The Hobby-Business Mash-Up

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Fact # 3

Our third case, Carson, presents a very strange fact pattern. Ms. Carson’s mom created a grantor trust and transferred mom’s cattle ranch to it; Mom was trustee. Mom and stepdad were the life beneficiaries of the trust. Ms. Carson and her brother were the remaindermen. During the tax years at issue (2017-2018) Mom and stepdad were living.

Per written agreements, Ms. Carson was obligated to pay the expenses of the ranch. But she was not entitled to any of the income from ranch unless both she and her mom agreed to it. Thus between 2014 and 2019 “[Ms.] Carson made substantial financial contributions to the ranch by paying its expenses. *** The ranch made money mainly by selling cattle. The receipts from the cattle sales were reported on the returns of [Ms.] Carson’s mother.” Oral Transcript at 3. That’s just weird. Normally parents try to assign income to their children, deductions!

It is not clear from the opinion but it appears that the Carsons lived on the ranch. At any rate Judge Morrison says that “the Carson’s two children lived at the ranch helping in the ranch’s business of raising cattle for sale. For this purpose, the children used horses, some of which they also used to compete in cash-prize rodeos. The children also performed manual labor for neighbors of the ranch.”

For the tax years at issue (2017 and 2018) the Carson’s filed a Schedule F, reporting a “livestock” business. However, the only income they reported each year was the cash prizes the kids won in rodeos and the money the kids made from neighbors: some $2,700 in 2017 (all from rodeo prizes) and some $8,000 in 2018 ($6,200 from rodeo prizes). Against that modest income they reported all the expenses Ms. Carson had agreed make: $139,000 in 2017 and $134,000 in in 2018.

This had been the pattern since 2014: “During the six years 2014 to 2019, the Carson’s reported cumulative losses of $502,742 on the schedules F. For each year, these losses not only dwarfed the gross income reported on the schedule F...but they largely offset the Carson’s ordinary income [from] wages.” Yessir, assignment of deductions!

On audit, the IRS disallowed all the Schedule F deductions in excess of the Schedule F income because the IRS Revenue Agent thought that the Carsons had mis-labeled the activity and it should have been reported as a rodeo activity, not a ranching activity. And the rodeo activity was a hobby, not a business. The Carsons petitioned the Tax Court. I cannot tell whether they were represented.


Lesson #3: Hobby + Business = Business?

The basic problem, Judge Morrison decides, is that the IRS mis-analyzed how the Carsons messed up their return. The Carsons' error was mashing up the rodeo activity and ranching activity on the same Schedule. That led the IRS to mis-analyze the return by ignoring the documented arrangement between Ms. Carson. The IRS approach “supposes that the Carsons lost approximately $120,000 per year entering their children in rodeos. *** [That] makes no sense in light of our view that the deductions reported on the Schedules F mainly related to ranching.” Transcript at 8.


Here, unlike our other two cases, the taxpayers kept good records. Transcript at 8. (Ms. Carson “kept meticulous details of the expenses that were deducted on the Schedule F.”). Those records showed most expenses related to the ranching activity and only a “relatively small part” related to the rodeo activity.  Id. Judge Morrison declines to parse the expenses because the IRS “did not challenge the substantiation behind the deductions” id. and thus he was not going to ding Ms. Carson for not bringing records with her to trial.


Bottom Line #3: Don’t try this at home, but once Judge Morrison accepted that the ranching activity was legit, then mashing up the hobby and business was basically harmless error. Sure, the Carsons should have reported the rodeo income on Schedule 1 and not Schedule F. Sure, they should have reported the rodeo expenses on Schedule A (and, of course, for 2018 they would not have been able to deduct any rodeo expenses because of evil §67(g)). The proper reporting position, however, would not have affected their bottom lines very much if at all. The ranching net losses would have still been able to be used to offset the modest rodeo income they had as well as most of their wage income.


Coda: The real issue here—that the IRS just missed—was the assignment of deductions. Judge Morrison notes the weirdness of allocating all the ranching income to Ms. Carson’s mom and allocating all the ranching expenses to Ms. Carson but tells us that a “mismatch of income and deductions is not prohibited under the Code per se, but may be relevant in determining the appropriateness of accounting methods and in determining the appropriate allocation of income and deductions between partners. However, these legal issues are not before the court.”



