The $230,000 Barn, 18 Years of Losses, and a $191,179 Tax Bill

Keith and Rhonda Schumacher are “longtime hippophiles,” the Tax Court’s words for lifelong horse lovers. He is a Nebraska veterinarian who works 60 hours a week or more. She works full time in education. In 2001 they started breeding Quarter Horses for show, and they kept at it for 18 years. They built a $230,000 indoor arena, and their horses earned second and third place at the AQHA World Championship Show. They also lost money every single year: $456,378 in losses in 2017 through 2019 alone. The IRS called the whole thing a hobby, disallowed the losses, and assessed $191,179 in tax plus $33,520 in penalties. This is Schumacher v. Commissioner, T.C. Memo. 2026-47.

The one idea to carry out of this story: a business that never makes money starts to look like a hobby, and the IRS has a nine-question test to prove it.

Who were Keith and Rhonda Schumacher?

The Schumachers lived on a 50-acre parcel in Nebraska they had acquired in 1994. Dr. Keith Schumacher had been around horses since he was young and had owned horses his entire adult life except for his years in veterinary school. He has practiced veterinary medicine since 1986 and is a shareholder in Northeast Nebraska Veterinary Services, PC. During the years at issue he worked there full time, usually 60 hours or more each week, including on-call time, regularly answering calls at night, on weekends, and during holidays.

Rhonda Schumacher had also been around horses since she was young and had competed in barrel racing, roping, and showing. Around 2007 she began working full time in education and continued in that role during the years at issue, typically 8 a.m. to 4 p.m. Their son, T.S., then a high school student, helped with the horses and was assigned 15 to 20 minutes of horse chores a day, between football in the fall and wrestling in the winter. It was common for the family, including the children, to ride the horses together.

Champions in the show ring

In 2001 the Schumachers established Schumacher Quarter Horses (SQH), a sole proprietorship, and bought a weanling filly for future breeding. At that time, the filly’s genetics were not their primary motivator. They selected her for her overall appearance and color.

They raised several foals from that filly and bought additional mares. In 2006 they bought a stallion of their own, chosen for his pedigree. He was a descendant of American Quarter Horse Association (AQHA) champions on both his sire’s and dam’s sides. They showed him for four years in pursuit of an AQHA championship but could not secure the necessary halter points. He still earned a substantial number of AQHA performance points, sired a great many foals on and off their farm, and was ultimately sold to a buyer in Brazil.

Around 2011 or 2012 they decided to upgrade the quality of their mares and bought a broodmare descended from successful show horses. That broodmare gave birth to at least one highly successful show horse: a mare who was a two-time reserve world champion and a three-time top ten contender at the AQHA World Championship Show in Oklahoma City. Schumacher horses earned either second or third place on four separate occasions. At some point they considered moving from AQHA competitions to alternatives such as the Howard Pitzer Invitational or the Riata Buckle.

The $230,000 barn, and the books that were not books

In or around 2016 the Schumachers built an indoor horse-riding arena, also known as a hoop barn, on their property at a cost of approximately $230,000, so they could comfortably ride year round. SQH’s horse inventory was between 10 and 25 horses during the years at issue. They also farmed alfalfa for horse feed on 17 of their 50 acres and sold any leftover cuttings.

The operation’s books were the problem. The Schumachers had a separate SQH business account at Homestead Bank, but they routinely replenished it from their personal checking account, and their personal checking account served as its overdraft protection. They frequently paid horse expenses from their personal checking account and then reported those expenses on their Schedules F, the farm schedule. To the extent they tracked income and expenses at all, they did so by looking at their bank statements in the aggregate rather than reviewing individual expenses. They did not track expenses for each individual horse. What they kept was handwritten notes and some receipts. They acknowledged that they had no business plan.

Their accountant, Robert Cruise, an accountant and enrolled agent, had prepared their returns for approximately 20 years. He relied exclusively on their handwritten records and statements from Dr. Schumacher, along with any receipts provided. He knew they used no business recordkeeping software and kept no ledger of expenses. He never told them their records were inadequate, never suggested they create a business plan, and advised them that their horse activities satisfied section 183, the hobby-loss rule, even though SQH had never had a profitable year since its founding. In the court’s words, when the SQH account ran dry, “the Schumachers ponied up to replenish it from their personal checking account.”

