Remember when Sarah Palin was the GOP vice presidential candidate and we finally got to see two tax returns (2006 and 2007)? They showed that Todd Palin claimed significant losses from his snowmobile racing activity, which the Palin's claimed as a business. Since various publicity items made it look more like a hobby, some tax experts expressed an interest in seeing more past returns. Did he really have a business or was this a hobby, for which losses from the hobby activity in excess of income from the hobby activity are nondeductible under the "basketing"rules of section 183? The crux of the matter is distinguishing a business activity from a hobby, and one of the most significant factors in doing that under the relevant regulations is whether there is income in a significant number of years (under the regs, 3 out of 5 years of income suggest a business, whereas only rare years of income suggest a hobby). We didn't see enough of the Palins' returns to reach a firm conclusion during the campaign, nor is there any way to know whether the IRS audited the returns and reviewed those issues. There are other factors that suggest a business, including the fact that the activity is undertaken for profitmaking. Todd Palin's activities seemed more for pleasure and PR purposes, from the coverage and friends' comments at the time, but of course that would require a fact-intensive investigation to be sure. For contemporaneous discussion of this issue, see Rangel's Villa; Palin's Home Away from Home (A Taxing Matter, 2008); Sarah Palin's Tax REturns Part II (A Taxing Matter, 2008); Bryan Camp, A Brief Analysis of Governor Palin's Tax Returns for 2006 and 2007, TaxBlog (originally published 2008 but republished on the blog Feb. 12, 2012).
I [Bryan Camp] have no idea what the answer is, but here are some data points that lead me to conclude that snow-machine racing is not Todd Palin’s business but is his hobby. First, I cannot find any websites for “professional“ snow machine racers. Of course, I might have just missed it. But if there is no professional association, that suggests that there is not enough money in the sport for folks to do it as a business. Second, I cannot find any references to Todd Palin being a “professional“ racer that predate Governor Palin’s selection as McCain’s VP running mate. For example, here is a story about his crash in the Iron Dog, but does not suggest that anyone thinks he is a professional racer. http://www.adn.com/news/alaska/story/316352.html Again, I might just be a lousy researcher, however.
Third, and most importantly, what does Todd Palin say and do? The determination of whether the racing is a business is really about Todd Palin’s personal intent. Why does he do it? Love of sport or love of lucre? Some more clues may be found in the following interview he had on FOX News, available here: http://www.foxnews.com/story/0,2933,423102,00.html :
VAN SUSTEREN: I take it that you like where you lie. Look at this spectacular view. How long have you lived here?
PALIN: About six years. And we’re very fortunate to be here. And it is nice for the kids in the summertime. It’s a big playground in the wintertime. About five months out of the year, it’s a big playground, as well, where we snow machine and ice skate on the lake. Id.
So why raise this old issue again? Because Candidate Romney has been similarly stingy in the number of returns released. And the 2010 return shows a $77,000 loss from an activity that raises similar questions whether it is a business (for which a loss would be deductible) or a hobby. See Trip Gabriel, In rarefied sport, a view of the Rommey's world, New York Times (May 26, 2012).
Here's the issue. Mrs. Romney grew up riding horses and when she was diagnosed with multiple sclerosis, she took up riding dressage (a fancy demonstration of horse techniques with a rider in formal gear). Dressage is a sport generally engaged in by the wealthy or by people who are "sponsored" by wealthy people. The Romney's wealth meant that they could provide deep support to their chosen tutor and horse caretaker, Jan Ebeling, a dressage rider who runs a horse farm (the Acres) that is one of the Romney's many vacation spots. The Romney's have provided loans to their friends/tutors the Ebelings. Mrs. Romney is also a partner in a partnership with Amy Ebeling and another Romney friend that owns a star mount, Rafalca, used by Ebeling in his dressage competitions and hoped to be used in his try for the Summer Olympics. These horses cost about $200,000 a year to own and maintain. The Romney's reported a $77,000 loss from the partnership owning Rafalca on their 2010 return. As the Times reports, "sponsorship arrangements are not unusual in dressage, where riders who want to climb to the top look to wealthy backers." The question is, is the partnership really a business that is out to make a profit, or is it just a part of an expensive hobby for wealthy people like the Romneys that provides them an "in" to an elite sport?
The article describes Romney's activities as traveling with Ebeling to Europe to buy horses for herself and her tutor; boarding her horses at Ebeling's farm; spending time at the farm riding; engaging in amateur competitions; and supporting Ebeling's sporting efforts related to his objective of competing in the Olympics. It doesn't sound like the partnership would have much hope of profits--Ebeling would have to make more than the cost of maintaining the horse annually in winnings from competitions, and he is apparently primarily engaged in training for the Olympics. Certainly there is enough here to suggest the same sorts of questions that arose around Palin's tax returns--is this really a business or is it a hobby for which the loss shouldn't be deductible. If the Romneys would release more of their earlier tax returns as other presidential candidates have done (most release 10 years of returns), the question would be easily answered. But without more, this looks like another one of those cases where the rich engage in pursuits unavailable to ordinary folk and then end up claiming a significant tax break for what appears to be a hobby.
The LA Times' earlier article on Romney and her relationship with the Ebelings provides more context but still doesn't answer the specific question about the partnership that owns Rafalca. See Robin Rabcarian, On a Trail of Her Own, LA Times (May 22, 2012). It suggests that Mrs. Romney's sponsorship of her dressage tutor is much more extensive than the partnership with Amy Eberling and the Romney friend that owns Jan Ebeling's star mount Rafalca. According to the LA Times article, Mrs. Romney is a partner in the horse training and boarding farm itself and in another company (a foreign corporation!) that breeds and trains dressage horses.
For nearly 10 years, Romney has trained and ridden with Jan and Amy Ebeling, who own the Acres, an immaculate, Mediterranean-style ranch in Moorpark, about 45 miles northwest of downtown Los Angeles. Romney is a partner with the Ebelings in the Acres, and she and Amy Ebeling own Rob Rom Enterprises LLC, a foreign corporation registered in Delaware that buys and trains dressage horses.
Assuming that the Acres and the breeding company are indeed businesses, that still leaves questions about the partnership that owns Rafalca, questions that would be clarified by seeing more of Romney's earlier tax returns: has that partnership actually made profits for a majority of the last 5 years? is the primary objective of that partnership to make profits or to sponsor a friend in, and stay connected to, a beloved activity? The costly nature of this elite sport suggests that any business profitmaking would be in providing services (horses, boarding, training) for the wealthy people who can engage in it, not in owning and maintaining a horse used by someone who is training for the Olympics.
Dressage is not for the faint of wallet; it requires healthy outlays of cash for upkeep, training, transportation and veterinary care. It attracts some of the world's richest people -- the daughter of billionaire New York Mayor Michael R. Bloomberg competes. Yahoo co-founder Jerry Yang and his wife own dressage horses. On a Trail of Her Own, LA Times (May 22, 2012).