United States Tax Court

United States Tax Court

T.C. Memo. 2025-122

GARY M. SCHWARZ AND MARLEE SCHWARZ,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent 1

—————

Docket No. 12347-20.

Filed November 24, 2025.

—————

In Schwarz I, we held that TI, a partnership owned

by Ps, did not engage for profit in an activity reported on

Schedule F, Profit or Loss From Farming, during the years

2015–17. In our discussion of the issue, we cited Treas. Reg.

§§ 1.183-1(d)(1) and 1.183-2(b) numerous times. Several

months after Schwarz I was filed, Ps filed a Motion for

Reconsideration alleging (for the first time) that Treas.

Reg. §§ 1.183-1(d)(1) and 1.183-2(b) are invalid because

they do not represent the best interpretation of I.R.C.

§ 183. See Loper Bright Enters. v. Raimondo, 144 S. Ct.

2244, 2266 (2024) (stating that if an agency’s

interpretation “is not the best, it is not permissible”). Ps

later also alleged that (1) the regulations violate the noticeand-comment requirements of the Administrative

Procedure Act, see 5 U.S.C. § 553, and/or (2) Congress did

not delegate authority to the Secretary of the Treasury to

issue the regulations. We agreed to consider the validity of

the regulations and/or whether the validity of the

regulations would affect the outcome of this case.

Held: We need not address petitioners’ arguments

regarding the validity of Treas. Reg. §§ 1.183-1(d)(1) and

1 This Opinion supplements our previously filed opinion Schwarz v.

Commissioner (Schwarz I), T.C. Memo. 2024-55.

Served 11/24/25

2

[*2]

1.183-2(b). The portions of those regulations necessary to

decide this case are largely based on caselaw existing at the

time I.R.C. § 183 and the regulations were adopted.

Applying that preexisting caselaw (and some more recent

caselaw) to the facts of this case, we would still hold that

TI did not engage in the Schedule F activity with the intent

to make a profit.

—————

Hannah L. Templin, Margarita L. Stone, Todd R. Geremia, Justin L.

Campolieta, Michael S. Coravos, Adam P. Sweet, Benjamin J. Peeler,

and Kacie N.C. Dillon, for petitioners.

Matthew R. Delgado, Nga Q. Tran-Medina, Marcus R. Rhodes, Audrey

Marie Morris, and Roberta L. Shumway, for respondent.

SUPPLEMENTAL MEMORANDUM OPINION

GOEKE, Judge: On May 13, 2024, we filed Schwarz I, holding

that a partnership owned by petitioners, Tecomate Industries, LLC (TI),

did not engage in an activity (farming activity) reported on Schedule F,

Profit or Loss From Farming, for profit in the years at issue, 2015–17. 2

In our discussion of the issue, we cited Treasury Regulation §§ 1.1831(d)(1) and 1.183-2(b) numerous times. Petitioners did not challenge the

validity of those regulations before Schwarz I was filed. Accordingly, in

Schwarz I we did not address whether those regulations were valid.

On June 28, 2024, the Supreme Court issued Loper Bright

Enterprises v. Raimondo, 144 S. Ct. 2244 (2024). In Loper Bright the

Supreme Court overruled Chevron U.S.A. Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837 (1984), regarding the standard of

review that courts are to employ when determining whether an agency’s

interpretation of a statute is permissible. Loper Bright, 144 S. Ct.

2 We further held that petitioners were not liable for section 6662 accuracyrelated penalties determined by respondent. Respondent has not challenged our

holding regarding the penalties, and we will not address them further.

Unless otherwise indicated, statutory references are to the Internal Revenue

Code (Code), Title 26 U.S.C., in effect at all relevant times, and regulation references

are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant

times. Rounding adjustments have been made to many of the monetary, acreage, and

percentage amounts stated herein.

3

[*3] at 2273. The Supreme Court held that if an agency’s interpretation

“is not the best, it is not permissible.” Id. at 2266.

On September 16, 2024, petitioners filed a Motion for

Reconsideration alleging that Treasury Regulation §§ 1.183-1(d)(1) and

1.183-2(b) are invalid in the wake of Loper Bright. Petitioners requested

that we “reconsider [our] holding that [TI] did not engage in [a] section

183 for-profit activity by interpreting the law instead of deferring to” the

regulations. On November 1, 2024, respondent filed a Response in which

he objected to the granting of petitioners’ Motion for Reconsideration on

several grounds. On November 5, 2024, we issued an Order granting

petitioners’ Motion for Reconsideration “insomuch that the Court will

reconsider” Schwarz I. We ordered the parties to file responses

addressing, among other things, (1) relevant caselaw; (2) authority

delegated by Congress to the Secretary of the Treasury (Secretary) to

issue regulations regarding section 183; (3) the history of the regulations

at issue; (4) if any portion of the regulations is “found to be invalid, how

the Court should evaluate the facts of this case and whether there would

be any effect on the outcome”; and (5) “[a]ny other issues, law, and/or

facts the parties believe are relevant.” After several extensions of time,

the parties filed their Responses on June 27, 2025 (Responses). 3

Considering the parties’ Responses and the relevant facts and

law, we conclude that, even if Treasury Regulation §§ 1.183-1(d)(1) and

1.183-2(b) were held to be invalid, TI’s farming activity was not engaged

in for profit in the years at issue. Accordingly, we will not address the

validity of those regulations in this Supplemental Memorandum

Opinion.

3 Motions for Leave to File Amicus Brief were filed on July 9, 2025 (by the

National Foreign Trade Council, Inc. (NFTC)), and July 11, 2025 (by the Chamber of

Commerce of the United States of America (USCC)). Amicus Briefs lodged with those

motions pertain to issues regarding the validity of regulations in the wake of Loper

Bright. We will not address the validity of Treasury Regulation §§ 1.183-1(d)(1) and

1.183-2(b) in this Supplemental Memorandum Opinion because the holding of

Schwarz I would not change even if the regulations were invalid. Accordingly, we do

not find the lodged Amicus Briefs helpful in the resolution of this case and will issue

Orders denying the Motions for Leave to File Amicus Brief. See Trump Vill. Section 3,

Inc. v. Commissioner, T.C. Memo. 1995-281, 1995 Tax Ct. Memo LEXIS 282, at *2.

However, we thank the NFTC and the USCC for their efforts.

4

[*4]

Background

We adopt the findings of fact set forth in Schwarz I, repeating

such facts only as necessary for clarity and convenience.

Discussion

I.

Burden of Proof

Generally, taxpayers bear the burden of proving, by a

preponderance of the evidence, that the Commissioner’s determinations

are incorrect. Welch v. Helvering, 290 U.S. 111, 115 (1933). In certain

circumstances, the burden of proof with respect to any factual issue may

be shifted to the Commissioner. § 7491(a). The parties disagree whether

petitioners have met the statutory requirements to shift the burden of

proof to respondent. However, because we decide all issues on the

preponderance of the evidence, we need not decide which party bears the

burden of proof. See Knudsen v. Commissioner, 131 T.C. 185, 189 (2008),

supplementing T.C. Memo. 2007-340.

II.

Issues with Mr. Swanson’s Expert Report

Petitioners argue that property value appreciation should be

considered in determining whether TI’s farming activity was engaged in

for profit in the years at issue. Merrill Swanson acted as a property

valuation expert for petitioners. In two expert reports Mr. Swanson

determined valuations as of October 31, 2022, for (1) the La Perla HQ

Tract and (2) the Lone-Star Tract and Jalisco Ranch. 4 In Schwarz I we

did “not determine whether Mr. Swanson’s [property] valuations are

accurate,” because we ruled that petitioners’/Affiliated Entities’ 5 real

estate activities and TI’s farming activity were separate activities, and

the property valuations were therefore irrelevant. Schwarz I, T.C.

Memo. 2024-55, at *60–61. However, in support of an alternative

position discussed in this Supplemental Memorandum Opinion, see

infra Discussion Part VII, we will address issues with the valuations

4 See Schwarz I, T.C. Memo. 2024-55, at *61, for a description of the acreage

making up the La Perla HQ Tract and the Lone-Star Tract. The La Perla HQ Tract

was only a portion of La Perla Ranch.

5 As defined in Schwarz I, T.C. Memo. 2024-55, at *11, “Affiliated Entities” are

entities partially or wholly owned by petitioners. Although TI was owned by

petitioners, it is not included in the term “Affiliated Entities.” Id. at *13.

5

[*5] that Mr. Swanson determined for the La Perla HQ Tract and Jalisco

Ranch.

In one report, Mr. Swanson determined that the value of the La

Perla HQ Tract was $9,347,000 ($7,614 per acre), comprising

(1) underlying land worth $3,392,000, (2) major water features (La Perla

Lake, forage ponds, and Waterworld) worth $3,392,000, (3) irrigation

systems worth $107,000, (4) “above standard improvements” worth

$1,840,000, and (5) associated water rights worth $616,000.

In another report, Mr. Swanson valued Jalisco Ranch and the

Lone-Star Tract separately. Mr. Swanson determined that the value of

Jalisco Ranch was $4,765,000 ($5,941 per acre), comprising

(1) underlying land worth $2,199,000, (2) major water features (Jalisco

Lake and forage ponds) worth $2.2 million, (3) irrigation systems worth

$126,000, and (4) associated water rights worth $240,000.

Considering the record in this case, 6 we find that Mr. Swanson

(1) overvalued the major water features on the La Perla HQ Tract and

Jalisco Ranch and (2) overvalued the underlying land of the La Perla

HQ Tract and Jalisco Ranch. We will discuss these issues separately.

A.

Overvaluing Major Water Features

Mr. Swanson determined that the large lakes and forage ponds

(as well as associated lake infrastructure) on the La Perla HQ Tract and

Jalisco Ranch were major water features that doubled the value of the

underlying land of each property. 7 This determination was based on

nine “case studies” that Mr. Swanson created for his reports. Each case

6 The fair market value of property on a given date is a question of fact to be

resolved on the basis of the entire record. McGuire v. Commissioner, 44 T.C. 801, 806–

07 (1965); Kaplan v. Commissioner, 43 T.C. 663, 665 (1965). We evaluate expert

witnesses’ opinions in the light of their qualifications and the evidence in the record,

and we may accept an “opinion in toto or accept aspects . . . that we find reliable.”

Oconee Landing Prop., LLC v. Commissioner, T.C. Memo. 2024-25, at *58,

supplemented by T.C. Memo. 2024-73; see also Savannah Shoals, LLC v.

Commissioner, T.C. Memo. 2024-35, at *35. We also “may determine fair market value

on the basis of our own examination of the evidence in the record.” Savannah Shoals,

T.C. Memo. 2024-35, at *35; accord Buckelew Farm, LLC v. Commissioner, T.C. Memo.

2024-52, at *51, aff’d, No. 24-13268, 2025 WL 2502669 (11th Cir. Sept. 2, 2025).

