The Hobby-Business Mash-Up
Author name
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.”
As families prepare for the new school year, many states are once again offering sales tax holidays —limited-time periods when shoppers can purchase certain items without paying state sales tax. While these tax-free events can lead to meaningful savings, the rules vary widely by state. Some holidays last only a weekend, while others span several weeks. Eligible items also differ, with some states exempting only clothing and school supplies while others include computers, emergency preparedness equipment, or energy-efficient appliances. Source: Sales Tax Institute. What Is a Sales Tax Holiday? A sales tax holiday is a designated period during which states temporarily suspend sales tax on specific purchases. Most are timed around the back-to-school shopping season, although some states also hold tax holidays for hurricane preparedness, hunting supplies, or energy-efficient products. Source: Sales Tax Institute. Which States Are Participating? Where Are Back-to-School Sales Tax Holidays Happening? The following states are offering statewide back-to-school sales tax holidays or similar tax relief programs during the 2026 shopping season. Keep in mind that dates, eligible items, and price limits vary by state. Arkansas (Aug. 1–2): Clothing, school supplies, instructional materials, and many electronics. Connecticut (Aug. 16–22): Clothing, footwear, backpacks, and qualifying school supplies under applicable limits. Florida (July 20–Aug. 20): Clothing, school supplies, learning aids, and computers meeting price thresholds. Illinois (Aug. 7–16): Reduced state sales tax rate on qualifying clothing, footwear, and school supplies. Iowa (Aug. 7–8): Clothing and footwear under $100 per item. Maryland (Aug. 9–15): Clothing and footwear priced at $100 or less. Massachusetts (Aug. 8–9): Most retail items priced up to $2,500 qualify, with certain exclusions. Missouri (Aug. 7–9): Clothing, school supplies, computers, software, and calculators within price limits. New Mexico (July 31–Aug. 2): Clothing, school supplies, computers, backpacks, calculators, and related technology. Ohio (Aug. 7–9): Qualifying clothing, school supplies, and instructional materials. Oklahoma (Aug. 7–9): Clothing and footwear under $100 per item. South Carolina (Aug. 7–9): Clothing, school supplies, computers, printers, software, and select household items. Tennessee (July 31–Aug. 2): Clothing, school supplies, and qualifying computers. Texas (Aug. 7–9): Clothing, footwear, backpacks, and most school supplies under $100 per item. Virginia (Aug. 7–9): Clothing, school supplies, emergency preparedness items, and qualifying Energy Star products. West Virginia (July 31–Aug. 3): Clothing, school supplies, laptops, tablets, and qualifying sports equipment. While back-to-school shopping receives the most attention, it's not the only type of sales tax holiday taking place throughout the year. Several states also offer temporary tax exemptions on items such as hurricane and emergency preparedness supplies, Energy Star® appliances, hunting and fishing equipment, firearms and ammunition, severe weather preparedness products, and even certain purchases made by members of the National Guard. These holidays are designed to encourage preparedness, support conservation efforts, or promote specific industries, and the qualifying items and dates vary widely by state. Before making a major purchase, it's worth checking whether your state offers a tax holiday that could help you save. Source: Sales Tax Institute; Federation of Tax Administrators. Read the Fine Print One of the biggest misconceptions about sales tax holidays is that everything is tax-free. In reality, each state establishes its own eligibility rules. Many programs include price limits, exclude luxury goods or accessories, or apply only to certain categories of merchandise. Some states also have different rules for online purchases, layaway transactions, coupons, and shipping charges. Source: Sales Tax Institute; Federation of Tax Administrators. Are the Savings Worth It? For families already planning back-to-school shopping, timing purchases to coincide with a sales tax holiday can reduce costs . With back-to-school expenses continuing to rise, even modest tax savings can make a difference, especially when purchasing clothing, backpacks, school supplies, or computers that qualify under your state's rules. However, shoppers shouldn't buy items simply because they're temporarily tax-free. The greatest benefit comes from purchasing items you were already planning to buy while understanding your state's specific requirements. Sales tax holidays can provide valuable savings, but they aren't one-size-fits-all. Before heading to the store, or placing an online order, check your state's rules to confirm the dates, eligible items, and any purchase limits that apply. If you own a retail business, remember that sales tax holidays also create additional compliance responsibilities. Your tax professional can help ensure you're applying your state's rules correctly and collecting the appropriate amount of sales tax throughout the year.
