I became fascinated by the Rafalca story because it brings together many of elements of tax practice that I follow closely – Code Section 183 (hobby losses), Code Section 469 (passive activities), the entity versus aggregate conception of partnership taxation. Rarely is there an opportunity to bring these all together and connect them to an event that is in the public eye. When I noted this morning that Rafalca was competing I became quite excited and thought I would be able to connect the stories. Since when I hit publish, Rafalca was in sixth place, I thought that meant she could not get a medal. A commenter quite rightly criticized me for poor research. It had not occurred to me that the dressage competition is a multi-stage affair. As I write this Rafalca is in 13th place and there is some hope of her advancing to the next stage. I apologize for not looking further into the matter this morning. And I will keep rooting for Rafalca.
Rarely do I regret not having television, but this is one of those times. I just read that Rafalca, Mitt, and Ann Romney’s dancing horse, is currently placed 6th with 70.243 points in the individual dressage competition at the London Olympics. I doubt that there is any connection between Rafalca getting 70 odd points and the Romneys having a 70 odd thousand deduction on their 2010 return from the partnership that owns Rafalca. I don’t know much about dressage, but I think that if you come in sixth, there is no medal.
It got me thinking about how much Rafalca saved Romney in current dollars on his 2010 return. My first thought was twenty to thirty grand. Then I remembered that his income is so heavily weighted towards capital gains and he gives so much to charity, that it might have only been about 10 grand. Then I remembered that the partnership was a passive activity with respect to the Romneys, meaning neither one of them spent at least 500 hours a year on the activity. Romney has over a million in losses from other passive activities and very little in the way of income from passive activities, so he was only allowed $50 of the loss from the partnership. Poor Rafalca. No medal and you only saved master about 10 bucks.
It is even worse though. If Romney had not had the Rafalca loss, he would have been able to deduct $50 more of the losses from his other passive activities. So for 2010, Rafalca saved master nothing.
It is true that Romney may get to use the losses in the future if he has income from passive activities or when the partnership interest is entirely disposed of, but the future is uncertain. Anyway, nice try Rafalca. I was rooting for you and so were Dogs Against Romney . Hope they let you ride inside on the flight home.
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Postscript
I had studied Romney’s 2010 and draft 2011 returns sometime ago. The Rob Rom partnership which owns Rafalca did not register with me. A few days ago, Janet Novack, my esteemed editor, called to interview me for her piece Both Left And Right Got The Taxes On The Romneys’ Olympic Horse Wrong. You can see what I had to say about it in her piece, but as part of the interview, I cluelessly asked her why this was in the news now. She told me it was because of the Olympics? I did remember that the Olympics were going on. I don’t have a television, though, and the only Olympic sport I like is curling, which they don’t do in the Summer Olympics. The tax questions were fascinating though and I did a piece on how to keep straight the various obstacles there are to posting negative numbers on your return – Romney’s Olympic Horse Not Jumping Through The Last Hoop of Deductibility. As Frank Frank notes, though, my research on the actual dressage competition was abysmal.
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