Tax issues that thoroughbred racehorse owners should consider

reprinted from: Catanese & Wells, a Law Corporation, provides a quarterly newsletter to the equine industry of and concerning legal, tax and business issues for participants in the horse business or sport. www.cataneselaw.com.

The issue addresses the general question of the "Hobby Loss" provisions of the Internal Revenue Code.

Section 183 provides that losses from a horse activity cannot be deducted against income from other sources unless the horse activity is a business and not a hobby. The IRS has issue various regulations interpreting Section 183. Generally, whether a horse activity will be treated as a business is determined by the facts and circumstances of the case. The critical inquiry is whether the activity has an objective of making a profit. Nine factors are normally considered by the IRS when it determines if the taxpayer has a profit objective.

The nine factors which are considered include:

(1) How you carry on your horse business;

(2) Your expertise;

(3) The time and effort you spend on the business;

(4) Whether you expect appreciation of your assets (horses) used in the business;

(5) Your success in similar businesses;

(6) Your history of income or losses in the horse business;

(7) Whether your horse business has profits during its history;

(8) Your financial status; and,

(9) How much pleasure or recreation is involved in the horse activity.

Even though these factors seem easy to answer, case law indicates that there are nuances regarding each factor. How these nuances are addressed many times is the difference between success in a Section 183 audit or failure. For example, even though personal pleasure may be a factor against finding the business to be for profit, if other facts and circumstances show the business is operated for a profit, the IRS will allow the horse business deductions. See Foster v. Commissioner (T.C. Memo 1973-14).

To conclude, it is very important to understand Section 183 in the organization and operation of a horse-related business. We recommend that persons engaged in the horse business be familiar with and understand how Section 183 applies to their business. In doing so, if the IRS does audit the horse business operator, they will have a better chance of obtaining a no-action result.

New or prospective racehorse owners should know this

If you are a new horse owner with not a lot of hands on experience with horses, you should read this article about suitability of horses for certain careers - http://www.thehorse.com/articles/30795/equine-performance-and-psychological-factors-linked

Before investing a lot of money buying horses, owners should understand that an expensive, royally bred and physically perfect horse is not a guaranteed race winner. Also, if an expensive, royally bred and physically perfect horse is not able to win a race, and if that horse is part of a "mega-stable" that makes an individualized program for one horse difficult or impossible, you might want to try a different trainer for a few months before giving up on your horse's racing career.

Of course all this assumes that an owner who buys an expensive horse can afford the huge ongoing expense of maintaining a horse. It's always good to remember that the maintenance cost of a horse is almost always more than the purchase price.

On the subject of how much to spend on buying a racing prospect - if you are buying a horse that is currently racing and ready to run, your best chance for success, in my opinion, is with a horse that can be purchased in the price range of $10,000-$100,000. In other words, please don't buy a horse for $1000 and please don't buy one for $1,000,000.

how to become a trainer - UPDATE

here is the general answer I gave about "how to become a trainer" in my blog a few years ago (www.thoroughbredracingworld.com) -

"In general there are not "courses" for learning how to become a trainer, most trainers work for another trainer starting at the bottom level job (hotwalker or groom) and working up to assistant trainer. Then you take the "trainer test" in the state where you wish to train when you feel that you are capable. If you already know horses and good horsemanship in general but you are not familiar with racing, you could possibly achieve this goal within several years, about the time it would take to get a university degree."

here is my update to that answer:

There are some ways now to do it a little differently but the old fashioned way is by far the best road to success. There are organizations that offer training for grooms and also trainers but I'd say it's mostly geared toward understanding the rules and regulations. You just can't learn good horsemanship by taking a course, that only comes with real world experience.

There are university degrees for racing related jobs offered by university of louisville and I think university of arizona but a degree is not needed to get a trainer's license - experience is really the key.

Some rich owners and children of influential/wealthy people have been known to "buy" a license without having any significant prior working experience with a licensed trainer, but in my experience these people don't stand the test of time in the business - this road to becoming a trainer is not recommended.

The "racing commission" in each state is the organization that licenses trainers and the racing commission will have an office at any actively racing racetrack, so you can visit that office at any track where you are interested in basing your business - please note - if you go there when there is not a racing meet going on there will generally not be anyone staffing that office. The racing commission will give you information about the licensing forms and tests required in that state.