If you’re planning a move—or you already split time between two states—you should understand the term domicile. Domicile is one of those legal concepts that can quietly change your tax picture in big ways. It helps decide which state can tax you on all your income, which state’s estate rules apply when you die, how community-property rules treat income with a spouse, and even whether you qualify as a bona fide resident for the foreign earned income exclusion. The good news: domicile is mostly about facts you can document. The better news: with a little planning and good recordkeeping, you can significantly reduce tax risk. This article explains what domicile is, how it differs from other residency tests, the practical evidence courts and tax agencies look for, and a step-by-step checklist to protect your position. What is Domicile? Domicile is your permanent legal home—the single place you intend to live for an indefinite or unlimited period and to which you intend to return when absent. Unlike a mailing address or where you happen to spend most of your days in a given year, domicile is a legal conclusion based on both intent and conduct. A person can only have one domicile at a time, even if they maintain houses in more than one state. Key Point : Physical presence alone doesn’t determine domicile. Moving into a new state for a short time without clear intent to remain can leave your old domicile intact. Conversely, a brief but genuine move with intent to stay can establish a new domicile quickly in some circumstances. How Domicile Differs from Other Residency Tests: States and federal tax rules use several different tests that are easy to confuse: Domicile (Common Law) : Your permanent legal home (intent + conduct). Only one domicile at a time. Statutory Residency/Day-Count Rules : Many states use a day-count (commonly 183 days) or a combination of “permanent place of abode + 183 days” to determine tax residency for the year, regardless of domicile. Federal Tax Residency for Aliens : Tests like the green card test and Substantial Presence Test are separate statutory rules for noncitizens and do not equate to common-law domicile. Because these tests are different, you can be domiciled in State A while also being a statutory resident of State B if you spend enough days there. That creates potential double-filing and taxation unless carefully planned and documented. Why Domicile Matters for Taxpayers : State Income Tax : Most states tax domiciliaries on worldwide income. If you’re domiciled in State X, that state expects a full resident return, even for income earned elsewhere. Part-Year Status : If you change domicile during the year, most states treat you as a part-year resident and apportion income between resident and nonresident periods. The exact date you changed domicile is often heavily contested in state audits. Nonresident Source Taxes : States typically tax nonresidents only on income sourced to the state—wages earned there, rents on in-state real estate, business income, or gains from sale of in-state property. Federal Issues : Domicile can influence whether you qualify as a bona fide resident for the foreign earned income exclusion (FEIE) when you work overseas, because the bona fide residence test looks to intention to make a foreign country your home. The alternative FEIE physical presence test is purely days-based. Estate and Gift Tax : Domicile is important for determining which state’s estate or inheritance taxes apply, if any, and can be a focal point when a decedent moved shortly before death. Community Property and Spouse Issues : The characterization of income as community or separate property often depends on spouses’ domiciles and applicable state law. What Courts and Tax Auditors Look For : Objective, contemporaneous evidence! Because domicile is a question of intent proved by conduct, agencies and courts evaluate the totality of the facts. No single item is dispositive—collect them all and keep dates clear. Useful evidence includes: Home Occupancy : Closing statements, lease, move-in dates, utility start and stop bills, photographs showing you lived in the new home. Family Location : Where your spouse/partner and dependent children reside; school enrollments; pediatrician or other medical records. Official Registrations and IDs : Voter registration and voting records, driver’s license or state ID issuance, vehicle registration. Tax Filings and Addresses : Address used on your federal and state returns, payroll withholding, and 1099s. Employment and Business Ties : Employer transfer letters, principal place of business, business registrations, professional licenses. Financial Ties : primary bank accounts, safe-deposit boxes, mortgage or loan documents. Social and Community Ties : Church membership, club memberships, subscriptions, local volunteering. Actions Severing Old Ties : Sale or long-term rental of prior residence, closure of local bank