7 Although the 6-acre House Lake sits on the La Perla HQ Tract, Mr. Swanson

did not deem House Lake to be one of the major water features on the La Perla HQ

Tract. Although the 18-acre Trophy Lake sits on the 1,000-acre Lone-Star Tract, Mr.

Swanson did not deem Trophy Lake to be a major water feature and thus found that

the Lone-Star Tract had no major water feature.

6

[*6] study comprised a pair of sales, “one recreational property with a

sizeable lake” or other major water feature(s) (major water feature

property) 8 and the other “a typical standard ranch for the [same] area”

without a major water feature. Mr. Swanson used the same nine case

studies in his valuations for both the La Perla HQ Tract and Jalisco

Ranch major water features. The properties used in the nine case

studies were different from the properties used as comparables to value

the underlying land of the La Perla HQ Tract and Jalisco Ranch.

For each case study pair, Mr. Swanson adjusted sale prices and

compared them. 9 For each pair, the major water feature property sold

for a higher adjusted price. Mr. Swanson considered the higher adjusted

sale prices for major water feature properties to be attributable to the

major water features. He concluded that a major water feature nearly

doubles the value of underlying land. The following table shows Mr.

Swanson’s results:

Case Study Pair No.

“Concluded Premium for [Major

Water Feature] Properties”

1

1.99

2

1.44

3

2.20

4

2.14

5

2.55

6

2.86

7

1.70

8

1.38

9

1.39

Average

1.96

Median

1.99

8 Not every major water feature property had a lake; Mr. Swanson stated that

one major water feature property had only “rural water service available and eighteen

stock tanks (some are sizable).”

9 Mr. Swanson adjusted sale prices for features other than water features, such

as physical features, recreational appeal, size, and various improvements.

7

[*7] Mr. Swanson then considered “the size, depth and condition of

the” lakes and forage ponds on the La Perla HQ Tract and Jalisco Ranch

“and the South Texas location of the ranch[es].” He concluded that the

lakes and forage ponds were major water features and “that an

appropriate multiple to be applied to the value of the underlying land is

near the middle of the [case study] range or 2.0.”

While all the case study properties were in Texas, none of the

properties were in Zapata County or adjacent counties. 10 The case

study 1 properties are in Medina County (approximately 150 miles from

Zapata County), and properties in the remaining eight case studies are

approximately 250–450 miles away. Of the nine case studies, three

involve properties near Dallas, Texas, two involve properties near

Houston, Texas, and two more involve properties near College Station,

Texas. We take judicial notice that Texas is a large state with distinctive

weather/precipitation patterns in different regions. Although Mr.

Swanson stated that he considered “the South Texas location of” the La

Perla HQ Tract and Jalisco Ranch, there is little to no analysis regarding

whether the value of a large lake on a property in Zapata County (where,

as Mr. Schwarz testified, drought is “not an act of God; that’s where we

live”) might be different from that of a similar lake on a similarly sized

property in a wetter region.

In addition to location issues, most of the case study major water

feature properties have water features that cover a significantly higher

percentage of land than the major water features on the La Perla HQ

Tract and Jalisco Ranch. 11 The major water feature properties in case

studies 3, 4, 5, 6, and 9 were about 90%, 70%, 20%, 29%, and 58% covered

by water, respectively. Conversely, the large lakes and forage ponds

cover only 8.7% of the La Perla HQ Tract and 10.7% of Jalisco Ranch.

The major water feature properties in case studies 1, 7, and 8 all appear

to be about 10% covered by water and are better comparables. It is

unclear how much of the major water feature property in case study 2 is

covered by water; Mr. Swanson only noted that the property had “rural

water service available and eighteen stock tanks (some are sizable).”

In valuing the major water features on the La Perla HQ Tract and

Jalisco Ranch, Mr. Swanson focused entirely on case studies involving

properties of questionable comparability. He did not consider the

10 We take judicial notice of the location of the counties in Texas.

11 Mr. Swanson acknowledged in his testimony that he focused on surface area

of water features because characteristics such as depth are often difficult to obtain.

8

[*8] December 2019 Twin Lakes South and Twin Lakes North sales,

which we find to be highly relevant. Lone Star La Perla, LP (LSLP), sold

Twin Lakes South and Twin Lakes North to different buyers. Twin

Lakes South (501 acres) sold for $2,250 per acre, and Twin Lakes North

(861 acres) sold for $2,150 per acre. Mr. Swanson used these sales as

two comparable property sales to value the underlying land of both the

La Perla HQ Tract and Jalisco Ranch in his reports. Mr. Swanson

recognized that Twin Lakes South has a “±30 surface acre lake” with a

“notable fish habitat,” while Twin Lakes North has only a 3-acre stock

tank. However, Mr. Swanson did not identify Twin Lakes South as a

major water feature property and did not use the Twin Lakes South and

Twin Lakes North sales as a pair in his water feature case studies.

Twin Lakes South is contiguous to the La Perla HQ Tract and

close to Jalisco Ranch, while Twin Lakes North is contiguous to Twin

Lakes South and close to both the La Perla HQ Tract and Jalisco Ranch.

TI completed work on the lake on Twin Lakes South, 12 as well as the

large lakes and forage ponds on the La Perla HQ Tract and Jalisco

Ranch. While the 6% water-to-land ratio on Twin Lakes South is smaller

than the 8.7% and 10.7% ratios on the La Perla HQ Tract and Jalisco

Ranch, respectively, the percentage is closer than those of most of the

major water feature properties in the case studies. And although the

lake on Twin Lakes South has a surface area of only 30 acres, Mr.

Swanson’s reports acknowledge that lakes as small as 7 acres can help

to designate a property as a major water feature property; the size of a

lake is less important than the percentage of the property covered by

water.

Mr. Swanson testified that “the lake on the Twin Lakes South is

muddy, and it’s a problem, and so the lake value is somewhat discounted

on that [sale] because it’s muddy, it’s not clear like the lakes on La

Perla.” However, Mr. Jones (the fisheries expert who advised TI) noted

“[w]ater clarity” issues and poor visibility in Jalisco and La Perla Lakes

in documents he prepared during 2016 and 2017. Mr. Jones also testified

at trial that “any muddy lake can be cleared within a few hours to two

days” using gypsum, which he previously used to improve the clarity of

La Perla Lake (and presumably of Jalisco Lake as well). There is no

12 An invoice issued by TI shows significant work by TI to expand the lake on

Twin Lakes South in 2012. Another invoice shows work by TI to “[d]eepen [the] Twin

Lakes South” lake in 2019.

9

[*9] indication that the mud in the lake on Twin Lakes South is of

concern or sets it apart from Jalisco and La Perla Lakes.

Considering property locations, known lake attributes, the ratio

of water to land, and the fact that TI improved the lake on Twin Lakes

South, we find (1) the lake on Twin Lakes South to be a major water

feature and (2) the pair of Twin Lakes Ranch sales to be more relevant

than any of the paired case study property sales in determining the

value of the major water features on the La Perla HQ Tract and Jalisco

Ranch. We must next (1) analyze the value of the lake on Twin Lakes

South and (2) consider that value, as well as the case studies, to

determine appropriate property valuation adjustments for the major

water features on the La Perla HQ Tract and Jalisco Ranch.

As part of our analysis of the value of the lake on Twin Lakes

South, we turn to the sections of Mr. Swanson’s reports regarding

comparable sales for underlying land valuations. As shown in the tables

infra this Discussion Part II.A, Mr. Swanson determined the valuation

of underlying land by attempting to neutralize differing property

features. One of the property features that he attempted to neutralize

was water features other than major water features (minor water

features). 13 When comparing sold properties to Jalisco Ranch, Mr.

Swanson noted that Jalisco Ranch had a “3[-inch] waterline from Loop

Road with wildlife waterings” minor water feature. With respect to Twin

Lakes South, Mr. Swanson noted a “±30 surface acre lake (muddy),” but

adjusted the sale price per acre of Twin Lakes South down only 10%

considering this (allegedly) minor water feature that he found to be

superior to the minor water feature(s) noted with respect to Jalisco

Ranch. 14 With respect to Twin Lakes North, Mr. Swanson noted a “±3

surface acre stock tank” and adjusted the sale price per acre of Twin

Lakes North down 5%. These adjustments are shown in the following

table from Mr. Swanson’s relevant report:

13 Mr. Swanson considered the valuation of underlying land and the valuation

of major water features in separate sections of his reports. Accordingly, he did not

make adjustments regarding the major water features in the sections of his reports

pertaining to underlying land valuations.

14 Because Mr. Swanson was valuing land, and water features increase sale

prices, superior water features on comparable properties appropriately resulted in a

negative adjustment to comparable property sale price per acre, while inferior water

features resulted in a positive adjustment.

10

[*10]

When comparing sold properties to the La Perla HQ Tract, Mr.

Swanson noted that the La Perla HQ Tract had “good water features,

±6.0 surface acre [House] lake, Arroyo Salado frontage (wet

11

[*11] weather);[15] piped water.” Mr. Swanson noted the “±30 surface

acre lake (muddy)” on Twin Lakes South but made no adjustment to the

sale price per acre considering this minor water feature that he found to

be equivalent to those noted with respect to the La Perla HQ Tract. Mr.

Swanson noted the “±3 surface acre stock tank” on Twin Lakes North

and adjusted the sale price per acre up 5% considering this minor water

feature that he found to be inferior to those noted with respect to the La

Perla HQ Tract. These adjustments are shown in the following table

from Mr. Swanson’s relevant report:

15 In his report, Mr. Swanson described Arroyo Salado as “a wet weather creek

which bisects the southern portion of” the La Perla HQ Tract.

12

[*12]

Odd in comparison were Mr. Swanson’s adjustments regarding

the Twin Lakes South and Twin Lakes North minor water features in

his Lone-Star Tract comparable property sales analysis. Mr. Swanson

13

[*13] noted that the Lone-Star Tract’s minor water features were

“Trophy Lake - ±18-acre lake; Arroyo Salado frontage (wet weather).”

Mr. Swanson noted the “±30 surface acre lake (muddy)” on Twin Lakes

South and adjusted the sale price per acre down 10%. Mr. Swanson

noted the “±3 surface acre stock tank” on Twin Lakes North and

adjusted the sale price per acre up 10%. What had previously been a 5%

gap with respect to the water features on Twin Lakes South and Twin

Lakes North, see the prior two tables, supra, was suddenly 20%, with no

explanation provided. The Lone-Star Tract comparable sales analysis is

shown in the following table from Mr. Swanson’s relevant report:

14

[*14]

In short, Mr. Swanson’s analyses show that he found the 30-acre

lake on Twin Lakes South increased the land value by only 5–20% more

than a 3-acre stock tank increased the land value of Twin Lakes North.