If you want to know what's really going on in Kentucky racing, subscribe to Indian Charlie

I haven't been writing much in this blog because I just don't have much to say right now, but I'm so happy that Indian Charlie is still around to sum it all up as only he can. The latest Indian Charlie newsletter is a great example: READ INDIAN CHARLIE TODAY FROM KEENELAND >>

THANK YOU TO PSY for promoting horse sports!

Gotta watch it - http://youtu.be/9bZkp7q19f0 - everybody will have their own take on this Korean hit "Gangnam Style". Maybe Psy's making fun of the rich who show off expensive horses among other things, but I like to think he's promoting the idea of horses for all, and the horse dance will certainly get you in shape for riding!

The Racetrack as a Microcosm

Microcosm - a community or other unity that is an epitome of a larger unity. If you've ever worked on the "backside" of a track like Churchill Downs, then you know it's a world of it's own. I think it's a lot like the bigger world outside and if you start looking at the economy of the racetrack from top to bottom, you'll find a lot of things similar to the problematic US economy.

The basics are: the giant racetrack corporations (CDI) boast record earnings and are flush with cash, while racetrack laborers including hot walkers ($5/horse or $200-$300/week), grooms ($100/horse/week or $400-$500/week), and exercise riders ($15/horse or $500-$700/week) are making EXACTLY the same wages as 15 years ago. The vast majority of the laborers do not own a home, do not have health insurance and do not have any savings.

This problem is not all due to high employment taxes, and it's not due to trainers being cheap because most trainers are as broke as their employees. Of course there are exceptions with the few stables at the highest end with the "star" horses, but I'm talking about the proverbial 99%. I don't mean to pick on Churchill Downs and CDI but those are the racetrack entities that I am most familiar with.

The HBPA Salix Position

The HBPA responded to a Thoroughbred Times article by pedigree expert John Sparkman by saying in a letter to the editor,

"Sparkman accuses American trainers of not believing "they can train without [Salix] regardless of the easily provable fact that trainers in nearly every other country in the world do just that.” That assertion, however, is not true. It is acknowledged industry wide that trainers in other countries, including England and Ireland, do train on Salix. The only difference is they are not permitted to use Salix on race day as we do in the U.S."

I hope somebody with some standing in the industry responds to that statement by the HBPA because I think it's misguided. Maybe the biggest european trainers with a megastable work/breeze every horse on Salix, but I doubt it. It's our understanding that european or south african or dubai trainers use Salix more as a tool and only on occasion, not as a matter of course for every horse and every workout.

Unfortunately it is our experience here in the US that way too many trainers treat with Salix before every work as a matter of course - that means the vet comes to give Salix then comes again to rehydrate with intravenous fluids after - yikes that's expensive! I think most owners would prefer their trainer treat each horse like an individual on a case by case basis when determining if Salix is really necessary. Maybe banning Salix for racing in the US will force trainers here to rely on horsemanship rather than drugs to manage their stables. I'm with Mr. Sparkman on this one.

Important to remember, there is no sure thing

http://www.equinometry.com/2012/07/31/sure-thing-horse-racing-dont-bet-on-it/

Xpressbet asks, "Why does the New York Times continue to attack horse racing?"

Thoroughbred Times quote of the day features a link to an article at http://xpressbet.com/ReadOnTrack?id=4555 which asks the question, Why does the New York Times continue to attack horse racing? The writer comes to the conclusion that racing is an easy target for sensationalism that sells papers. I keep waiting for prominent writers to ask which powerful industry would benefit most ($) from the demise of horseracing in the US, because therein lies the answer.

An update to the blog's most popular post

Since "What does maintenance and training cost?" is the most popular post of the blog, I think anyone who reads it should also read the article at

http://racehorsetrainers.com/wordpress/article/do-you-know-where-your-day-rate-money-goes/

which breaks down the "day rate", or trainer's daily fee per horse, to show where that money goes. I think new owners sometimes assume that all or most of it goes in the trainer's pocket, but it's actually used to pay all stable employees and all feed for the horses (plus a lot of other business expenses) - employees and feed are the two biggest expenses a stable has. That means if a trainer is only charging $65/day in a public stable of claiming horses in 2012, the business is not viable unless it has some kind of outside investment.