The losses: 18 years, zero profitable years

SQH never turned a profit. Not in 2001, when it started. Not in any year after that. The court noted the operation had lost money for at least 18 years. Here is the decade the opinion lays out in full:

Those losses did real work on the Schumachers’ returns. Their wage income was $118,028, $130,182, and $114,660 for 2017, 2018, and 2019. Their Schedules E also reported income passed through to them from the veterinary practice of $301,993 and $279,499 for 2017 and 2018. The Schedule F losses partly offset that income, leaving final tax bills of $85,811, $40,046, and $60,829 as filed.

There is a shortcut in the law that could have helped them. Section 183(d) presumes a horse activity is engaged in for profit if it produces gross income exceeding deductions in at least two of the last seven years, in plain terms, two profitable years out of seven. SQH did not clear that hurdle. It had not been profitable since its inception in 2001.

What did the IRS assess?

The IRS opened its examination in January 2020 and assigned Revenue Agent Jeane Quinne. On October 16, 2020, as the examination neared completion, she prepared a penalty approval form, and her group manager, Robert Mahon, approved the penalties the same day. On January 5, 2021, she sent the Schumachers Letter 4121, the first formal word that the IRS intended to assert penalties. The parties settled several smaller adjustments by stipulation. The live issues were whether SQH was operated for profit under section 183, and whether the Schumachers owed accuracy-related penalties. The Notice of Deficiency arrived December 8, 2022.

• 2017: deficiency $62,266, penalty $11,458
• 2018: deficiency $61,466, penalty $11,697
• 2019: deficiency $67,447, penalty $10,365
• Total at stake: $191,179 in tax plus $33,520 in penalties, $224,699 combined, before interest.

The nine-question test

Under sections 162(a) and 212(1), a taxpayer may deduct ordinary and necessary expenses of a trade or business. Expenses for an activity not engaged in for profit, such as a hobby, are generally not deductible, except up to the amount of gross income the activity itself produces. To decide which side of that line an activity falls on, the court weighs nine factors from Treasury Regulation section 1.183-2(b). No single factor controls, and the taxpayer’s expectation of profit need not have been reasonable, but it must have been a good faith expectation.

The nine factors: (1) the manner in which the activity is carried on; (2) the expertise of the taxpayer or their advisers; (3) the time and effort expended; (4) the expectation that assets used in the activity may appreciate in value; (5) success in other similar or dissimilar activities; (6) history of income or losses; (7) the amount of occasional profits, if any; (8) the taxpayer’s financial status; and (9) elements of personal pleasure or recreation.

Here is how the court scored them:

• Manner: for the IRS. The Schumachers failed to keep complete and accurate records. They kept handwritten notes and receipts for tax reporting, not for profit-making purposes. The SQH account functioned as an extension of their personal checking account. They had no business plan, written or unwritten. And the changes they made to breeding and training made them better at showing horses, but the money did not follow. The court could not say their decisions were driven by a profit motive rather than a desire to succeed in horse competitions.
• Expertise: for the Schumachers. Both had trained horses before SQH, kept learning, and Dr. Schumacher completed the 12-week Clinton Anderson Method Ambassador horse training course in 2019 and studied horse breeding informally through discussions with others at AQHA events.
• Time and effort: for the Schumachers. Despite demanding jobs, Dr. Schumacher spent two to four hours a day with the horses and Mrs. Schumacher substantially more, morning and afternoon during the school year and from early morning until dusk in summer. Building the indoor arena showed they worked the horses year round.
• Appreciation: for the IRS. Other than a headcount estimate by Dr. Schumacher at trial, they provided no evidence of their horse inventory during the years at issue, or that they even recorded it. The court had no way to determine the herd’s value or what its future value might have been.
• Success in other activities: neutral. Dr. Schumacher’s veterinary practice was successful, but nothing about it resembled horse breeding.
• History of losses: for the IRS. SQH began in 2001 and had not turned a profit since its inception. Losses ran from $51,028 to $210,148 a year between 2010 and 2019. By way of analogy, the court noted the startup phase for a saddle-bred horse operation may run five to ten years. SQH had lost money for at least 18.
• Occasional profits: for the IRS. There were none. SQH had never turned a profit since its inception in 2001.
• Financial status: for the IRS. The Schumachers reported substantial income from sources other than SQH, which suggested they could absorb the losses and would benefit from them because the losses sheltered income from other sources.
• Personal pleasure: for the IRS. The Schumachers derived substantial pleasure from breeding, raising, training, racing, and showing horses, and the other factors showed they did not have a profit motive.