15

[*15] Other facts also support a low value for the lake on Twin Lakes

South. Twin Lakes South sold for $2,250 per acre and Twin Lakes North

sold for $2,150 per acre. But Twin Lakes South is only 58% the size of

Twin Lakes North, and it is well established that smaller parcels (other

things being equal) generally sell for higher per-acre prices than larger

parcels. See Estate of Giovacchini v. Commissioner, T.C. Memo. 2013-27,

at *96–97; Estate of Kolczynski v. Commissioner, T.C. Memo. 2005-217,

2005 Tax Ct. Memo LEXIS 219, at *17 (noting premium paid for smaller

parcels). In addition to being smaller, Twin Lakes South also had water

rights worth $48 per acre, while the water rights for Twin Lakes North

were worth only $9 per acre. Mr. Swanson noted no other significant

differences between the properties other than the lake on Twin Lakes

South compared to the stock tank on Twin Lakes North. 16 Reducing the

sale price for Twin Lakes South by $39 per acre for the additional water

rights and by a small amount per acre considering its smaller parcel size

(relative to Twin Lakes North) results in a per-acre sale price almost

identical to that of Twin Lakes North. This is strong evidence that the

30-acre lake on Twin Lakes South has little or no value above the 3-acre

stock tank on Twin Lakes North. And nothing in Mr. Swanson’s reports

indicates that a 3-acre stock tank has more than a minimal effect on a

property valuation.

Considering the facts summarized above, we find that the lake on

Twin Lakes South added 5–20% to the value of the Twin Lakes South

land. The low value of a lake that covers 6% of Twin Lakes South

strongly indicates that Mr. Swanson significantly overvalued the major

water features on the La Perla HQ Tract and Jalisco Ranch (which cover

8.7% and 10.7% of the properties, respectively).

In his reports, Mr. Swanson gave equal weight to each of the nine

case studies in determining that, on average, a major water feature

increases the value of land by 96%. We make three adjustments to Mr.

Swanson’s conclusion. First, we give no weight to case study 2, which

involved a major feature property with only “rural water service

available and eighteen stock tanks” of unstated size. Second, we give

double weight to case studies 1, 7, and 8, which involve major water

feature properties that all appear to be about 10% covered by water

16 In one of the three tables from Mr. Swanson’s reports, see supra p. 12, he

adjusted the price per acre for Twin Lakes South up by 5% regarding “[l]and [f]eatures”

but adjusted the price per acre for Twin Lakes North up by only 2.5% regarding land

features. In the other two tables there was no difference in the land feature

adjustments for the properties. We find the 2.5% difference in one of the tables to be

insignificant.

16

[*16] (close to the water coverage percentages for the La Perla HQ Tract

and Jalisco Ranch). These two adjustments somewhat offset each other;

making both reduces the average premium only from 96% to 94%.

Third, we find that a 5–20% valuation premium for the 30-acre

lake on Twin Lakes South strongly indicates that a 94% valuation

premium for the major water features on the La Perla HQ Tract and

Jalisco Ranch is significantly too high. Although the Twin Lakes South

property is not a perfect comparable property to the La Perla HQ Tract

and Jalisco Ranch, it is much more closely comparable than any case

study major water feature property. We find that a one-third reduction

to the 94% average premium discussed in the prior paragraph is

appropriate considering facts regarding Twin Lakes South. We therefore

find that a 63% valuation premium is appropriate for the major water

features on both the La Perla HQ Tract and Jalisco Ranch.

B.

Overvaluing Underlying Land

In Discussion Part II.A, supra, we included tables from Mr.

Swanson’s reports that show how he determined the value of the

underlying land for both the La Perla HQ Tract and Jalisco Ranch. The

table pertaining to the La Perla HQ Tract showed a rounded value for

the La Perla HQ Tract land of $5,955,000. Elsewhere in his report, Mr.

Swanson subtracted from that amount certain other items reflected in

the table: (1) water rights worth $616,000; (2) irrigation systems worth

$107,000; and (3) improvements (other than lakes) worth $1,840,000.

Accordingly, Mr. Swanson determined that the “value of the underlying

land is approximately $2,760 per acre or $3,392,000.”

Mr. Swanson failed to similarly subtract improvements for

Jalisco Ranch. The table pertaining to Jalisco Ranch showed a rounded

value for the Jalisco Ranch land of $2,565,000. Mr. Swanson subtracted

from that amount: (1) water rights worth $240,000 and (2) irrigation

systems worth $126,000. However, Mr. Swanson failed to subtract

“Jalisco Lake [i]nfrastructure” improvements worth $330,000. This is

despite his note that those improvements were to be “[c]onsidered with

lake and separately from land.” 17 Mr. Swanson determined that the

“value of the underlying [Jalisco Ranch] land is $2,199,000 or $2,740 per

acre.” Also subtracting the $330,000 in lake infrastructure

17 In another part of his report, Mr. Swanson similarly stated that “the Jalisco

Lake Complex include[s] . . . all infrastructure related to the lake” and found this lake

complex to double the value of the underlying Jalisco Ranch land.

17

[*17] improvements results in a value for the underlying land of only

$1,869,000 ($2,330 per acre).

Mr. Swanson committed another error with respect to each

comparable property sale used to value the land of both the La Perla HQ

Tract and Jalisco Ranch. As shown in the relevant tables, he made dollar

per acre adjustments to comparable sales with respect to the water

rights, irrigation systems, and improvements for the La Perla HQ Tract

and Jalisco Ranch, as well as adjustments based on sale dates and (for

one property) an adjustment because the comparable was only a listing

rather than an actual sale. In doing so he reached an “adjusted

price/acre” for each comparable property sale. Mr. Swanson then made

additional percentage adjustments to comparable property sales

regarding attributes such as location, land features, minor water

features, airstrip access, etc. He multiplied these percentage

adjustments (plus one) by the adjusted price per acre that he had

previously reached. Finally, he subtracted out specific values for the

water rights, irrigation systems, and (for the La Perla HQ Tract only)

other improvements. The issue is that most of Mr. Swanson’s percentage

adjustments to comparable property sales were positive. Thus, Mr.

Swanson added the water rights, irrigation system, and improvement

values, allowed them to be multiplied by mostly positive percentages

(plus one), and then subtracted out the original values. This was

advantageous for petitioners, but erroneous as a matter of valuation.

As an example, comparable sale #1 for the La Perla HQ Tract was

a property named Bell Ranch, which sold for $1,316 per acre. Mr.

Swanson added water rights, irrigation system, and improvement

values totaling $2,088 per acre, as well as a date of sale adjustment of

$147 per acre, to reach an adjusted price per acre of $3,551. Mr. Swanson

then multiplied that $3,551 by 1.35 owing to other adjustments he made

to the Bell Ranch sale totaling 35%. This resulted in an “indicated

value/acre” of $4,794. Mr. Swanson then effectively subtracted $2,088

from $4,794, which equals $2,706. 18 Had Mr. Swanson simply never

18 Mr. Swanson used the $4,794 “indicated value/acre,” as well as “indicated

value/acre” from the five other comparable sales, to determine that the value of the La

Perla Tract land was $4,850 per acre, or $5,955,000 total. Mr. Swanson then subtracted

out the water rights, irrigation system, and improvement values totaling $2,563,000

($2,088 per acre), resulting in a value for the La Perla Tract land of $3,392,000 ($2,760

per acre). The outcome would have been the same (assuming use of the same rounding

methods) had Mr. Swanson subtracted $2,088 from the “indicated value/acre” for each

comparable property sale and then used the six resulting amounts to determine the

per-acre value for the La Perla Tract land.

18

[*18] added the water rights, irrigation system, and improvement

values to begin with, his “indicated value/acre” for Bell Ranch would

have been only $1,975 (($1,316 + $147) × 1.35). The difference between

$1,975 and $2,706 is $731, which is (of course) 35% of $2,088. In short,

Mr. Swanson’s method improperly added $731 to the “indicated

value/acre” for Bell Ranch, which increased the value that Mr. Swanson

assigned to the La Perla HQ Tract land.

Correcting this error with respect to each comparable property

sale for both the La Perla HQ Tract and Jalisco Ranch results in an

average price per acre reduction of $296 for the La Perla HQ Tract

(about $363,000 total) and $62 for Jalisco Ranch 19 (about $50,000

total). 20

C.

Valuation Conclusions

For the La Perla HQ Tract, correcting the errors described supra

Discussion Part II.B yields a value for the underlying land of $3,027,385.

Applying a 63% valuation premium for the large lakes and forage ponds

increases the value to $4,934,638. To that amount we add $107,000 for

irrigation systems, $1,840,000 for improvements, and $616,000 for

water rights associated with the property, increasing the value to

$7,497,638. Making minor rounding adjustments, we find that, as of

October 31, 2022, the value of the La Perla HQ Tract was $7.5 million.

For Jalisco Ranch, correcting the errors described supra

Discussion Part II.B yields a value for the underlying land of $1,820,676.

Applying a 63% valuation premium for the large lake and forage ponds

increases the value to $2,967,702. To that amount, we add $126,000 for

19 The Jalisco Ranch adjustment is significantly smaller because (1) the water

rights, irrigation system, and improvement values for Jalisco Ranch were smaller than

those for the La Perla HQ Tract and (2) Mr. Swanson’s percentage adjustments to

comparable property sales were smaller with respect to Jalisco Ranch than they were

with respect to the La Perla HQ Tract. We note that a much smaller adjustment

(around $11,000, or $11 per acre) could apply to the Lone-Star Tract, but we will

consider the error with respect to the Lone-Star Tract comparable property sales to be

de minimis.

20 In each of his tables, Mr. Swanson calculated maximum, minimum, average,

and median prices per acre of comparable properties and determined a “[c]oncluded”

price per acre using an unclear method. Correcting Mr. Swanson’s errors reduces the

maximum, minimum, and median prices per acre by amounts different from the

average price per acre reduction. Because the method by which Mr. Swanson

determined the concluded price per acre is not clear, we find use of the reduction in

average price per acre to be the most appropriate.

19

[*19] irrigation systems and $240,000 for water rights associated with

the property, increasing the value to $3,333,702. 21 Making minor

rounding adjustments, we find that, as of October 31, 2022, the value of

Jalisco Ranch was $3,335,000.

III.

Background of Section 183 and Treasury Regulation §§ 1.183-1

and 1.183-2

Interpreting the Code and earlier statutes, courts have long

recognized that taxpayers generally may not deduct losses sustained in

activities not engaged in for profit. See Temple v. Commissioner, 10

B.T.A. 1238, 1241 (1928) (holding that taxpayer “was engaged in the

business of ranching and farming for profit and he is entitled to [a]

deduction . . . under section 214 of the Revenue Act of 1921”); Farish v.

Commissioner, 103 F.2d 63, 65 (5th Cir. 1939) (holding that “[a]s to both

partnerships we conclude that they were transactions entered into for

profit and the losses incurred . . . were deductible” under section 23 of

the Revenue Act of 1932), rev’g 36 B.T.A. 1114 (1937); Bessenyey v.

Commissioner, 45 T.C. 261, 273 (1965) (stating that “[u]nder any of the

possibly pertinent provisions of the 1954 Code, it is necessary that the

operation be conducted for the purpose of making a profit” and citing

sections 162, 165, and 212 in a footnote), aff’d, 379 F.2d 252 (2d Cir.