Race Day Medication

The debate about banning all race day medication in the United States has surpassed the alternative gaming issue in the discussion about how to bring our sport back to national and international prominence.

My husband, trainer Jere Smith Jr., doesn't like to get involved in political debates, so when asked if he believes in banning all race day medication, he replies, "I can race with it or I can race without it." Despite his reluctance to enter the debate, we know that he will probably benefit from a ban on race day medication because he has the experience and skill to prepare horses to race successfully without drugs. We also know that a ban on race day medication could help struggling owners by eliminating some vet expenses. So from a purely selfish business standpoint, I support a ban on race day medication in the United States because it will probably help my husband's business.

My personal belief about Lasix/Salix in horses on race day is that it never made much sense to me. Horses on Lasix/Salix pee out their hydrating fluids in the hours before a race, then if they're lucky enough to have owners who can afford it, the vet comes out the following morning to rehydrate them through a tube after each race. Bute can cover up a problem that may get worse in a race, and the sooner the problem is dealt with and not covered up for a race, the better it is I believe for the horse and the owner in the long term.

I know there are all kinds of implications about the economics of racing in this issue. Owners, breeders, trainers, veterinarians, tracks and fans will have to lower their expectations and give horses the necessary time and attention to be ready to race without drugs - more time to develop, more time to prepare for each race and more attention to the overall health of the horse. I'm guessing there will be a "correction" in the US thoroughbred racing market after a sweeping drug ban, but just think of the possibilities if all major racing markets of the world operate on the same rules, making thoroughbred racing a truly global sport - the economic possibilities could be huge for all.

On a related subject, I recently read a comment from someone who said the US is the only black sheep in the major world thoroughbred racing jurisdictions that allow race day medication - but that's not true. Saudi Arabia is a small to medium size thoroughbred racing market which is patterned on a mix of european and US rules - and I'm sure there are plenty of other small countries with similar rules. But Saudi Arabia is a closed system - it's rare for them to race outside their country and rarer still for outside horses to come there to race. I found it to be a microcosm of US racing with a lot of the same problems.

When we were there we often wondered how great it would be if there was a true international thoroughbred racing league that includes Saudi Arabia and the rest of the middle east, all the Americas, Africa, Europe, Australia, Asia. It would be incredible and I hope I see it in my lifetime.

The horse is too often forgotten

If you are a prospective thoroughbred racehorse owner considering entering the racing "game", please ask yourself why.

If you don't particularly care for animals, if you don't really care about the beauty and spirit of the thoroughbred horse, or the tradition and spectacle of the racetrack, please reconsider.

If you want to be involved in order to look cool, impress people or feel cool and powerful, please take up a different hobby.

If you want to be involved mainly to use the business losses to offset your income for tax purposes, please do the horses a favor and find another tax shelter.

If you have no experience in horseracing but you want to buy horses so that your son or daughter can fulfill a dream of training racehorses, or worse so you can fulfill your own dream of being a horse trainer, please get yourself or your kid a job as a groom with an old timer trainer instead.

If you have an overpowering desire to win a "title" for most wins in your country or at your local track, please do the horses a favor and find another goal.

If you want to be involved with owning racehorses simply to get inside information to use in betting on races, you're wasting your time and money. Anything can happen to living, breathing horses before, during and after a race, and a bet on a horserace is always going to be the gamble that it's meant to be.

Get involved because you love the pure spirit, heart and beauty of the horses, the sporting and social traditions, the spectacle and excitement of the racetrack. Never forget that it's all about the horses.

There are so many people out there who are interested in horseracing, we just need to help them get involved!

I had a couple of good conversations lately with people who are interested in horseracing but don't know anything about it. The other day I got an email asking, "what times do the horses run?"

So I replied with the answer I thought she seeked, but my answer was not at all what she wanted. I said, "If you mean when does racing start for the day, post time is usually 12:30pm or so unless the track features night racing then it usually starts around 7pm. Most tracks have a "dark" day or two when there is no racing. TV coverage of the races on the racing channels usually starts around 11am or so (eastern time). If you mean how fast do they run, usually 1/2 mile in about 45-48 seconds, 3/4 mile in about 1:09-1:15, 1 mile in about 1:35-1:43."

But this was too much information!

What she wanted to know was, "What time is practice in the morning? I want to take my niece there tomorrow."

