When You are a US Billionaire, Your Hobbies Can Slash Your Tax Bill
Paul Kiel, Jesse Eisinger  and  Jeff Ernsthausen (ProPublica) 13 December 2021
This story was originally published by ProPublica.
When the Kentucky Derby allowed spectators to return this spring, after the pandemic had curtailed attendance in 2020, the mood was euphoric. Under cloudless skies, ladies swanned about in colorful broad-brimmed hats and gentlemen donned seersucker suits, the trademark pageantry of the sport of kings.
The sport’s royalty, including the billionaire owners of thoroughbreds, was well represented. Basking in the glory of their racehorses’ appearance on the most prestigious stage in the world, they knew all but one of them would see their colt or filly suffer defeat. A victory would bring not only a seven-figure purse, but possibly also tens of millions of dollars in breeding rights over years to come.
Even if their horses finished far out of the money, some owners had a salve for the sting of defeat: tax write-offs. Six of the 20 thoroughbreds selected to run in this year’s Derby were owned by ultrawealthy Americans whose horse-racing operations have produced a combined $600 million in losses that they could use to offset their federal taxable income, according to ProPublica’s analysis of IRS data.
Among them was Paul Fireman, who made his fortune by turning the shoe company Reebok into a household name before selling it to Adidas in 2005 for $3.8 billion. Fireman was new to the endeavor, but he’d already spent millions building a professional horse-racing operation, including dropping almost $1 million on a single thoroughbred, a descendant of a Preakness winner. His horse, King Fury, was scratched from the Kentucky Derby after spiking a fever.
Charlotte Weber, a Campbell Soup heiress who Forbes says is worth $1.6 billion, saw her appropriately named horse Soup and Sandwich break well from the outside before faltering with a breathing issue and finishing last. Brad Kelley, who made his money selling his tobacco company two decades ago and is worth $2.7 billion, owned Bourbonic, who finished 13th. Hedge fund manager Seth Klarman, worth $1.5 billion, entered a horse named Highly Motivated that would place 10th.
The tax records obtained by ProPublica shed light on how much each of these owners was able to write off. Over 16 years, Kelley claimed $189 million in losses for his racing business; Weber claimed $173 million in 21 years, and Klarman $138 million over 19 years. Fireman, a relative newcomer to the game, had taken only $9.3 million in losses as of 2018. (Kelley and Weber did not respond to requests seeking comment. Klarman, who has donated to ProPublica in the past, declined to comment.)
All Americans are entitled to life, liberty and the pursuit of happiness. But the happiness of the wealthy can come with an added bonus: It’s subsidized by taxpayers. Billionaires can not only deduct the costs of buying, owning and training thoroughbred horses, but they can treat all manner of pastimes and side pursuits as businesses, and then tap those businesses as an extra source of deductions. By contrast, if you’re a middle-class person with a passion for thoroughbreds and you attend the Kentucky Derby, neither the money you spend on your ticket to sit in the grandstand nor, say, the $20 you blow in bets would help you lower the taxes you owe on your wages.
A trove of tax data obtained by ProPublica reveals for the first time the extent to which tax breaks underwrite the enjoyment of our richest citizens. Yesterday, ProPublica examined a special class of superrich taxpayers we called the biggest losers, who amass deductions to such an extent that they can avoid income taxes for years on end. We showed that many of these tax avoiders are titans in commercial real estate or oil and gas, industries on which the tax laws bestow unusually lucrative advantages.
Today we’re focusing on a broader set of strategies the ultrawealthy use to pile up deductions. Tax records show these loss producers go beyond the classic hobbies and encompass all sorts of businesses the rich control.
Sometimes, they plow funds into pet projects that lose money so consistently that it suggests profitability isn’t the main goal. The wealthy may not start these businesses chiefly as a way to reduce taxes — many billionaires would happily race horses even without a tax payoff — but the benefits flow in just the same. Continue Reading
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