1967). As the U.S. Court of Appeals for the Ninth Circuit has explained:

From the early case of Wilson v. Eisner, 282 F. 38 (2d Cir.,

1922) through Brooks v. C. I. R., 274 F.2d 96 (9th Cir.,

1959) and Wright v. Hartsell, 305 F.2d 221 (9th Cir., 1962),

the warp and woof of the definitions of “carrying on any

trade or business” as used in Section 23 and elsewhere in

the [Internal Revenue Code of 1939], is that the activity or

enterprise claimed to constitute “carrying on a business” be

entered into, in good faith, with the dominant hope and

intent of realizing a profit, i.e., taxable income, therefrom.

As Judge Learned Hand pointed out in Thacher v. Lowe,

288 F. 994 (D.C.N.Y. 1922), in ascertaining that intention,

the Court must consider if it can be honestly said to be

carried on for profit. “[I]f a man does not expect to make

21 We do not add the $330,000 in lake infrastructure improvements because,

as Mr. Swanson noted, these improvements were to be “[c]onsidered with lake and

separately from land.” These improvements are accounted for as part of the 63% major

water feature valuation premium.

20

[*20] any gain or profit out of the [activity], it cannot be said to

be a business for profit.” (At 995).

From the very import of Section 23, which

presupposes that the taxpayer has received taxable income

before deductions can be taken therefrom, it is clear that

Congress intended that the profit or income motive must

first be present in and dominate any taxpayer’s “trade or

business” before deductions may be taken. While the

expectation of the taxpayer need not be reasonable, and

immediate profit from the business is not necessary,

nevertheless, the basic and dominant intent behind the

taxpayer’s activities, out of which the claimed expenses or

debts were incurred, must be ultimately to make a profit or

income from those very same activities. Doggett v. Burnet,

62 App.D.C. 103, 65 F.2d 191 (1933); C. I. R. v. Widener, 33

F.2d 833 (3d Cir., 1929); Coffey v. C. I. R., 141 F.2d 204 (5th

Cir., 1944); Morton v. C. I. R., 174 F.2d 302 (2d Cir., 1949);

Brooks v. C. I. R., supra; Trent v. C. I. R., 291 F.2d 669 (2d

Cir., 1961). Absent that basic and dominant motive, the

taxpayer’s activities, no matter how intensive, extensive or

expensive, have not been construed by the Courts as

carrying on a trade or business within the purview of

Section 23. Coffey v. C. I. R., supra; Morton v. C. I. R.,

supra; Thacher v. Lowe, supra; White v. C. I. R., 227 F.2d

779 (6th Cir., 1955); Kerns Wright, 31 T.C. 1264, aff. 274

F.2d 883 (6th Cir., 1960); Stephen H. Tallman, 37 B.T.A.

1060.

Hirsch v. Commissioner, 315 F.2d 731, 736–37 (9th Cir. 1963), aff’g T.C.

Memo. 1961-256.

Against this backdrop, section 183 was enacted in 1969 and

effective for taxable years beginning after December 31, 1969. Tax

Reform Act of 1969, Pub. L. No. 91-172, § 213, 83 Stat. 487, 571–72. The

present text of section 183(a) through (c) provides:

Sec. 183. Activities not engaged in for profit

(a) General rule.—In the case of an activity engaged

in by an individual or an S corporation, if such activity is

not engaged in for profit, no deduction attributable to such

activity shall be allowed under this chapter except as

provided in this section.

21

[*21]

(b) Deductions allowable.—In the case of an activity

not engaged in for profit to which subsection (a) applies,

there shall be allowed—

(1) the deductions which would be allowable

under this chapter for the taxable year without

regard to whether or not such activity is engaged in

for profit, and

(2) a deduction equal to the amount of the

deductions which would be allowable under this

chapter for the taxable year only if such activity

were engaged in for profit, but only to the extent that

the gross income derived from such activity for the

taxable year exceeds the deductions allowable by

reason of paragraph (1).

(c) Activity not engaged in for profit defined.—For

purposes of this section, the term “activity not engaged in

for profit” means any activity other than one with respect

to which deductions are allowable for the taxable year

under section 162 or under paragraph (1) or (2) of section

212.

Excepting one minor change, 22 section 183(a) through (c) has not been

amended since enactment.

Analyzing section 183 and regulations pertaining to that section,

we have stated:

The somewhat enigmatic language of section 183

can be better understood by viewing that section in the

context of its position in the Code. Section 183 is found in

subtitle A, chapter A, subchapter B, part VI, entitled

“Itemized Deductions for Individuals and Corporations.”

The first section under part VI is section 161, which

provides, in part, “in computing taxable income under

section 63(a), there shall be allowed as deductions the

items specified in this part.”

Such specified deductible items include, among

numerous others, trade or business expenses (sec. 162),

22 In 1982 “an electing small business corporation (as defined in section

1371(b))” was struck from section 183(a) and “an S corporation” was inserted in its

place. Subchapter S Revision Act of 1982, Pub. L. No. 97-354, § 5(a)(23), 96 Stat. 1669,

1694.

22

[*22] interest (sec. 163), and taxes (sec. 164). Viewed in the

context of its position in part VI, section 183 is simply a

statute that allows certain deductions attributable to

“activities not engaged in for profit” in computing taxable

income under section 63(a). Section 183(c) defines an

“activity not engaged in for profit” as an activity for which

deductions under section 162 or section 212(1) or (2) would

not be allowable.

....

The legislative history surrounding section 183

indicates that one of the prime motivating factors behind

its passage was Congress’ desire to create an objective

standard to determine whether a taxpayer was carrying on

a business for the purpose of realizing a profit or was

instead merely attempting to create and utilize losses to

offset other income. S. Rept. No. 91-552, to accompany H.R.

13270 (Pub. L. 91-172), 91st Cong., 1st Sess. 104 (1969).

In an effort to comply with the congressional

purpose of establishing objective tests to determine

subjective intentions, the Commissioner promulgated

regulations under section 183 which set forth nine separate

factors which should be examined in making a profitmotive determination. Sec. 1.183-2(b)(1)–(9), Income Tax

Regs. The regulations further provide, however, that these

enumerated factors are neither exclusive nor necessarily

controlling in each case and that “all the facts and

circumstances with respect to the activity are to be taken

into account.” Sec. 1.183-2(b), Income Tax Regs.

Further, we note that the test under section 183 is

not whether the taxpayer’s intention and expectation of

profit is reasonable but rather whether such intention and

expectation is bona fide.

Although section 183 has clearly placed a gloss on

post-1969 judicial profit-motive inquiries, we think pre1969 case law in this area remains relevant. We say this

for two reasons. First, section 183(c) defines an “activity

not engaged in for profit” as an activity with respect to

which deductions would not be allowable under section 162

23

[*23] or section 212(1) or (2). Thus, prior cases dealing with profit

motive under these sections retain their vitality. Second,

the so-called “relevant factors” set forth in the regulations

are themselves derived from prior case law and, therefore,

we think such prior law has a role to play in their

application.

Accordingly, determinations as to the existence or

absence of a profit motive, whether directed toward years

beginning prior or subsequent to December 31, 1969, will

quite often be identical.

Jasionowski v. Commissioner, 66 T.C. 312, 320–22 (1976) (footnotes and

most citations omitted).

The legislative history cited in Jasionowski states, in part:

The committee amendments provide that an activity

is not engaged in for profit if deductions with respect to the

activity are not allowable as trade or business expenses or

as expenses incurred for the production of income or in

connection with property held for the production of income.

In making the determination of whether an activity is not

engaged in for profit, the committee intends that an

objective rather than a subjective approach is to be

employed. Thus, although a reasonable expectation of

profit is not to be required, the facts and circumstances

(without regard to the taxpayer’s subjective intent) would

have to indicate that the taxpayer entered the activity, or

continued the activity, with the objective of making a

profit.

S. Rep. No. 91-552, at 104 (1969), reprinted in 1969-3 C.B. 423, 490.

Although Congress apparently intended for “an objective rather than a

subjective approach” to govern “the determination of whether an activity

is not engaged in for profit” for purposes of section 183, S. Rep. No. 91552, at 104, 1969-3 C.B. at 490, Congress did not state as much in section

183. However, as discussed in Jasionowski, 66 T.C. at 321, the Secretary

issued Treasury Regulation § 1.183-2, which provides that “[t]he

determination whether an activity is engaged in for profit is to be made

by reference to objective standards, taking into account all of the facts

24

[*24] and circumstances of each case.” Treas. Reg. § 1.183-2(a). 23

Treasury Regulation § 1.183-2(b) lists nine “factors which should

normally be taken into account” in determining whether an activity is

engaged in for profit. 24 Treasury Regulation § 1.183-2(b) also provides

that

[i]n determining whether an activity is engaged in for

profit, all facts and circumstances with respect to the

activity are to be taken into account. No one factor is

determinative in making this determination. In addition,

it is not intended that only the factors described in this

paragraph are to be taken into account in making the

determination, or that a determination is to be made on the

basis that the number of factors (whether or not listed in

this paragraph) indicating a lack of profit objective exceeds

the number of factors indicating a profit objective, or vice

versa.

The Secretary also issued Treasury Regulation § 1.183-1(d)(1),

which provides:

(1) Ascertainment of activity. In order to determine

whether, and to what extent, section 183 and the

regulations thereunder apply, the activity or activities of

the taxpayer must be ascertained. For instance, where the

taxpayer is engaged in several undertakings, each of these

may be a separate activity, or several undertakings may

constitute one activity. In ascertaining the activity or

23 The Secretary issued Proposed Treasury Regulation §§ 1.183-1 and 1.183-2

in 36 Fed. Reg. 16,112, 16,113–18 (Aug. 19, 1971). The Secretary issued final

regulations in 37 Fed. Reg. 13,680–85 (July 13, 1972). Certain differences between the

proposed regulations and final regulations will be noted in this Supplemental

Memorandum Opinion.

24 The nine factors are: (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 other similar or dissimilar activities; (6) the taxpayer’s history of income

or losses 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. Treas. Reg. § 1.183-2(b). Proposed Treasury Regulation

§ 1.183-2(b) contained 11 factors, though 2 (“[t]he cause of the losses” and

“[e]xpectation of profit by the taxpayer”) were removed from the final regulation.

Compare 36 Fed. Reg. at 16,117, with 37 Fed. Reg. at 13,684.

25

[*25] activities of the taxpayer, all the facts and circumstances

of the case must be taken into account. Generally, the most

significant facts and circumstances in making this

determination are the degree of organizational and

economic interrelationship of various undertakings, the

business purpose which is (or might be) served by carrying

on the various undertakings separately or together in a

trade or business or in an investment setting, and the

similarity of various undertakings. Generally, the

Commissioner will accept the characterization by the

taxpayer of several undertakings either as a single activity

or as separate activities. The taxpayer’s characterization

will not be accepted, however, when it appears that his

characterization is artificial and cannot be reasonably

supported under the facts and circumstances of the case. If

the taxpayer engages in two or more separate activities,

deductions and income from each separate activity are not

aggregated either in determining whether a particular

activity is engaged in for profit or in applying section 183.