So I replied, "Try to get there early as possible, between 7am and 8am, training generally ends at 10am and most horses are off the track by 9am, best time to be there is right after the 8am break when a lot of horses will breeze. Sometimes the schedule changes if there's a big race that day and early post time."

I met a couple from Pennsylvania in town visiting relatives and struck up a conversation because they are animal lovers, one of them an animal sciences major in college and owner of an OTTB (off the track thoroughbred) that she is training as a show hunter. They had never attended the races before but when I took them they loved it and were full of curious questions about everything. For instance they asked, "Is that a girl jockey?", "what's the difference between betting place or show?, "where on the track will this race start?" (the gate was not visible because it was all the way in the back of the chute). If we had stayed all day I'm sure there would have been a hundred questions like this.

If every racetrack veteran takes the time to introduce newbies to the track in a personal way, just think how much we could help promote our sport! I have a lot of fun answering all the questions and seeing new people have a good time at the track.

What does it mean when your horse is "AE"?

The "AE" horses appear in the program at the bottom of the list of horses entered in a race, usually in a shaded box with "AE" next to them. That means these horses are "Also Eligible". Which means that if only 10 horses are allowed in a race but more than 10 are entered, the horses who definately get in the race have satisfied various criteria, and the rest are on stand-by. If one of the definate horses scratches out of the race prior to a set deadline on the morning of the race, then an AE horse takes its place, in a set order. It's my understanding that the preference system and also the scratch time deadline can vary from track to track - someone please correct me if I'm wrong about that.

Owners need to understand this part of the game. It's a part that can be foggy for owners and bettors alike. It's tough for owners to plan to attend a race when their horse is "on the AE", but it's part of the drama! Today Jere talked to his owner at about 11:30 on the day of the race to discuss "plan B" since their horse on the AE that day did not get in. Some owners think they have until the time of the race to maybe get in if a horse scratches, but that's not the way it works in the United States.

Jere had a good time relating how in Saudia Arabia he had to have his horse ready up until the time of the race in case a horse scratched to let his horse in. Many things can happen between scratch time and the race - the state vet can scratch a horse for signs of lameness in the post parade, a horse can get loose and run off before the race, etc. But as he told his owner, as of 11am on the day of the race, if your horse doesn't scratch into the race, "The Party's Over, Done and Dusted. Time for plan B."

How do travelers who are unfamiliar with horseracing decide to visit a racetrack?

I know one thing - many racetracks don't make it easy for new customers to find them and that worries me. For instance, if you Google "Hawthorne Race Course" and click on the Google Map that comes up at the top of the search results, you get a big blank space with a lake and a pin labelled "Illinois Thoroughbred Breeders". So although Hawthorne has a web site, they are not working on their overall internet presence (as of today anyway, hopefully this is quickly fixed).

Similarly, I wrote a quick review on Tripadvisor.com of Busch Gardens in Tampa after a recent visit. After you submit a review the web site automatically emails to ask you to review more attractions in the same city, so I figured I'd give Tampa Bay Downs a nice review. Unfortunately this very popular travel site Tripadvisor.com has no idea about Tampa Bay Downs, so I'm waiting on them to tell me that Tampa Bay Downs meets their criteria as an "attraction", then they'll let me review it.

What in the world? I admit that as a small business I'm not too good at keeping up with my own internet presence, but Hawthorne and Tampa Bay Downs are big companies that should be able to keep up a little better than this. If you notice things that racetracks can do better, please join me in speaking up so we can all help our industry survive!

I spent a day at the races with a gambler who had never been to a racetrack!

I hung out with a racetrack newbie the other day, he's a retired mailman who plays poker with my husband occasionally. He came along with a group of the poker night people. We figured he'd want to know all about handicapping, and my husband was busily picking winners and explaining why he picked each horse, etc. I directed his attention to the payoffs of the races to show how it can be lucrative to bet exactas and other exotics, but he was not particularly interested in that stuff.

He wanted to know, "Who are the people in the red coats out there, what do they do?" (outriders) Then when the starting gate was right in front of the grandstand for a 1 mile 40 race, his attention was rapt. He was fascinated by the pony guy who looked like the Marlboro man might look at age 70, and his extremely well turned out pony that looked ready for the hunter ring. He even quizzed the track vet about how she got that job and what was she looking at out there on the track during the post parade.

