Thread by @doctorow

When you hear that a billionaire has bought a horse or a newspaper or a sports team, you might think it's just dilletantish dabbling by a member of the parasite class with nothing better to do with their time - a way to make the idle rich slightly more vigorous.

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If you'd like an unrolled version of this thread to read or share, here's a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:

pluralistic.net/2021/12/08/req…

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But as @propublica documents in the latest installment of its #IRSLeaks reporting - drawing on never-seen tax filings of the ultra-rich - hobbies are a way to pile up gigantic tax write-offs that can be applied to passive income (money you earn for doing nothing).

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What's more, though there are limits to the way that hobby-related expenses can be deducted from your tax-bill, the super-rich routinely flout those limits and the underfunded IRS lets them get away with it.

propublica.org/article/when-y…

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If anyone is going to get dinged for aggressively taking deductions from their leisure activities, it'll be a middle-class person who can't afford the kind of high-powered consultants, lawyers and accountants that can tie the IRS up in expensive knots it can't afford.

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The tax code is stacked in favor of elite hobbies. Most of the time, a hobby has to turn a profit in 3 out of 5 years to count as a business and supply deductions. But if your hobby is horse-racing, you only have to turn a profit in 2 out of 7 years.

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But the wealthy flout even this modest stricture: tobacco billionaire Brad Kelley and Cambell's Soup billionaire Charlotte Weber both took millions of dollars in horse-losses for 16 or more consecutive years without an IRS investigation.

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No surprise, really: the nine criteria the IRS uses to sort side-hustles from hobbies are subjective and easy to argue against. How can the IRS prove that you're not experiencing undue "personal pleasure or recreation" from your hobby?

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Even the more objective criteria, like "the expertise of the taxpayer or his or her advisers" can be bought for (billionaire) chump-change. In the case of the horsey set, there's a whole industry of consultants, breeders, etc who will provide cover to satisfy that test.

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Technically, you have to spend at least ten hours a week on a hobby for it to constitute a business. Theoretically, the largest number of hobbies a billionaire can claim business losses against is four or five - not more than six or seven.

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But by grouping multiple hobbies together under a single "holding company," the super-rich can duck even this hard limit.

Billionaire Patrick Soon-Shiong is America's 89th richest person.

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He has a "cancer moonshot" business, he buys newspapers like the LA Times and San Diego Union-Tribune, he says he's making a covid vaccine. He has a health care infomatics company, a car battery company, a bioplastics company.

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He's got a water purification company, a production soundstage, and an electric scooter company.

Many of these businesses lose money.

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Soon-Shiong claims he's personally spending at least 10 hours a week on each of them, which lets him take personal tax deductions on their losses.

All told, that's added up to $887m in deductions he's taken against his major source of income - capital gains from his existing wealth. He's got another $400m off losses saved up he can write off against any future gains, too.

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If you or I invest in a portfolio of high-risk businesses, our deductions are capped at $3k/year. You have to be a billionaire like Soon-Shiong to reap hundreds of millions of dollars in deductions for essentially the same activity.

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Propublica's reporting - by @paulkiel, @eisingerj and @JeffErnsthausen - identifies plenty of other super-rich hobbyists who mostly or entirely escape tax through their hobbies.

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* Tobacco billionaire Brad Kelley: $189m in writeoffs for his horses

* Soup heiress Charlotte Weber: $173m in writeoffs for her horses

* Hedge fund billionaire Seth Klarman: $138m in writeoffs for his horses

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* Reebok founder Paul Fireman: $9.3m in writeoffs for his horses, $22m in writeoffs for a "ranch" (Fireman made $360m from 2008-17, and paid $0 in federal tax)

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* Beanie Babies founder Ty Warner: $219m in writeoffs for money-losing prestige resorts (Warner made $363m from 2004-16 and paid $0 in federal tax)

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* Uniphase billionaire Kevin Kalkhoven: $264m in writeoffs for money-losing racecars, planes and an auto-parts company (Warner made $264m from 2005-2018 and paid $422k in federal tax)

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I'm a science fiction writer.

I earn a good living from writing about weird stuff, and I take some weird deductions, because the kind of research I do for each book is often strange, and sometimes I have to talk about that at length with my accountant to make sure I'm on the right side of the law.

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But never, in my wildest dreams, have I contemplated the kind of aggressive - even fraudulent - claims these ultra-wealthy people routinely use.

After all, the IRS *does* have the resources to drag people like you and me into tax-audit hell.

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When everyday hobbyists who overclaim on their taxes get taken to court by the IRS, the taxman usually wins.

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The parts of the tax-code that deal with hobbies, and the enforcement mechanisms for them, are tailor-made for billionaire tax-evasion - not for a fair deal for everyday people with a side-gig.

eof/