Where land is purchased or held primarily with the intent

to profit from increase in its value, and the taxpayer also

engages in farming on such land, the farming and the

holding of the land will ordinarily be considered a single

activity only if the farming activity reduces the net cost of

carrying the land for its appreciation in value. Thus, the

farming and holding of the land will be considered a single

activity only if the income derived from farming exceeds

the deductions attributable to the farming activity which

are not directly attributable to the holding of the land (that

is, deductions other than those directly attributable to the

holding of the land such as interest on a mortgage secured

by the land, annual property taxes attributable to the land

and improvements, and depreciation of improvements to

the land).[25]

25 In the sentences regarding farming and the holding of land, Proposed

Treasury Regulation § 1.183-1(d)(1) made references to the taxpayer’s “expect[ation]

that the farming activity will reduce the net cost of carrying the land” and “inten[tion]

that the income derived from farming will exceed the deductions attributable to the

farming activity which are not directly attributable to the holding of the land.” 36 Fed.

Reg. at 16,116. These sentences were altered in the final regulation. Compare 36 Fed.

Reg. at 16,116, with 37 Fed. Reg. 13,683.

26

[*26] IV.

Summary of the Parties’ Arguments and Basis for Decision

Respondent’s position is that we should reaffirm the holding of

Schwarz I, for two reasons. First, respondent argued that Treasury

Regulation §§ 1.183-1 and 1.183-2 are valid because they (A) represent

the best interpretation of section 183, see Loper Bright, 144 S. Ct.

at 2266 (holding that if an agency’s interpretation “is not the best, it is

not permissible”), and/or (B) are a valid exercise of the rulemaking

authority that Congress delegated to the Secretary in section 7805(a). 26

Second, respondent argued that even if both regulations are invalid, our

holding should remain the same on the basis of the relevant facts,

statutes, and caselaw.

Petitioners’ position is more intricate. Petitioners argued that

Treasury Regulation §§ 1.183-1 and 1.183-2 are invalid because (1) the

regulations violate the notice-and-comment requirements of the

Administrative Procedure Act, see 5 U.S.C. § 553; (2) the regulations do

not represent the best interpretation of section 183; and/or (3) section

7805(a) does not delegate independent discretionary authority to the

Secretary to fill gaps in the Code. 27

As part of their arguments regarding the invalidity of the

regulations, petitioners recognized that Congress “codifie[d] a focus on a

profit motive from case law interpreting §§ 162 and 212” when it enacted

section 183. However, citing S. Rep. No. 91-552, at 104, 1969-3 C.B.

at 490, petitioners claimed that “Congress tweaked the profit-motive

standard from case law,” to be based only on objective factors, to the

exclusion of subjective factors. Petitioners proceeded to set out their own

“proper test” for determining whether a profit motive exists. Petitioners’

test pertains only to allegedly “objective” factors, 28 while excluding

26 In relevant part, section 7805(a) provides that “the Secretary shall prescribe

all needful rules and regulations for the enforcement of this title, including all rules

and regulations as may be necessary by reason of any alteration of law in relation to

internal revenue.”

27 The parties agree that section 183 provides no delegation of authority that

would allow the Secretary to issue Treasury Regulation §§ 1.183-1(d)(1) and/or 1.1832(b).

28 While petitioners did not explicitly set forth a list of factors, their “proper

test” focuses on (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; and (5) limited financial considerations. Petitioners

discount TI’s “continuous losses” from its farming activity and describe petitioners’

financial status and Dr. Schwarz’s enjoyment of TI’s farming activity as “irrelevant.”

27

[*27] allegedly subjective factors found in Treasury Regulation § 1.1832(b). Petitioners argued that “[u]nder the[ir] proper test, [they] would

have prevailed.”

Petitioners relatedly argued that we should alter our analysis

regarding the activity at issue if Treasury Regulation § 1.183-1(d)(1) is

found to be invalid. Petitioners claimed that, pursuant to their proposed

method of analysis, TI’s farming activity and petitioners’/Affiliated

Entities’ real estate activities were a single activity.

After consideration of the parties’ Responses, we will sustain the

holding of Schwarz I because, even if Treasury Regulation §§ 1.1831(d)(1) and 1.183-2(b) were held to be invalid, our holding would remain

the same. Accordingly, we will not address the validity of those

regulations in this Supplemental Memorandum Opinion.

V.

Partnerships and Section 183

In Schwarz I, T.C. Memo. 2024-55, at *83 n.100, we stated:

Absent stipulation to the contrary, this case is

appealable to the U.S. Court of Appeals for the Fifth

Circuit. See § 7482(b)(1)(A). The Tax Court will follow a

court of appeals decision which is squarely on point where

appeal from our decision lies to that court of appeals alone.

Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445

F.2d 985 (10th Cir. 1971).

In a case involving interest under section 6621(c),

the Fifth Circuit stated that, for partnerships, [the]

deductions [at issue in that case were] “not actually

disallowed under I.R.C. § 183, but under I.R.C. §§ 162 and

174.” Copeland v. Commissioner, 290 F.3d 326, 336 (5th

Cir. 2002), aff’g in part, rev’g and remanding in part T.C.

Memo. 2000-181. The court noted that it is “accepted that

in the partnership context, the profit motive inquiry

focuses on the partnership, not the individual partners,

and that the factors in the Treasury Regulations to I.R.C.

§ 183 (for determining whether an ‘activity is . . . engaged

in for profit’) may be employed to determine the profit

motive required by section[] 162 . . . exists.” Id. at 335

(footnote omitted). Neither party has argued that Copeland

affects the section 183 analysis in this case, and we find

that it does not.

28

[*28] In Copeland v. Commissioner, 290 F.3d at 334, the Fifth Circuit

also stated that

[t]he plain language of [section 183] thus explicitly cabins

its applicability to activities engaged in by individuals or S

corporations—and, by virtue of the traditional maxim of

statutory construction, expressio unis [sic] est exclusio

alterius (the expression of one thing is the exclusion of

others), precludes the section’s applicability to

partnerships.

In their responses, neither party addressed Copeland.

Considering our analysis set forth in this Supplemental Memorandum

Opinion, we find that Copeland does not affect the result reached herein.

However, we note petitioners’ implicit argument that there are

differences between the profit motive standard applicable to section 183

and the profit motive standard applicable to section 162. Petitioners

claimed that when Congress enacted section 183,

it codifie[d] a focus on a profit motive from case law

interpreting §§ 162 and 212. . . .

However, Congress tweaked the profit-motive

standard from case law. Courts previously placed great

weight on evidence of a taxpayer’s subjective motives, such

as whether the taxpayer personally enjoyed the activity.

But Congress expressly considered and rejected this

approach. Explaining this rejection, the Senate Committee

on Finance wrote that “[i]n making the determination of

whether an activity is not engaged in for profit, the

committee intends that an objective rather than a

subjective approach is to be employed.” S. Rep. No. 91-552,

[at 104, 1969-3 C.B. at 490]. Congress intended the “facts

and circumstances” inquiry into whether a taxpayer

“engaged in” an activity (i.e., conducted his operations) for

profit to be made “without regard to the taxpayer’s

subjective intent.” Id. . . . .

We disagree with petitioners’ claim that Congress “tweaked” the section

162 profit motive standard for purposes of section 183. Section 183(c)

provides that “[f]or purposes of this section, the term ‘activity not

engaged in for profit’ means any activity other than one with respect to

which deductions are allowable for the taxable year under section 162

29

[*29] or under paragraph (1) or (2) of section 212.” 29 A plain reading of

section 183(c) shows that Congress adopted the profit motive standard

applicable to section 162 and did not alter it. To the extent one agrees

with petitioners’ claim though, we question whether the analysis in

Copeland would preclude use of a “tweaked” section 183 profit motive

standard in this case involving the activity of a partnership. See

Copeland v. Commissioner, 290 F.3d at 334–35 (holding that (1) the

profit motive requirement exists pursuant to section 162 in cases

involving partnerships and (2) section 183 does not apply to

partnerships, even though “the factors in the Treasury Regulations to

I.R.C. § 183 . . . may be employed to determine the profit motive required

by section[] 162 . . . exists”). This question may be relevant should this

case be appealed.

VI.

Ascertaining the Activity at Issue

In Schwarz I we ruled that petitioners’/Affiliated Entities’ real

estate activities and TI’s farming activity were separate activities. We

began our analysis by discussing the “case as a whole.” Schwarz I, T.C.

Memo. 2024-55, at *84–86. Among other things, we discussed that

(1) “[p]etitioners chose to structure entities they partially or wholly

owned in such a way that TI’s farming activity was separate from the

real estate activities”; (2) “TI’s farming activity was focused on

ecotourism rather than developing real estate”; (3) “[e]cotourism and

real estate activities had distinct objectives”; (4) “[a]ppreciation of La

Perla and Jalisco Ranches resulting from TI’s ecotourism was incidental

to the goal of selling hunting, fishing, and event packages”; (5) TI was

paid to do work on properties owned by Affiliated Entities as if it were

“a third-party contractor [rather than] part of an integrated business

operation”; and (6) petitioners’ attempt “to use a strong real estate

market and their price-enhancing sales techniques (such as purchasing

large tracts and selling smaller pieces) to justify TI’s extremely

unprofitable ecotourism.” Id. (footnotes omitted). We concluded that the

ties between the real estate activities and TI’s farming activity were

“weak.” Id. at *86.

After discussing the case as a whole, we considered the test

regarding farming and the holding of land found in Treasury Regulation

29 Section 212 expressly applies only “[i]n the case of an individual.”

30

[*30] § 1.183-1(d)(1) (the farming and land test). 30 Schwarz I, T.C.

Memo. 2024-55, at *86–93. Applying the farming and land test, we

“ruled that TI’s farming activity and LSLP’s holding of 1,736 acres

[constituting the larger part of La Perla Ranch] are separate activities.”

Id. at *94.

We then analyzed certain other factors set forth in Treasury

Regulation § 1.183-1(d)(1) and caselaw (discussed infra) and concluded

that on the basis of “all the facts and law . . . TI’s farming activity and

the real estate activities” were separate activities. Schwarz I, T.C.

Memo. 2024-55, at *94–100.

In their Response filed June 27, 2025, petitioners argued that, if

Treasury Regulation § 1.183-1(d)(1) is invalid, our analysis should be

altered. 31 Petitioners claimed that Congress intended that “farming and

landholding are presumed [to be] one activity unless not interrelated.”

Petitioners claimed that, in enacting section 183, “Congress expected an

individual’s activities to be defined ‘[a]s under present law.’ H.R. Rep.

No. 91-413, [pt. 1, at 71 (1969), reprinted in 1969-3 C.B. 200, 245];[32] see

also S. Rep. No. 91-552, [at 103, 1969-3 C.B. at 489] (expressing ‘basic

agreement with the approach taken by the House’).” Petitioners then

claimed that prior to enactment of section 183, “[i]n the farming context,

it was well-understood that farming and holding the farmland are

almost always sufficiently interrelated to constitute one business unit.”