accounts, cancellation of memberships. Estate Planning Updates : Revising wills, trusts, beneficiary designations and filing them where appropriate. Special Rules and Common Exceptions: Rapid Domicile Establishment : In estate and gift tax contexts, a person may quickly acquire domicile if they move and show no definite present intent to leave. Military and Certain Government Personnel : Special protections often preserve a prior domicile despite moves. The Servicemembers Civil Relief Act (SCRA) protects military members from losing or acquiring domicile solely due to change-of-station orders. Federal laws (MSRRA and VAEIA) let a civilian spouse elect to use the servicemember’s domicile for state tax purposes in many situations. Noncitizens : Don’t confuse statutory tax residency tests for aliens with domicile; they’re analytically separate and have different consequences. Common Audit Issues : Auditors commonly challenge the claimed effective date of a domicile change. Typical red flags include: Inconsistent dates across records (e.g., driver’s license updated after tax filing date). Retention of strong ties to the old state—especially voter registration, vehicle registration, and bank accounts. Failure to occupy the purchased home as your primary residence. Lack of contemporaneous documentation (e.g., collecting evidence only after an audit starts). Practical, Taxpayer-focused Checklist for Changing Domicile: If you intend to change your domicile and want to reduce audit risk, act deliberately and create contemporaneous records. Steps to follow: Create a dated timeline - Document every relevant event: move date, property sale or lease, employment change, family moves, and any major actions with exact dates. Update official records promptly Apply for a driver’s license and state ID in the new state as soon as you establish residency there. Register to vote and actually vote in the new state. Register vehicles where required. Update professional licenses if you are required to be licensed in the new state. Make your new home your primary residence Move personal belongings and occupy the home. Start utility service in your name at the new home. Use photographs, receipts, and service start dates to show occupancy. Change financial and legal ties Move primary bank accounts and close old local accounts when practical. Update beneficiary designations, wills, and trusts to reflect new domicile. Transfer professional licenses, business registrations, and professional memberships if applicable. Shift social and community ties Join local organizations, churches, and clubs; maintain membership records and dates. Enroll children in local schools; keep enrollment and medical records. Sever ties to the old domicile Sell or rent the former residence (long-term leases are stronger evidence than occasional rentals). Cancel local club memberships or transfer them. Close or consolidate local accounts. Update tax and employment records Update your address with your employer’s payroll department and adjust withholding to reflect the new state. File part-year returns when appropriate and be consistent about the claimed date of domicile change. Keep contemporaneous, organized documentation Maintain a one-page chronology and a file of exhibits (tabbed and dated) for each relevant year. Draft a short, signed contemporaneous declaration of intent to make the new state your permanent home and keep it in your file. Practical Tips and Final Thoughts : Consistency Matters: Conflicting dates or addresses in different documents are a red flag. Make sure your driver’s license, voter registration, tax returns, and employer records tell the same story. Be Mindful of Statutorily Based Residency Rules: Even if you change domicile, you can still trigger tax obligations in other states if you spend enough days there. Don’t Ignore Estate and Community-Property Implications: A move late in life, or different domiciles between spouses, can create complex tax and property issues. When in Doubt, Consult: Domicile disputes are fact-intensive and often litigated. If your circumstances are complicated (e.g., cross-border moves, multi-state income, military service, or imminent estate issues), contact this office for guidance before engaging with an auditor. Bottom Line : Domicile is about where you truly intend to make your home—not just where you sleep a few nights a year. Because it is decided by the totality of your actions and documented intent, proactive planning and thorough, contemporaneous recordkeeping are your best defenses. If you’ve moved or plan to move, follow the checklist above, keep clear records, and coordinate changes to IDs, financial accounts, tax withholding, and estate documents as soon as practical. Those steps will help you minimize surprises and be ready to defend your chosen domicile if a tax agency asks questions. If you are contemplating a move it may be appropriate to consult with this office in advance.