EPLI- What every growing business should know! Part 5

July 9, 2026
When to Consider Employment Practices Liability Insurance The best time to consider Employment Practices Liability Insurance is before a claim happens. Many owners wait until there is a problem. By then, a new policy may not help with an issue the business already knew about. A business should review EPLI when it: Hires its first employee Adds managers Grows quickly Terminates employees Creates an employee handbook Expands into another state Handles workplace complaints Has high turnover Operates without formal HR support The National Association of Insurance Commissioners notes that small business insurance needs vary based on the business, including employee count, products, services, and operations. That is a good reminder that insurance should grow with the company. [6] Employment Practices Liability Insurance is not just about today's team. It is also about where the business is headed. If the plan is to hire more people, open another location, or add supervisors, EPLI should be part of the planning conversation. Take the Next Step Before Your Next Hire Hiring is one of the biggest decisions a small business makes. It affects payroll, taxes, cash flow, workplace practices, and insurance all at once. Those pieces work better when they are reviewed together. That is why Steven Brewer & Company CPAs and Gild Insurance Agency work together. Brewer helps business owners understand the real cost of hiring, plan for payroll and taxes, and protect cash flow as the team grows. Gild helps owners understand which coverages belong in the conversation, from Employment Practices Liability Insurance to workers' compensation and general liability. Request a quote with Steven Brewer & Company to talk through the financial side of your next hire. Then take a few minutes for a free business insurance review through Gild Insurance and get a fast online quote. Two conversations. One stronger plan for growing your business.

EPLI- What every growing business should know! Part 4

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Why Growth Increases Employment Risk A business with two employees may feel easy to manage. A business with ten employees needs more structure. A business with twenty employees needs even more consistency. Growth creates more decisions. More decisions create more chances for confusion, conflict, or claims. As a business grows, employment practices can lag behind. The company may add people before updating job descriptions. It may promote a team member into management before training them. It may handle performance issues differently from one employee to another. These gaps are common. They do not always mean the owner is careless. They often mean the business is busy. But employment claims often focus on process. For example: Was the rule applied the same way for everyone? Was the employee warned? Was the complaint reviewed? Was the hiring process fair? Was the manager trained? Was the decision documented? A clear process is easier to defend than memory. The Equal Employment Opportunty Commission advises employers to train managers and employees on equal employment opportunity laws, establish neutral and objective criteria for employment decisions, and monitor practices for consistency. It also recommends fostering open communication and early dispute resolution to keep small issues from becoming legal claims. [4] That is why Employment Practices Liability Insurance works best when it is paired with good workplace habits. Insurance helps protect the business financially. Documentation helps explain what happened. How Small Businesses Can Reduce EPLI Risk Employment Practices Liability Insurance is one layer of protection. Strong employment practices are another. Small businesses can reduce risk by making workplace decisions more consistent. This does not require a large HR department. It does require a simple system. Start with these steps: Use written job descriptions. Create a basic employee handbook. Document performance concerns. Use consistent interview questions. Keep hiring notes professional and job-related. Train managers on harassment, discrimination, and retaliation. Respond to employee complaints promptly. Apply workplace policies consistently. Review termination decisions before acting. Keep payroll and worker classification practices current. These steps help create a better workplace. They also help the business if a claim appears later. The EEOC offers a Small Business Resource Center with free guidance on hiring, training, evaluating, disciplining, and terminating employees. The agency notes that small business owners often do not have legal or HR experts on staff, and the resources are designed to help fill that gap. [5] Owners should be especially careful with terminations. A termination may be valid, but it should still be documented. The business should be able to explain why the decision was made and show that similar situations were handled in a similar way.  Good records do not remove all risk. They make the business more prepared.

EPLI- What every growing business should know! Part 3

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What EPLI Is Not Employment Practices Liability Insurance is not the same as general liability insurance. General liability usually focuses on third-party bodily injury, property damage, and certain personal injury claims. For example, it may apply if a customer slips and falls at your office. EPLI is different. It focuses on workplace claims. Employment Practices Liability Insurance is also not the same as workers' compensation. Workers' compensation helps cover employees who are injured or become ill because of their work. EPLI helps with certain claims about how employees or applicants were treated. That distinction matters. Many owners assume their business insurance will cover an employee lawsuit. It may not. A claim involving wrongful termination, discrimination, harassment, or retaliation may fall outside general liability or workers' compensation. EPLI is designed to help fill that gap. EPLI also has limits. The Insurance Information Institute notes that EPLI policies may reimburse companies for defense costs, settlements, and judgments. But they generally do not cover punitive damages or civil or criminal fines. [1] Common exclusions may include: Criminal acts Intentional wrongdoing Bodily injury Property damage Workers' compensation claims Certain wage and hour claims Claims known before the policy began Some contract disputes Wage and hour claims deserve extra attention. Some policies exclude them. Others may offer limited defense coverage or an endorsement. The best question is not, "Do we have EPLI?"  The better question is, "What does our Employment Practices Liability Insurance actually cover?"