What do you know? Potential new racing fans don't necessarily start out by betting on races! But those who have a good EXPERIENCE at the track usually end up betting on races.

I missed a good bet the other day

When I notice a race result with a young horse or possible future claim that I want to follow, I add that horse to my "stable alert" list. I use BRIS rather than Equibase for email alerts simply because I started out with BRIS a million years ago before Equibase offered the service. So the other day I got an email alert, two days out, for an entry of one of my horses in a stake race at Gulfstream and on the morning of the race I made a show bet on that 12-1 shot through my TVG account, then went on with my day doing other things.

I found out later in the day that my horse scratched out of the stake at Gulfstream and raced instead in an ALW at Tampa Bay. Unfortunately I never got the entry for the race at Tampa Bay so I didn't bet it and of course my horse won the race at 5-2 odds. So I'm pretty mad when I find out my horse was double entered and I only got the one entry notice. Why is it legal in this case to double enter? Because one of the races was a stake that required a nomination fee.

Just thought I'd mention this to let owners know they can nominate and enter for a stake, then scratch if it comes up too tough so their horse can run in an easier spot on the same day. I don't know if there are exceptions to the rule depending on the state, or other considerations.

I'd like to hear more about the rules on double entering if anyone would like to elaborate.

PBS shines a bright light on Second Stride!

WSIU, the public broadcasting station of Carbondale, Illinois, featured the horse rehabilitation non-profit Second Stride in an upcoming episode of alt.news!!!

The show is edgey, engaging and creative, and the segment on Second Stride is beautifully filmed and edited. All of us associated with Second Stride are grateful for the exposure that PBS has given to the Second Stride program!

You can watch the entire alt.news episode online at http://an2646.com/featured/episode-13-03/

Our take on the John Veitch / Life At Ten mess

I can't believe that the charge against Kentucky Steward John Veitch has dragged on this long without someone with authority speaking up on behalf of John Veitch. I'm afraid that a lot of people who would otherwise speak up are scared of establishment retaliation that could ruin their racing related business. From our point of view as owner and trainer involved in Kentucky thoroughbred racing for decades, it seems like either an insane vendetta by a corrupt racing commission or an attempt to divert guilt from the very high profile trainer and the racing commission appointed state veterinarian.

Those of us who race are very aware of the ultimate power of the state vet to examine and possibly scratch any horse leading up to a race, in the paddock, during the post parade, behind the gate. The AAEP (American Association of Equine Practitioners) clearly states on their web page at http://www.aaep.org/responsibilities_racetracks.htm titled "RESPONSIBILITIES OF VETERINARY OFFICIALS AT RACETRACKS" under "Pre-Race Inspection" -

An important duty for regulatory (commission or association) veterinarians is the pre-race inspection of all horses scheduled to race. This inspection is performed to determine, in the veterinarian’s professional opinion, whether a horse is able to compete.

A suggested pre-race inspection should include:
•proper identification of each horse;
•pre-race observation of each horse in motion;
•manual palpation when indicated;
•close observation in the paddock and saddling area, during the parade to post, at the starting gate, during and after the race and any other inspection deemed necessary.

Following inspection, regulatory veterinarians will recommend to the stewards or judges the scratching of any horse that, in their opinion, is physically unfit to race. The AAEP recognizes that pre-race inspection cannot prevent all racing injuries nor can it detect all pre-existing conditions. The primary responsibility for the condition of the horses entered to race rests with the trainer.


What the public doesn't realize is something I see every day with owners who are not hands on horsepeople - horses are just like human athletes in that they do have sluggish days when they are not 100% - for many different reasons. Sometimes it's just the weather, could be a touch of allergies that day, could be they didn't eat or sleep well the night before, could even be a reaction to LEGAL race day medication - some horses can get lethargic after being treated with Lasix (Salix). If the steward overrules the trainer and state vet every time a horse is reportedly acting different than their normal, he could scratch a horse in nearly every race.

Isn't there somebody in KY government with enough power to stand up to the KY Racing Commission in this matter? Governor Beshear? Republican senate leader Mitch McConnell, attorney general Jack Conway? This is the kind of scandal that is ruining Kentucky racing, and I'm just really sad about it, because the hard working horses and dedicated horse people of the racetrack do not deserve to be associated with it.