Gary M. Schwarz & Marlee Schwarz v. Comm., TCM 2024-55

Gary and Marlee Schwarz had been involved in real estate activities in South Texas, primarily focusing on ranch land development. Gary developed a “love of deer” growing up when visiting his grandparents’ ranch observing deer and other wildlife. He studied deer and ranch management, learning that deer in Canada and the Midwest were more plentiful and larger than in South Texas. He developed a system that would mimic the feeding and crop growing techniques of those areas to produce deer with larger antlers.  In 2005, they acquired 15,070 acres with the intent to develop and sell the land. They later changed their plans to use some of the property for ecotourism (hunting, fishing & event operation). Through several entities owned in part, or wholly, the taxpayers managed farming operations, construction, and ecotourism. Ecotourism activities consistently lost money for many years. However, because of the intercompany transactions, the losses were difficult to isolate. But that’s what IRS auditors do – account for the losses – and then disallow them. While there were millions of dollars of revenues from the taxpayer’s business activities, there were also millions of dollars of losses from the ecotourism.

In a detailed 117-page explanation of the intertwined activities and application of Treas. Reg. §1.187-2(b), the Court was able to favor the taxpayers with two of the nine factors.