Selling em Cheap!!???

[Tuffmug]

In 1st at Belmont today ( a Maiden 50K Phillip Johnson and Todd Pletcher had a fire sale and I don't understand WHY they did it?
Trainer Horse Purchase Price
Johnson Dr. Tony $125K First time starter
with sharp works

Pletcher Smoker $175K Second out, ran first
time at Monmouth for
50K and came in 3rd

Is there some fantastic tax writedown I don't know about that makes it attractive to these two guys to risk 200K loss if both are claimed out of this race???

Any answers on this bizarre trainer behavior will be appreciated.

Thanks,
Tuffmug

[VetScratch]

The only tax implication is that the IRS will not usually contest the active/passive or business/hobby status of a full-time trainer who is also an owner.

For owners who are not trainers, the IRS constantly challenges the owner to prove that racing is not a passive activity or a hobby enterprise. Even if an owner operates profitably for 2 years out of 7 (which is rare), the IRS has recently become more aggressive on the passive/active question.

For wealthy investors, few luxury endeavors offer fewer tax loopholes than horseracing. Practically nothing about horseracing is easy to integrate within a typical owner's normal business endeavors (for tax purposes).

At the same time, nothing quite compares with the thrill of racing!

[VetScratch]

In my last post, the hobby rule threshold should have been stated as 2 profitable years out of 5, although this has been successfully challenged by some owners willing to go to court with the IRS. VERY FEW owners show a profit in 3 or more years out of 5.

[Suff]

Originally posted by Tuffmug

Is there some fantastic tax writedown I don't know about that makes it attractive to these two guys to risk 200K loss if both are claimed out of this race???

Thanks,
Tuffmug

Typically high end investments done with T-breds are done through Limited Partnership.

The IRS Classifies income or Loss's from Limited partnerships as "PASSIVE" income or Loss's.


Inlike typical income that can be lowered by Deducting your expenses (therby lowering your tax Liability), PASSIVE gains can only be OFFSET by PASSIVE LOSS'S.

but.. They are offset...DOLLAR FOR DOLLAR.

500K Passive GAIN, can be tax free when MATCHED with a 500K Passive LOSS.



Often, wealthy horse owners have large amonts of PASSIVE INCOME. That income is taxed at its GROSS amount, unless your able to offset it with it PASSIVE LOSS'S.


Thoroughbred Limited Partnerships give off HUGE passive loss's.

Exhibit A.

Wealthy Horse owner has $1,000,000.00 in Passive Income from a Real Estate Partnership he invested in 10 years ago. He also has $250,000.00 in PASSIVE loss's from a Thoroughbred racing partnership he invested in.

Now..his tax liabiality on the Million is only for $750K. He essentially recieved a "Pass" on paying tax's on the first $250,000.00 in Passive gains.

So on paper his Racing partnership shows a big loss...But those loss's shelter other income. So the Net-Net is less.

technically if the Horse owner had a MILLION in passive loss's he would have NO tax liability on the ONE million in passive Gains from his RE Deal.

The key here for the GOVT and the Tax Payer..is YOU HAVE to be a limited partner. You can have no "Controlling" stake in the partner ship. Nor own more than a certain %'s of the LP stakes. Thats why many wealthy owners use syndicates or "partnerships" to own horses. The GENERAL PARTNER cannot claim PASSIVE loss's because by being the general Partner the IRS considers that entity an "ACTIVE" income producer. And that income is taxed at the same rates as any US company. ONLY the Limited partners get the "PASSIVE" designation from the IRS.


So if your wealthy with a diverse investment portfolio that produces PASSIVE INCOME. Typically your accountant will reccommend you find investments that have SOME UPSIDE, Equity gain potential,,,,,but also distribute passive loss's.

Thoroughbreds are somewhere in the TOP 10 of investment vehicles for wealthy individuals looking to meet these investment guidlines.

[Whirlaway]

A horse is worth what it's worth. Just because you paid $200,000 for a yearling doesn't mean he's worth $200,000 as a 2 or 3-year-old. If you bought AOL/TimeWarner for 40 bucks a share, does that mean it's worth 40 bucks today?

I've seen $600,000 yearlings running in 8K maiden claimers at Bay Meadows (and losing.) Smart owners run their stock where they belong, not where they hope or wish they belong. As the old saying goes there's no point in throwing good money after bad.