The tally: six factors for the IRS, two for the Schumachers, one neutral.

The court’s answer

The court held that “the Schumachers did not have an actual and honest objective to operate SQH for a profit during the years at issue” and sustained the disallowance of the loss deductions. The Schumachers argued they had profited from selling their stallion to a buyer in Brazil. The court questioned that claim, noting they kept little to no record of direct or indirect per-horse expenses. The court’s closing line on the point: “We do not doubt that the Schumachers took exceptional care of SQH’s horses and spent substantial time training them, but that alone does not show that they did so with a profit motive.”

So the deductions were gone. The $456,378 in losses for 2017 through 2019 could not offset the Schumachers’ other income. The $191,179 in tax stood. But the case was not over. There was still the $33,520 in penalties.

The twist: the penalties disappeared

Section 6662(a) imposes a 20% penalty on the part of an underpayment due to negligence or a substantial understatement of income tax. But section 6664(c)(1) says no penalty applies if the taxpayer shows reasonable cause and good faith. Reliance on professional advice counts as reasonable cause when three things are true: the adviser was a competent professional with enough expertise to justify reliance, the taxpayer gave the adviser the necessary and accurate information, and the taxpayer actually relied in good faith on the adviser’s judgment.

The court found all three. The Schumachers had little knowledge of tax law: Dr. Schumacher is a veterinarian, and Mrs. Schumacher works with schoolchildren. Mr. Cruise was an experienced accountant and enrolled agent, and Dr. Schumacher had relied on him for decades, not only for personal returns but for Northeast’s bookkeeping and tax returns too. Each year, Mr. Cruise discussed the section 183 factors with the Schumachers and concluded SQH was operated for profit. Dr. Schumacher promptly replied to requests for additional information, and there is no indication he withheld information from Mr. Cruise.

The court’s holding: “the Schumachers should not be saddled with the section 6662(a) accuracy-related penalties.” All $33,520 in penalties was wiped out. The tax stood, the penalties did not. Decision will be entered under Rule 155, the Tax Court’s post-opinion number-crunching step, which means the final numbers get computed from the opinion.

That is the split ending of this case. The deductions were a hobby, and the tax was real. The penalties were not, because the couple had done what the law rewards: they handed their adviser everything they had, answered every question, and followed the advice they were given.

The checklist: what Schumacher teaches about a hobby

• Loving it is not the problem, but it counts. Enjoyment alone does not make an activity a hobby, but when the other factors point the same way, pleasure tips the scale. Dr. Schumacher’s “tremendous amount of pleasure” and Mrs. Schumacher’s “great deal of satisfaction” were in the opinion, and they counted.
• Losses need a finish line. By way of analogy, the court noted the startup phase for a saddle-bred horse operation may run five to ten years. Eighteen years of losses with no profitable year is not a startup anymore. If the losses never end, the court stops believing a profit is the goal.
• Your books are the business. Records kept for tax reporting are not the same as records kept to run a business. No per-horse costs, no ledger, no software, and a business account that was really a personal account with a different label: that is what the court saw, and it scored against them.
• A plan on paper matters. A written business plan is not required, but the Schumachers acknowledged they had none, written or unwritten, and their adviser never suggested one. When there is no plan, there is nothing to point to that says profit was the goal.
• Good advice can save the penalties even when it cannot save the deductions. Mr. Cruise’s advice did not make SQH a business. But because the Schumachers gave him everything and followed his judgment in good faith, it saved them $33,520 in penalties. Advice is not a shield against a disallowance. It can be a shield against the penalty.
• The horse presumption has a threshold. The law presumes a horse activity is for profit if gross income beats deductions in two of the last seven years. SQH never had a single profitable year, so the presumption never applied.

Alex Volkov, CPA is a New York-licensed CPA with over two decades in accounting, focused on resolving IRS tax problems, back taxes, liens, levies, garnishments, and audits, for individuals and businesses in all 50 states and around the world.