, and Sydney L. Gutierrez-Chapin. The case is Chapin v. Commissioner, T.C. Memo. 2026-76 (Aug. 27, 2026).