[so.cal.fan]

I agree with Whirlaway.
This is the real deal in 90% of these drops.

[Tuffmug]

wHIRLAWAY,

Agree with you BUT these horses had never raced before being dropped. Carryback was a $100 purchase but raced to make 1 million. Best value determinant of a horse is what he does in a race. Why didn't they give them a race before dropping them below purchase price?

[JustRalph]

Originally posted by Tuffmug
Why didn't they give them a race before dropping them below purchase price?

Because they own a stop watch...........and have seen him run
"in company" in morning workouts

[so.cal.fan]

Once in a while someone will try to sneak a better horse in first time out in a mdn. claimer. They sometimes get away with it, but often don't, so it's a risky proposition.
When a high priced yearling becomes of racing age, and runs first time for a price, you can bet your car title that this horse is not much, either very unsound, or just can't run. Don't be fooled by fast works, either........they don't drug test workouts.

[andicap]

Won't trainers also give horses fast works to entice someone to claim the nag? In New York, in a 6f sprint, horses run 45 and change all the time in the lead. So a 47 half usually puts you mid-pack.
It can't take much to get a 4f/47 work out of a horse, especially if you don't care if it squeezes the lemon dry -- you're just trying to sell the dog.

[so.cal.fan]

Yeah, andicap,
They do the same thing here. When you see mediocre works but a good looking horse trained by a sharp stable......sometimes they will put one in for 40K to get eligible to all the phony alw. races and starter races for mdn. claimers. I have yet to see one of these horses worth more ever show any bullet works.
The most interesting horse in a maiden claimer is the layoff dropper who was obviously worth more a year ago........they come in two types.........the horse that is gone really bad and is not worth two dead flies........or the horse who comes into the paddock with NO BOOTS and/or WRAPS with a big old BOW there for all to see.............and be afraid to claim.
These win at a rate that is way, way higher than you would expect. They outclass the field.........usually by many, many lengths.

[VetScratch]

Once again, the dog has stepped in snake oil and put his paw in his mouth.

Only folks who are asking to get skinned enter into limited partnerships in the horse business. You can verify this opinion by consulting any trustworthy source who has actually been a meaningful player in the business!

Here is what is true about horseracing limited partnerships: you have no authority, you make no decisions, you pay exorbitant fees/rates (i.e., everyone in racing pads bills to LPs, often in complicity with the General Partner), you are cut to ribbons at the auctions (i.e., everyone gets a piece of you), and you feel no sense of ownership (i.e., you are treated like an owner only as a condescending gesture). In short, LPs are for chumps.

Furthermore, you get no passive loss tax advantages that are not available to individual owners (or simple partnerships) because the general IRS policy is that horse ownership is a passive activity unless you can prove otherwise. In addition, there is little to like about passive losses, especially when you are the chump in an LP. It is the Hobby Rule, and not a passive loss tax advantage, that entices chumps into horse LPs.

Few accountants will advise you to play passive loss games in the wake of the 1986 Tax Reform Act. The attractive passive loss multipliers for limited partners (that were once sought by the rich) have been phased out. Without a significant loss multiplier and a low degree of risk, passive loss schemes are inherently losing propositions.

Tax deferment was at the heart of all these schemes, which promised deferred income at the tail-end to offset the accelerated losses that were accumulated at the front-end. Many of these schemes were frauds. Goldman Sachs, Morgan Stanley, Merrill Lynch and others have quietly paid $millions$ in restitutions, and the courts are still hearing appeals for some of the countless lawsuits that were the fallout from pre-1986 schemes (in real estate, oil & gas, etc.). Too many of these deals fizzled and left formerly rich limited partners with huge accumulated tax liabilities while providing no income to pay these taxes (i.e., front-end K-1 tax losses always come back to haunt you at some future date). Thus, while appearing to close loopholes for the rich, the passive loss phaseouts initiated by the 1986 reforms were really protection for the rich. As usual, the spinning was shown to poor, but the wool was meant to cloth the rich.

Finally, let's examine why a limited horse partnership is not a great tax advantage. If you have $100 in passive income and $25 in passive racing losses, your net taxable passive income is $75. However, you must make at least an additional $25 investment commitment in order to generate the $25 loss. In a racing partnership, a $25 commitment usually requires a significant portion to be paid up front in order to acquire horses (albeit very cheap ones in this example). The best case scenario assumes your partnership loses your money about as fast as you supply it.