30 As set forth in Treasury Regulation § 1.183-1(d)(1), the farming and land test

provides:

Where land is purchased or held primarily with the intent to profit

from increase in its value, and the taxpayer also engages in farming on

such land, the farming and the holding of the land will ordinarily be

considered a single activity only if the farming activity reduces the net

cost of carrying the land for its appreciation in value. Thus, the farming

and holding of the land will be considered a single activity only if the

income derived from farming exceeds the deductions attributable to the

farming activity which are not directly attributable to the holding of

the land (that is, deductions other than those directly attributable to

the holding of the land such as interest on a mortgage secured by the

land, annual property taxes attributable to the land and

improvements, and depreciation of improvements to the land).

31 Our analysis from here on in this Discussion Part VI will assume that

Treasury Regulation § 1.183-1(d)(1) was found to be invalid and set aside. Of course,

we make no actual determination regarding the validity of the regulation.

32 The complete sentence petitioners cited reads: “As under present law, the

loss would be determined separately with respect to each activity carried on by an

individual.” H.R. Rep. No. 91-413, pt. 1, at 71, 1969-3 C.B. at 245. There is no provided

definition or standard for what constitutes a separate activity.

31

[*31] In support, petitioners pointed to Treasury Regulation § 1.2701(a)(4), 33 which provides, in relevant part:

Where several business activities emanate from a single

commodity, such as oil or gas or a tract of land, it does not

necessarily follow that such activities are one business for

the purposes of section 270. However, in order to be treated

separately, it must be established that such business

activities are actually conducted separately and are not

closely interrelated with each other.

We reject petitioners’ arguments set forth above for several

reasons. First, Congress did not add any definition or standard for what

constitutes a separate activity to section 183; outside of the title, the

statute does not even use the plural “activities.” Second, “[f]or those who

consider legislative history relevant,” Warger v. Shauers, 574 U.S. 40,

48 (2014), Congress did not provide any definition or standard for what

constitutes a separate activity in the legislative history regarding

section 183, see supra note 32. Finally, Treasury Regulation § 1.2701(a)(4) has not applied since 1969, and the standard provided in that

regulation does not strongly support petitioners’ position in any case.

In the absence of statutory guidance, we turn to relevant caselaw.

See Loper Bright, 144 S. Ct. at 2257–58, 2265–66 (stating that courts

must say what the law is even when a statute is ambiguous or there is

a statutory gap).

Petitioners have cited four Tax Court opinions in which farming

and the holding of land were treated as one activity: Thacker v.

Commissioner, T.C. Memo. 1969-276; Sanderson v. Commissioner, T.C.

Memo. 1964-284; Hillcone S.S. Co. v. Commissioner, T.C. Memo. 1963220; and Blake v. Commissioner, 38 B.T.A. 1457 (1938). However, in

none of those cases did we consider whether (nor did either party

contend that) the farming activities at issue were separate from the

holding of land. These cases offer little to no support for petitioners’

33 Enacted in 1954, section 270 disallowed certain deductions for trades or

businesses which lost over $50,000 for each of five consecutive years. Internal Revenue

Code of 1954, ch. 736, § 270, 68A Stat. 3, 81–82. Section 270 was based on prior section

130 enacted in 1943. See Revenue Act of 1943, ch. 63, § 129, 58 Stat. 21, 48–49. Section

270 was repealed in the Tax Reform Act of 1969, Pub. L. No. 91-172, § 213(b), 83 Stat.

487, 572. Neither section 270 nor Treasury Regulation § 1.270-1(a)(4) applies for

taxable years beginning after December 31, 1969. Tax Reform Act of 1969, § 213(d), 83

Stat. at 572; Treas. Reg. § 1.270-1(f).

32

[*32] position. Opinions that substantively address whether

undertakings constitute one or multiple activities are far more relevant.

Whether undertakings constitute one or more activities is a

question of fact. See Patients Mut. Assistance Collective Corp. v.

Commissioner, 151 T.C. 176, 198 (2018) (“Whether two activities are two

trades or businesses or only one is a question of fact.” (first citing

Californians Helping to Alleviate Med. Probs., Inc. v. Commissioner, 128

T.C. 173, 183 (2007); and then citing Owens v. Commissioner, T.C.

Memo. 2017-157, at *21)), aff’d, 995 F.3d 671 (9th Cir. 2021). This

question of fact has arisen in several contexts other than section 183.

See, e.g., Davis v. Commissioner, 65 T.C. 1014 (1976) (§ 162); Nielsen v.

Commissioner, 61 T.C. 311 (1973) (§ 355); Lester v. Commissioner, 40

T.C. 947 (1963) (§ 355); Collins v. Commissioner, 34 T.C. 592 (1960)

(§ 130, 1939 Code); Davis v. Commissioner, 29 T.C. 878 (1958) (§ 130,

1939 Code); Roselle v. Commissioner, T.C. Memo. 1981-394, 1981 Tax

Ct. Memo LEXIS 346 (§ 1348, 1969 Code); Peterson Produce Co. v.

United States, 205 F. Supp. 229 (W.D. Ark. 1962) (§ 446(d)), aff’d, 313

F.2d 609 (8th Cir. 1963). In resolving such questions, courts have

generally considered all facts and circumstances of a case. See, e.g.,

Roselle, 1981 Tax Ct. Memo LEXIS 346, at *17 (finding activities at

issue were separate trades or businesses “[o]n the basis of the facts and

circumstances herein”); Davis, 65 T.C. at 1020 (beginning analysis by

stating “[w]hen we consider the facts of the case now before us”); Nielsen,

61 T.C. at 317 (“After careful consideration of all of the facts in the

stipulated record, we are of the opinion that the operations [at issue]

constituted two separate businesses.”). Of course, particular factors

have also been highlighted as relevant in determining whether

undertakings constituted one or more activities in certain cases. In

Collins, 34 T.C. at 596–98, we considered the organizational and

economic interrelationship of two undertakings, finding that the

undertakings were “separately and independently conducted.” We also

stated that “the fact that an individual carries on two or more

enterprises which engage in identical or similar activities may be a

factor suggesting that the enterprises are in reality a single trade or

business.” Id. at 597. We addressed arguments regarding similar factors

in Davis, 29 T.C. at 887–92. In Davis we also explained that there were

33

[*33] “very good business reasons” for conducting the undertakings as

separate activities. 34 Id. at 891.

On the basis of the caselaw discussed in the prior paragraph, we

conclude that the determination of whether undertakings constitute one

activity or multiple activities is to be based on all facts and

circumstances of a case. We further conclude that the factors considered

in Collins and Davis may be employed to assist a court in making such

determinations. In addition, after the enactment of section 183 and the

promulgation of Treasury Regulation § 1.183-1(d)(1), we have developed

additional factors (not enumerated in the regulation) to assist us in

ascertaining whether undertakings are single or multiple activities.

These factors include (1) whether the undertakings were conducted at

the same place, (2) whether the undertakings were part of the taxpayers’

efforts to find sources of revenue from their land, (3) whether the

undertakings were formed separately, (4) whether one undertaking

benefited from another, (5) whether the taxpayers used one undertaking

to advertise the other, (6) the degree to which the undertakings shared

management, (7) the degree to which one caretaker oversaw the assets

of multiple undertakings, (8) whether the same accountant was used for

the undertakings, and (9) the degree to which the undertakings shared

books and records. See Topping v. Commissioner, T.C. Memo. 2007-92,

2007 Tax Ct. Memo LEXIS 88, at *17–18 (citing Mitchell v.

Commissioner, T.C. Memo. 2006-145, 2006 Tax Ct. Memo LEXIS 145).

We find these commonsense caselaw factors to be helpful and would also

employ them even if we were to find Treasury Regulation § 1.183-1(d)(1)

to be invalid.

In Schwarz I, T.C. Memo. 2024-55, at *84–86, *94–100, when

ascertaining whether the farming and land holding undertakings were

single or multiple activities, we considered all facts and circumstances.

We began our analysis by discussing the “case as a whole.” Id. at *84–86.

34 The three enumerated factors in Treasury Regulation § 1.183-1(d)(1) are

based on factors considered in Collins and Davis, and we find the caselaw and

regulation factors to be the same in substance. See John W. Lee, A Blend of Old Wines

in a New Wineskin: Section 183 and Beyond, 29 Tax L. Rev. 347, 367 (1974). We note

that the article states that “[t]he similarity test was clearly overruled in Collins.” Id.

That is incorrect; we explicitly stated that “engage[ment] in identical or similar

activities may be a factor suggesting that” undertakings comprise one activity. Collins,

34 T.C. at 597.

34

[*34] We also discussed the Collins/Davis 35 and other factors (together,

relevant factors). Id. at *94–100. However, there is a wrinkle with

respect to our discussion of the relevant factors. Before discussing them,

we considered the Treasury Regulation § 1.183-1(d)(1) farming and land

test. 36 Schwarz I, T.C. Memo. 2024-55, at *86–93. Applying the farming

and land test, we “ruled that TI’s farming activity and LSLP’s holding

of 1,736 acres are separate activities.” Id. at *94. Accordingly, we

technically analyzed the relevant factors only with respect to “the

remaining properties/real estate activities.” Id.

Upon review and reconsideration of our discussion of the relevant

factors, we conclude that our analysis would be unchanged by including

the 1,736 acres. We note that the 1,736 acres were part of the 2,238-acre

La Perla Ranch property, which we analyzed in our discussion of the

relevant factors. Furthermore, to the extent our analysis pertained to

properties/real estate activities in general, we find that the same

analysis would apply if the 1,736 acres were included.

Having also reconsidered the facts and circumstances of this case

as a whole, we again rule that the real estate activities and TI’s farming

activity were separate activities. We reiterate our analysis from

Schwarz I, T.C. Memo. 2024-55, at *84–86. In short, petitioners and

Affiliated Entities conducted one activity (or set of activities) that aimed

to profit from the leasing and selling of real estate located throughout

South Texas. This activity was highly profitable, chiefly because of

petitioners’ price-enhancing sales techniques and the strong market for

rural land in South Texas that had appreciated at an average rate of 6%

or more per year since the early 2000s. We emphasize that this is not a

case in which taxpayers merely held land that they farmed. Rather,

petitioners owned and controlled a series of entities that were engaged

in extensive and sophisticated real estate operations involving

numerous valuable properties spread over a large geographic area.

35 In Schwarz I we identified the Collins/Davis factors as the Treasury

Regulation § 1.183-1(d)(1) factors. As previously noted, the Treasury Regulation

§ 1.183-1(d)(1) factors and the Collins/Davis factors are the same in substance. See

supra note 34.

36 The farming and land test is not based on any caselaw that we have found,

and we will not consider the test in this Supplemental Memorandum Opinion. No

inference should be drawn from this regarding whether the farming and land test

represents the best interpretation of section 183. See Loper Bright, 144 S. Ct. at 2266

(stating that if an agency’s interpretation “is not the best, it is not permissible”).