Frequently Asked Questions About Employment Practices Liability Insurance What is employment practices insurance? Employment practices insurance is another way people refer to Employment Practices Liability Insurance, or EPLI. It helps protect a business from certain claims tied to employment decisions and workplace treatment. These claims may involve wrongful termination, discrimination, harassment, retaliation, failure to hire, or failure to promote. Employment practices insurance is not designed for physical injuries or property damage. It is designed for employment-related allegations. Do I need employment practices liability insurance? If your business has employees, former employees, or job applicants, Employment Practices Liability Insurance is worth considering. Small businesses often think they are too small to face an employment claim. But even small teams make hiring, pay, discipline, promotion, and termination decisions. Any of those decisions can lead to a dispute. EPLI may be especially important if your business is hiring quickly, adding managers, handling terminations, expanding into new states, or operating without HR support. What is the difference between E&O and EPLI? Errors and Omissions insurance, often called E&O, is different from Employment Practices Liability Insurance. E&O insurance generally helps protect a business from claims that it made a professional mistake. That may include poor advice, missed deadlines, or failure to deliver services as promised. EPLI focuses on workplace claims. It helps protect against certain allegations from employees, former employees, or job applicants. A simple way to separate them is this: E&O is about the professional work your business does for clients. EPLI is about how your business treats employees and applicants. What is the difference between EBL and EPLI? Employee Benefits Liability, or EBL, is different from Employment Practices Liability Insurance. EBL generally helps protect a business from certain mistakes in employee benefits administration. For example, it may apply if an employee was left off a benefits plan by mistake or given incorrect information about eligibility. EPLI focuses on broader workplace claims. These may include wrongful termination, discrimination, harassment, retaliation, failure to hire, or failure to promote. A simple way to separate them is this: EBL is about benefits administration mistakes. EPLI is about employment-related claims and workplace treatment. Sources [1] Insurance Information Institute, "Employment Practices Liability Insurance." The III explains that EPLI protects businesses against claims that workers' legal rights as employees were violated. It also lists common claim types and notes that policies generally do not cover punitive damages or civil or criminal fines. https://www.iii.org/article/employment-practices-liability-insurance [2] Equal Employment Opportunity Commission, "EEOC Highlights Record-Breaking Results in Agency Reports." The EEOC reported securing $660 million for 17,680 victims of employment discrimination in fiscal year 2025. https://www.eeoc.gov/newsroom/eeoc-highlights-record-breaking-results-agency-reports [3] International Risk Management Institute, "Employment Practices Liability Insurance." IRMI identifies common EPLI claim types, including wrongful termination, discrimination, sexual harassment, and retaliation. It also notes that EPLI policies contain shrinking limits provisions, meaning defense costs reduce the policy's available limits. https://www.irmi.com/term/insurance-definitions/employment-practices-liability-insurance [4] Equal Employment Opportunity Commission, "Best Practices for Employers and Human Resources/EEO Professionals." The EEOC outlines general best practices for preventing workplace discrimination, including training, neutral and objective criteria for employment decisions, and open communication. https://www.eeoc.gov/initiatives/e-race/best-practices-employers-and-human-resourceseeo-professionals [5] Equal Employment Opportunity Commission, "Small Business Resource Center." The EEOC provides free guidance for small business owners on hiring, training, evaluating, disciplining, and terminating employees. https://www.eeoc.gov/employers/small-business [6] National Association of Insurance Commissioners, "Small Business Insurance." NAIC explains that small business insurance needs vary based on business factors such as employees, products, services, and operations. https://content.naic.org/consumer/small-business.htm [7] International Risk Management Institute, "Claims-Made Policy." IRMI explains that under a claims-made policy, coverage applies to claims first made during the policy period, and that EPLI is typically written on this basis. https://www.irmi.com/term/insurance-definitions/claims-made-policy