In many instances, however, an initial investment larger than $25 is required to realize a current $25 loss. Even "Rip-Off Stables LP" may be too slow at losing your money (assuming some dumb advisor told you to lose $25). A limited partnership might require an initial $100 investment to lose $25 per year for three years before distributing $25 back to you when it is liquidates. Thus, in the first year, you might need to spend $100 to avoid paying taxes on $25 while still paying taxes on $75. If your major source of passive income falters after that first year, you are still pretty much locked into your dumb horse LP and the inevitable losses. After the 1986 reforms were phased in, rich folks no longer get richer by finding ways to lose money. It's as simple as this: if you have $100 in passive income, pay the taxes and look for more profitable investments.

[Pace Cap'n]

Two well-reasoned posts from Suff and VS reached different conclusions on the same subject. I think this is due to differing perspectives.

For someone with an extra few hundred thousand laying around generating passive income, making a few claims and hoping for the best would most likely produce the negative expectations that VS depicts.

For someone with an extra few million, or even more, throwing off all kinds of passive income, getting into the high end of the horse market could be a wise move. The losses are not going to hurt from a cash flow perspective and willl definitely offset some passive income. The upside, while perhaps still a negative-expectation game, will offer potential rewards far in excess of the intial investment.

Purchasing quality stock will put one in a postion to reap rewards for years to come should breeding potential and stud syndication come to fruition.

[VetScratch]

Pace Cap'n,

I respect your intentions Pace Cap'n, and I wouldn't want your post to be misunderstood. Yes, the super-rich get into the high-end of the horse market, but NOT usually through limited partnerships.

You won't find names like Paulson doing business "Dogwood Stables style" where they are not commander-in-chief. The LPs that cater to the nouveau riche are sucker traps like ads at horseracing vendor sites. Sure, an advertised example for LPs won two graded stakes, and another ad claims that Acme-Ultra PPs were used to take out a huge Pick-6, but both are cases of ludicrously extreme backfitting. There is no sensible rationale for describing horse ownership as a get-rich opportunity

The upside potential that has been mentioned does exist, just like 30 straight passes at the craps table. However, all credible statistics show that the probability of hitting a Home Run are substantially less than 1 percent, and many breeding syndications are reported in a manner that exaggerates their rewards (just like owner stats show gross purse totals).

You can easily spend $20-million in the Select Sales at KEE or SAR without ever hitting a Home Run. When you spend that kind of money, you want and deserve the full measure of whatever glory and good fortune comes your way. If an LP wins a graded stake at Keeneland, all limited partners can sip from the same gold mint julep cup, but that is not very satisfying. Really rich owners want their own "authentic" Keeneland service set for mint juleps, and their own splendid and "authentic" trophies from BEL, SAR, GP, CD, SA, HOL, etc.

The vast majority of the super-rich owners don't need or want LPs in order to stay rich, and many have successfully challenged the IRS Hobby Rule guidelines, sometimes in court, by demonstrating business intent, risk exposure, and sufficiently active participation, especially if they breed and raise some of their own runners.

The ideal tax scenario for many owners is to qualify horseracing as an active business endeavor (i.e., to avoid all passive income/loss). In this way, they can use racing losses to offset income from other active businesses or even ordinary income from a salaried position. This can be legitimately accomplished by small-time owners. However, run-of-the-mill accountants are clueless about how to do this. One of these days I will post a description of the tactics and feasibility considerations for getting this done because good handicappers have a natural advantage in this regard.

Since I may sound a bit pompous, I want to make it understood whose side I am on. I cannot help but sympathize with the many owners that I have watched (close-up) as they floundered or got fleeced. I could tell a lot of true anecdotes, but that would betray too many friendships, cause embarrassment to other folks, and probably invite prejudice against the gamesmanship that has always been a part of horse racing/trading, whereas much of the fun and challenge that has withstood the test of time actually lies therein.

[LurkingBettor]

In the LP scenario:

Once the asset (the horse) is disposed of (via claim, private sale, etc.), don't all the passive losses realized until then but held in "limbo" (carried forward) and not used against any type of income become immediately recognized in that tax year regardless of passive or active status, even offsetting other ordinary income?

Of course there would be some gain from the claim, sale, or whatever, but, if an LP was set up for that particular horse, the LP ceases to exist.