35

[*35] TI conducted a separate farming activity, which was focused on

ecotourism (mostly selling hunting, fishing, and event packages). 37 This

activity was extremely unprofitable. 38 Although the ecotourism activity

took place almost entirely on La Perla and Jalisco Ranches, benefits to

the real estate activities from the ecotourism activity were minimal,

certainly in comparison with the substantial ecotourism losses. As we

stated, “[n]o competent real estate activity would have conducted

staggeringly unprofitable ecotourism for such nominal benefits.” Id. at

*86 n.104.

VII.

Whether TI’s Farming Activity Was Engaged In for Profit

We next reconsider whether TI’s farming activity was engaged in

with the intent to make a profit. In section 183(c) Congress defined the

term “activity not engaged in for profit” as “any activity other than one

with respect to which deductions are allowable for the taxable year

under section 162 or under paragraph (1) or (2) of section 212.” After

enactment of section 183, the Secretary issued Treasury Regulation

§ 1.183-2. Treasury Regulation § 1.183-2(a) provides, in part, that “[t]he

determination whether an activity is engaged in for profit is to be made

by reference to objective standards, taking into account all of the facts

and circumstances of each case.” 39 See also Wann v. Commissioner, T.C.

Memo. 1968-246, 1968 Tax Ct. Memo LEXIS 52, at *20 (stating that the

for-profit determination “must be made upon the entire record”).

Treasury Regulation § 1.183-2(b) reiterates that “[i]n determining

whether an activity is engaged in for profit, all facts and circumstances

with respect to the activity are to be taken into account.” Treasury

37 Although Affiliated Entities (and third parties) paid TI to complete custom

farming work on various properties, we analyzed TI’s financial records and found “that

the large majority of TI’s Schedule F losses were attributable to ecotourism (and work

in support of ecotourism) which had little to no relationship to the real estate

activities.” Schwarz I, T.C. Memo. 2024-55, at *84, *56–58.

38 TI reported Schedule F losses totaling over $15 million for 2005–20, over $11

million for 2010–20, and over $4 million for the years at issue. Id. at *37. We found

that “profit margins for ecotourism were abysmal,” being “far less than negative 151%

for years 2010–20” combined and significantly less than negative 200% for the years

at issue combined. Id. at *57.

39 Treasury Regulation § 1.183-2 might not be perfectly internally consistent,

depending on how one views the term “objective standards” as used in paragraph (a).

Compare Treas. Reg. § 1.183-2(a) (“The determination whether an activity is engaged

in for profit is to be made by reference to objective standards . . . .”), with Nickerson v.

Commissioner, 700 F.2d 402, 404 (7th Cir. 1983) (describing the Treas. Reg. § 1.1832(b) factors as “primarily objective”), rev’g T.C. Memo. 1981-321.

36

[*36] Regulation § 1.183-2(b) also provides a list of nine “factors which

should normally be taken into account” in making a for-profit

determination. Those nine factors, which are “originally derived from

court opinions,” 40 are: (1) the manner in which the taxpayer carries on

the activity; 41 (2) the expertise of the taxpayer or the taxpayer’s

advisers; 42 (3) the time and effort expended by the taxpayer in carrying

on the activity; 43 (4) the expectation that assets used in the activity may

appreciate in value; 44 (5) the success of the taxpayer in carrying on other

similar or dissimilar activities; 45 (6) the taxpayer’s history of income or

loss with respect to the activity; 46 (7) the amount of occasional profits, if

any; 47 (8) the financial status of the taxpayer; 48 and (9) whether

elements of personal pleasure or recreation are involved. 49 Most courts

have relied on this summary of caselaw for decades. See Westbrook v.

Commissioner, 68 F.3d at 876 (“Courts have consistently relied on these

nine factors, originally derived from court opinions, to determine

whether a profit motive exists for purposes of deduction of losses under

§§ 162 and 212.”).

Although Treasury Regulation § 1.183-2(b) provides that the nine

factors “should normally be taken into account” in making for-profit

40 Westbrook v. Commissioner, 68 F.3d 868, 876 (5th Cir. 1995), aff’g per curiam

T.C. Memo. 1993-634; see also Faulconer v. Commissioner, 748 F.2d 890, 894–95 (4th

Cir. 1984), rev’g T.C. Memo. 1983-165; Eastman v. United States, 225 Ct. Cl. 298, 305

(1980); Jasionowski, 66 T.C. at 321–22.

41 See Lamont v. Commissioner, 339 F.2d 377, 379–80 (2d Cir. 1964), aff’g T.C.

Memo. 1964-2; Whitman v. United States, 248 F. Supp. 845, 854–55 (W.D. La. 1965).

See Babbitt v. Commissioner, 23 T.C. 850, 867 (1955); Worrell v. United

States, 254 F. Supp. 992, 993, 995 (S.D. Tex. 1966).

42

43 See Wright v. Commissioner, 31 T.C. 1264, 1267–68 (1959), aff’d per curiam,

274 F.2d 883 (6th Cir. 1960); Mauller v. Commissioner, T.C. Memo. 1966-146, 1966

Tax Ct. Memo LEXIS 139, at *15–16.

44 See Blake, 38 B.T.A. at 1460; DuPont v. United States, 234 F. Supp. 681, 688

(D. Del. 1964).

45 See Lowenthal v. Commissioner, T.C. Memo. 1968-79, 1968 Tax Ct. Memo

LEXIS 221, at *22; Vanderbilt v. Commissioner, T.C. Memo. 1957-235, 1957 Tax Ct.

Memo LEXIS 13, at *16–17.

46 See Bessenyey, 45 T.C. at 275; Ellsworth v. Commissioner, T.C. Memo. 1962-

32, 1962 Tax Ct. Memo LEXIS 277, at *19.

47 See Lamont v. Commissioner, 339 F.2d at 379; Demler v. Commissioner, T.C.

Memo. 1966-117, 1966 Tax Ct. Memo LEXIS 166, at *22.

48 See Clark v. Commissioner, T.C. Memo. 1969-241, 1969 Tax Ct. Memo LEXIS

53, at *10; Mauller, 1966 Tax Ct. Memo LEXIS 139, at *15.

49 See Bessenyey, 45 T.C. at 275; White v. Commissioner, 23 T.C. 90, 95 (1954),

aff’d per curiam, 227 F.2d 779 (6th Cir. 1955).

37

[*37] determinations, courts have discretion to follow, add to, or

disregard those factors as they see fit. See Abramson v. Commissioner,

86 T.C. 360, 371 (1986) (“[The regulation] factors are not applicable or

appropriate for every case. The facts and circumstances of the case in

issue remain the primary test.”). Indeed, the U.S. Court of Appeals for

the Seventh Circuit has called Treasury Regulation § 1.183-2(b) “a goofy

regulation,” and has chosen not to “wad[e] through the nine factors” but

instead to take a more holistic approach. Roberts v. Commissioner, 820

F.3d 247, 250, 254 (7th Cir. 2016), rev’g T.C. Memo. 2014-74. On the

other hand, the Fifth Circuit has stated that “IRS regulations provide

that the profit-motive determination is an objective one made using a

non-exhaustive list of nine factors . . . . This court likewise relies on those

factors.” Vest v. Commissioner, 690 F. App’x 210, 212–13 (5th Cir. 2017),

aff’g T.C. Memo. 2016-187; see also Westbrook v. Commissioner, 68 F.3d

at 877 (“[A] balancing of the nine factors and any other relevant

consideration is the proper method for determining whether a profit

motive exists.”).

In Schwarz I, T.C. Memo. 2024-55, at *112, we considered all nine

Treasury Regulation § 1.183-2(b) factors and the facts of the case as a

whole, concluding that the facts

pertaining to TI’s history of losses and lack of profits are

the most significant. Year after year, TI’s farming activity

continued to lose money, and there is no indication it will

ever be profitable. We believe that Dr. Schwarz was

following his longtime passion for deer and ranch

development and pursued this independently of any desire

to earn a profit. Petitioners had money to do this, especially

when they knew that the real estate market was strong.

Considering all the facts and circumstances, we find that

petitioners did not have an actual and honest profit

objective. We hold that TI’s farming activity was not

engaged in with the intent to make a profit.

Even if Treasury Regulation § 1.183-2(b) was found to be invalid, we

would consider the same factors based on caselaw predating issuance of

the regulation, along with all relevant facts, and our conclusion would

be unchanged. 50 See Strode v. Commissioner, T.C. Memo. 2015-117,

50 Alternatively, our conclusion would be unchanged even if we disregarded the

nine factors and instead employed either (1) the holistic approach espoused by the

Seventh Circuit, see Roberts v. Commissioner, 820 F.3d at 250–54, or (2) the test

38

[*38] at *11 n.7 (recognizing that the Treasury Regulation § 1.183-2(b)

factors represent a summary of applicable caselaw, and those factors

would apply even if the regulation was invalid); 51 see also Jasionowski,

66 T.C. at 321 (“[S]ection 183(c) defines an ‘activity not engaged in for

profit’ as an activity with respect to which deductions would not be

allowable under section 162 or section 212(1) or (2). Thus, prior cases

dealing with profit motive under these sections retain their vitality.”).

This is consistent with Fifth Circuit precedent recognizing that the

Treasury Regulation § 1.183-2(b) factors are “derived from court

espoused by petitioners, see supra note 28. Under any approach, by far the most

important facts relevant to the for-profit analysis in this case are TI’s long history of

substantial farming activity losses and lack of realistic possibility to earn future

profits. See Schwarz I, T.C. Memo. 2024-55, at *112; see also Golanty v. Commissioner,

72 T.C. 411, 427 (1979) (“A record of . . . large losses over . . . many years is persuasive

evidence that the [taxpayer] did not expect to make a profit.”), aff’d, 647 F.2d 170 (9th

Cir. 1981) (unpublished table decision). We analyzed TI’s financial information at great

length throughout Schwarz I, concluding that “[y]ear after year, TI’s farming activity

continued to lose money, and there is no indication it will ever be profitable.”

Schwarz I, T.C. Memo. 2024-55, at *112. We reiterate that statement.

51 In Strode, we considered a challenge to the validity of Treasury Regulation

§ 1.183-2(b) under the (now overruled) Chevron standard. We stated that

the regulation’s list of factors purports to serve as no more than a

guide. . . .

Far from being arbitrary and capricious or contrary to law, the

regulation reflects a reasonable construction of secs. 162, 183, and 212

and provides helpful guidance to taxpayers seeking to ascertain

whether they may properly deduct expenses associated with a

particular activity. In any event, the factors listed in the regulation

were derived from caselaw, see Allen v. Commissioner, 72 T.C. 28, 33–

34 (1979), so even if the regulation were invalid (which it is not), we

would consider the very same factors in deciding whether petitioner

had a profit motive.

Strode, T.C. Memo. 2015-117, at *11 n.7.

