Semantics. If the hobby business never makes a profit and is capturing losses for tax benefits, that’s a failing business. It can be failing indefinitely as long as there’s money to support it, but you can’t call it a successful business.

You appear to be suggesting that fun hobbies which don't make money are a 'failure' rather than a success. Not everything is judged by how much money it makes.

Have you ever wondered why kids climb trees?

It's really not that deep: they're characterising the business, you're characterising the hobby. The owner having a good time doesn't make it a successful business. A failing business can be a successful hobby, sure, that's still a failing business.

This wasn't a hobby. At least the head engineer and sales persons were constantly stressed by flagging sales and lack of customer acceptance.

It wasn’t a hobby for them but it still may have been a hobby business for the founder. Rich dude LARPing tyrant CEO or Steve Jobs imitator is common.

Doesn't running consistent losses eventually cause tax issues with the IRS? If the losses are offsetting profit elsewhere, I would assume the IRS would become very interested in challenging the validity of the hobby business?

You see a lot of hobby shops in ultra-wealthy areas of major metropolises. Tiny art studios, interior decorators with a handful of items in stock, boutique fashion shops.