I could be wrong, but, might explain some of the actions in the original post.

LB

[VetScratch]

LurkingBettor,
You are quite right where an LP has a single asset/horse, but most of the ones that I have come in contact with are funded to acquire three to five yearlings/2YOs-In-Training. I have always figured this was motivated by a desire to give limited partners a reasonable chance to hang up at least one winners' circle photo. With only one horse, more stories of totally disasterous LPs would circulate via word of mouth. Shutouts are bad memories in any sport.

[Pace Cap'n]

VS

Thanks for your efforts in attempting to rectify any misunderstanding that may have been inflicted upon anyone reading my post.

As an accountant I can assure you that people of means do avail themselves of tax advantages inherent in limited partnerships. That is probably the driving factor in their very existence. (the lp's, not the people.)

Whether the Paulson's do or not, I would have no way to verify. Do you?

[JustRalph]

You have to admit this board has some sharpies in here. You guys are a great read sometimes. Compare this thread with a few other boards I have seen and this place looks like MIT. For guys like me who are practically scared of horses and have no real on track experience, I get a real education from this place.
great thread

[VetScratch]

Stable names established as a byproduct of ownership licensing will imply how each horse is owned. These stable names are published when horses run. Few stable names reflect an attempt to obscure the type of ownership, and the same stable names tend to be used with great consistency year after year.

Sole proprietors must declare the horses they own and designate a stable name to run these horses under. Likewise, horses, ownership percentages, and a stable name are also associated with each simple partnership. General partners must also declare horses/interests and designate stable names when they are licensed. Frequently, this is one stable name for all LPs managed by each GP.

Subsequent changes in ownership must be recorded by racing officials before a horse can run for a new ownership interest.

I have not encountered or heard of stable names for LPs that were cleverly composed to imply a sole proprietorship or a simple partnership. Moreover, almost no sole proprietors and few simple partners are motivated to disguise themselves. They want to see their true names engraved on trophies, imprinted on photos, and become immortalized in publications like the American Racing Manual. However, a small minority of simple partnerships do adopt ambiguous stable names.

After you have raced against John Q Doe's horses for a dozen years, at every age and class level, you can be pretty sure that John is an individual. Most simple partnerships run under names like R Evans & R Novak. After a while, you are also likely to learn that The Supremes stable is really a simple partnership between three women whose first names are coincidentally Diane, Mary, and Flo. Likewise, folks at the racetrack become familiar with the trainers and stable names used by the most active syndicators like Team Valor.

All North American owners/stables are published annually in the American Racing Manual. Names that clearly imply sole proprietorships and simple partnerships far outnumber other ownership implications (even if number of starts is considered).

Maybe a critical national shortage of accountants is the best explanation for this phenomenom. :)

[VetScratch]

I really don't want to ruffle feathers.

My main purpose in posting on the subject of ownership was to add perspective, and maybe I fell short in this respect.

Many of the facts posted by others cannot be contested except to point out that changes phased in by the 1986 Tax Reform Act have indeed made LPs far less attractive as tax shelters. However, entrenched popular perceptions live on after the facts have changed. In the subculture of horsemen/backsiders, LPs are perceived as privileged vehicles of the rich, who can magically spend a $1 to kill taxes on $10 without future consequences. While this is not true, like actress Pam Anderson, the popular perception of LPs reflects extreme circumstances that may no longer exist or are still undergoing change.

I guarantee you that the rank and file among folks who work in the horse industry share a cynical perception of LPs. This perception grossly exaggerates the tax advantages of LPs, and it assumes the essential purpose of LPs is to generate huge "paper" losses that somehow allow the rich to earn $millions but pay no taxes.

As a result, at each level of the financial food chain within the horse industry, everyone obliges this cynical perception by grabbing their share of the losses that the rich are seeking. Countless farms, vanners, trainers, veterinarians, farriers, bloodstock agents, and consignors have been guilty of price gouging or other questionable gamesmanship tactics in order to get their share of losses that they perceive will benefit the rich. In some cases, the ethics of General Partners aid and abet this feeding frenzy.

Curiously, numerous owners perpetuate the popular myth that horseracing has magical tax advantages (big "paper" write-offs with no consequences). I think this happens because many owners find it hard to admit they are in racing for purely psychological reasons and are willing to lose substantial money in order to entertain their psyches.