In Loper Bright, the Supreme Court cautioned that by overruling Chevron it

did “not call into question prior cases that relied on the Chevron framework. The

holdings of those cases . . . are still subject to statutory stare decisis despite [the

Supreme Court’s] change in interpretive methodology.” Loper Bright, 144 S. Ct.

at 2273. The parties agree that the holding in Strode regarding the validity of Treasury

Regulation § 1.183-2(b) is not entitled to stare decisis because Strode is a memorandum

opinion. See Newman v. Commissioner, 68 T.C. 494, 502 n.4 (1977) (stating that

memorandum opinions are “not controlling precedent”). However, Strode correctly

holds that the Treasury Regulation § 1.183-2(b) factors represent a summary of

applicable caselaw regarding whether an activity is conducted for profit.

39

[*39] opinions” and should be considered when “determining whether a

profit motive exists.” Westbrook v. Commissioner, 68 F.3d at 876–77. 52

While our conclusion from Schwarz I remains unchanged, we

slightly alter our analysis of one factor. In discussing the expectation

that assets used in activity may appreciate in value factor, we included

the following footnote:

Even if we agreed that most real estate activities and TI’s

farming activity are part of the same activity, there is no

guarantee that this factor would strongly favor petitioners.

The [farming and land test] clearly precludes consideration

of the 1,736 acres purchased by LSLP for investment in

2005 and never sold. This is the most valuable acreage

owned by petitioners or Affiliated Entities since 2005.

Excluding this acreage, using taxable gains (when

available) for sold properties instead of gross gains, and

correcting other errors that Dr. Hakala made, it strongly

appears that TI’s Schedule F losses from 2005 to the end of

2020 outweigh realized and unrealized gains in real

property (using Mr. Swanson’s valuations). Considering

the strong real estate market and petitioners’ priceenhancing sales techniques, that is a shockingly bad

outcome for petitioners.

We also note our caselaw holding that “[a]n

unsuccessful farming operation cannot be carried on

forever simply because the price of land in that general

area is rising.” Boddy v. Commissioner, T.C. Memo. 1984156, 1984 Tax Ct. Memo LEXIS 514, at *22 n.6 (citing

Jasionowski, 66 T.C. at 323), aff’d, 756 F.2d 884 (11th Cir.

1985) (unpublished table decision).

Schwarz I, T.C. Memo. 2024-55, at *105–06 n.116. Because we will not

apply the farming and land test in this Supplemental Memorandum

Opinion, we alter our analysis, which we will do in the remainder of this

Discussion Part VII.

52 The Fifth Circuit has chosen to employ the Treasury Regulation § 1.183-2(b)

factors even though it has never been bound to do so. See Roberts v. Commissioner, 820

F.3d at 250–54 (noting that the regulation permits courts to “devise[ their] own test,

with [their] own factors, as long as [they] explain[] why the [regulation] factors . . .

[a]re insufficient”).

40

[*40] There is little question that the real estate activities regarding

properties other than La Perla and Jalisco Ranches were separate from

TI’s farming activity. See id. at *95–100 (discussing TI’s farming

operations on La Perla and Jalisco Ranches as compared to minimal

operations on other properties). However, though we do not agree with

it, petitioners’ position that TI’s farming activity and the real estate

activities regarding La Perla and Jalisco Ranches are part of the same

activity is stronger. See id. As we stated in Schwarz I, T.C. Memo. 202455, at *85, “[m]ost properties at issue had little or no connection to TI’s

farming activity. For the few properties that did have a significant

connection (like La Perla and Jalisco Ranches), TI’s farming activity was

focused on ecotourism rather than developing real estate.”

Even if we agreed with petitioners that TI’s farming activity and

the holding of La Perla and Jalisco Ranches were parts of the same

activity, the outcome of this case would not change, for two reasons.

First, TI’s farming activity losses far outweigh LSLP’s unrealized

property gains attributable to La Perla and Jalisco Ranches. As we

discussed in Schwarz I, T.C. Memo. 2024-55, at *75, *80, Dr. Hakala

estimated LSLP’s unrealized gains as of December 31, 2017, in part by

backdating certain of Mr. Swanson’s October 31, 2022, property

valuations. We stated that “it appears that $9 to $10 million [of Dr.

Hakala’s unrealized gains estimate] is attributable to La Perla and

Jalisco Ranches.” Id. at *80. However, we also discussed several

problems in Dr. Hakala’s analysis that would cause that estimate to

decrease by an indeterminable but substantial amount. 53 Id. at *78,

*80–82. Furthermore, in this Supplemental Memorandum Opinion we

have analyzed Mr. Swanson’s valuations of the La Perla HQ Tract and

Jalisco Ranch and valued those properties at only $7.5 million and

$3,335,000, respectively, as of October 31, 2022. Adjusting these

valuations back to December 31, 2017 (using Dr. Hakala’s backdating

method, which is overly favorable to petitioners), would reduce them to

approximately $6,123,000 and $2,723,000, respectively. These values

53 We found that (1) a balance-sheet-related error regarding Jalisco Ranch

would have reduced Dr. Hakala’s estimate by $801,644, (2) a math error would have

increased Dr. Hakala’s estimate by $403,221, and (3) a failure to consider assets shown

on TI’s 2017 balance sheet would have reduced Dr. Hakala’s estimate by an amount

that could not be determined because of “a lack of specificity regarding assets shown

on TI’s 2017 depreciation schedule.” Schwarz I, T.C. Memo. 2024-55, at *80–82. In

addition, we discussed oddities regarding “Dr. Hakala’s method for accounting for

changes in real estate values over time” that were “advantageous for petitioners when

calculating property values as of the end of 2017.” Id. at *78.

41

[*41] are lower than the $7,630,992 and $3,890,197 December 31, 2017,

valuations that Dr. Hakala determined for the La Perla HQ Tract and

Jalisco Ranch by a combined amount of $2,675,189. All things

considered, LSLP’s unrealized property gains attributable to La Perla

and Jalisco Ranches as of December 31, 2017, were substantially lower

(by at least $3 million) than Dr. Hakala’s $9 to $10 million estimate.

LSLP’s unrealized property gains attributable to La Perla and Jalisco

Ranches were also far lower than TI’s farming activity losses of over

$12 million for years 2005–17. 54

54 Petitioners have asked us to consider the appreciation of La Perla and Jalisco

Ranches going back to 2005. As we discussed in Schwarz I, TI conducted its farming

activity primarily in Starr County until around 2010, while LSLP conducted most of

the farming operations in Zapata County (and reported combined Schedule F losses for

years 2008–12 of $2,714,992). Id. at *17–19, *65–66. We determined that a focus on

years beginning with 2010 was most appropriate in this case. Id. at *66. While we lack

the facts necessary to determine appreciation of La Perla and Jalisco Ranches during

2010–17 only, we note that the facts indicate that that value of those ranches

substantially increased soon after Affiliated Entities purchased them in 2005 (i.e.,

before 2010). See id. at *14–15 (describing the purchase of 15,070 acres of land in

Zapata County in 2005 for a low price, improvements made to the land, and sale of

11,972 acres by the end of 2006 at a price per acre 43% higher than the average price

per acre paid for the 15,070 acres purchased in 2005). Considering the strong

appreciation in property values in years before 2010, it appears that the appreciation

of La Perla and Jalisco Ranches during 2010–17 was dwarfed by TI’s farming activity

losses of over $8 million for years 2010–17.

We also note that G. Morgan Capital Partners, Ltd. (GMCP), and/or LSLP sold

1294 acres constituting (what would later become) Jalisco Ranch and a portion of La

Perla Ranch in 2005. See id. at *14–16. Evidence shows that these 1,294 acres were

sold for a profit of about $554,000. LSLP bought back a portion of the acreage in May

2006 and GMCP bought back the remaining acreage in December 2006. Id. at *16.

Given TI’s work primarily in Starr County in 2005 and 2006, we see no reason to count

the $554,000 profit against TI’s farming activity losses. Even if we did, this relatively

small gain would not affect our conclusion.

We further note that TI’s farming activity losses of over $3.3 million for years

2018–20 far outpaced appreciation of La Perla and Jalisco Ranches during 2018–20.

According to data Dr. Hakala used in backdating property values, Texas rural real

estate valuations increased only 2.48% from December 31, 2017, to December 31, 2020.

Using our property valuations as of October 31, 2022, and Dr. Hakala’s backdating

method, the La Perla HQ Tract, the Lone-Star Tract, and Jalisco Ranch combined were

worth approximately $11 million as of the end of 2017. Applying a 2.48% increase

results in property appreciation of approximately $275,000, i.e., less than 9% of TI’s

farming activity losses for years 2018–20.

In petitioners’ favor, Texas rural real estate valuations increased by 19.52%

during 2021. The amount of TI’s farming activity profit or loss for 2021 was not

established to be used as a comparison.

42

[*42] Second, and building on the first reason, “[a]n overall profit is

present if net earnings and appreciation are sufficient to recoup the

losses sustained in the ‘intervening years’ between a given tax year and

the time at which future profits were expected.” Helmick v.

Commissioner, T.C. Memo. 2009-220, 2009 Tax Ct. Memo LEXIS 222,

at *32 (quoting Bessenyey, 45 T.C. at 274); see also Mathis v.

Commissioner, T.C. Memo. 2013-294, at *12–13 (first citing Foster v.

Commissioner, T.C. Memo. 2012-207; and then citing Golanty, 72 T.C.

at 427–28). During the years at issue, there was no indication that TI’s

farming activity would ever be profitable, and TI’s accumulated farming

activity losses far exceeded LSLP’s unrealized gains in La Perla and

Jalisco Ranches. The evidence presented did not indicate that future

appreciation of the ranches would exceed TI’s future farming activity

losses, much less recoup accumulated losses from any relevant

intervening years. In fact, appreciation of La Perla and Jalisco Ranches

over the three years 2018–20 offset less than 9% of the additional losses

TI incurred in its farming activity during those years. 55 See supra

note 54. In short, the evidence shows that a bona fide expectation to earn

an overall profit did not exist during the years at issue.

VIII. Conclusion

We again hold that TI’s farming activity was not engaged in for

profit in the years at issue. Petitioners are not liable for accuracy-related

penalties for the reasons discussed in Schwarz I. We have considered all

arguments made by the parties, and to the extent not mentioned or

addressed, they are irrelevant or without merit.

To reflect the foregoing,

An appropriate order will be issued.

55 “Evidence from years outside the years in issue can be relevant if it provides

context to evaluate the taxpayer’s overall requisite profit motive.” Den Besten v.

Commissioner, T.C. Memo. 2019-154, at *18; cf. § 6214(b). Nonetheless, “we look at the

profit picture in respect of the years at issue in terms of prior actual and anticipated

future operations as they appeared at those times; actual profits or losses in those and

subsequent years have probative, although not determinative, significance in such

evaluation.” Smith v. Commissioner, T.C. Memo. 1993-140, 1993 Tax Ct. Memo LEXIS

138, at *26.