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11-22-2003, 05:45 AM
The Wall Street Journal
Wednesday, 19 November 2003,
p. B1Tax Breaks at the Track: How Congress Spurred Horse Sales
By SHAILAGH MURRAY Staff Reporter of THE WALL STREET JOURNAL
LEXINGTON, Ky. -- It still isn't clear how much good Congress has done the overall economywith its recent round of tax cuts. But if you want to see investment tax breaks in action, head tothe local racetrack.The thoroughbred market turns out to be a huge beneficiary of the tax incentives Congresspassed to get business investment flowing again. Those incentives, which expire by the end of2005, have a number of applications, including allowing horse buyers to depreciate a horse'spurchase price more rapidly. And that's spurring horse sales like a crop to the flank.The industry's September yearling sale here at Keeneland Association Inc., the Lexington-basedrace track and auction house, brought in $274 million in gross sales, the second highest amountin the September sale's history. At the November sale, which wrapped up last week, buyers paidthe highest prices ever for breeding mares and young colts.Congress wasn't exactly thinking horses when it passed one round of business tax breaks lastyear and another this spring. Its goal was to jump-start the struggling manufacturing sector. Andthere's some anecdotal evidence, particularly within the high-technology industry, that theincentives are starting to work. But the breaks apply to all businesses, racing stables included.Rep. Jim McCrery, a Louisiana Republican who helped to craft both tax breaks, says he's notsurprised at the surge in thoroughbred prices. He jokes that he wishes he had realized the impactfor racing during the tax debate, so he could claim credit for it now. Mr. McCrery's district ishome to Louisiana Downs, and he's one of the racing industry's bigsupporters in Congress.A prime example of the incentives' lure is the case of Bob Lewis, aformer Anheuser-Busch Co. wholesaler from Southern Californiawho is one of the most successful owners in racing: Two of hishorses, Silver Charm in 1997 and Charismatic in 1999, have wonthe Kentucky Derby.Mr. Lewis had planned to sit out the sales this year. But the taxbreaks "did give me some motivation," he says. Mr. Lewis bought18 yearlings in September, for a total of $8.6 million.Owning a thoroughbred is not too different from betting on one:Chances are, you're going to lose money. Most people go into thebusiness because they love racing.
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But a favorable tax code helps. In 1986, when Congress took away various breaks from horseowners -- including some widely abused tax shelters -- the industry virtually collapsed.Here's how the new tax breaks work: Investors who spend less than $400,000 in one year cantake up to $100,000 as an expensing write-off. Under previous law, the limit was $25,000.Bigger spenders don't get the $100,000 write-off but are allowed a first-year depreciation"bonus" of 50%, in addition to regular depreciation. There's no dollar limit to what can beclaimed.That can result in big savings. Say an investor pays $200,000 for several young horses. Thefirst-year write-off, including depreciation, would come to $155,357. Assume another individualpays $500,000 for yearlings; that write-off would total $276,787 in bonus and regulardepreciation. The National Thoroughbred Racing Association has been circulating suchexamples to promote the tax cuts to owners.Of course, there are other factors putting some thoroughbred owners in a buying mood, from arecovering stock market to a rebounding economy to accumulated demand from the recent lossof thousands of in-utero foals to an illness of uncertain cause. But the tax breaks enhance whathorse people call "churn," the way money flows through the industry like a champion'sbloodlines."The economic model changed drastically when the depreciation schedule changed," says JimSquires, a retired newspaper editor who owns nearby Two Bucks Farm, where 2001 KentuckyDerby winner Monarchos was bred. Hanging out in the walking ring behind the sales pavilion,Mr. Squires was just outbid on a mare, so he'll wait a few days for cheaper horses before heraises his hand again.The breaks haven't fulfilled all the industry's wishes. For awhile, investors thought the extrawrite-off applied to mares that were retired from racing and ready for breeding. The InternalRevenue Service recently issued a temporary ruling that it didn't.Even so, those breaks the IRS permits "are certainly motivating people," says Lexington horsetax attorney Douglas Romaine. Mr. Lewis, who also took advantage of the boom to sell somemares, warns his fellow investors to keep a cool head."You don't let the tax incentive influence you to the degree that you overlook the fundamentalsof the horse," he says. "Remember what you're trying to accomplish here."
Wednesday, 19 November 2003,
p. B1Tax Breaks at the Track: How Congress Spurred Horse Sales
By SHAILAGH MURRAY Staff Reporter of THE WALL STREET JOURNAL
LEXINGTON, Ky. -- It still isn't clear how much good Congress has done the overall economywith its recent round of tax cuts. But if you want to see investment tax breaks in action, head tothe local racetrack.The thoroughbred market turns out to be a huge beneficiary of the tax incentives Congresspassed to get business investment flowing again. Those incentives, which expire by the end of2005, have a number of applications, including allowing horse buyers to depreciate a horse'spurchase price more rapidly. And that's spurring horse sales like a crop to the flank.The industry's September yearling sale here at Keeneland Association Inc., the Lexington-basedrace track and auction house, brought in $274 million in gross sales, the second highest amountin the September sale's history. At the November sale, which wrapped up last week, buyers paidthe highest prices ever for breeding mares and young colts.Congress wasn't exactly thinking horses when it passed one round of business tax breaks lastyear and another this spring. Its goal was to jump-start the struggling manufacturing sector. Andthere's some anecdotal evidence, particularly within the high-technology industry, that theincentives are starting to work. But the breaks apply to all businesses, racing stables included.Rep. Jim McCrery, a Louisiana Republican who helped to craft both tax breaks, says he's notsurprised at the surge in thoroughbred prices. He jokes that he wishes he had realized the impactfor racing during the tax debate, so he could claim credit for it now. Mr. McCrery's district ishome to Louisiana Downs, and he's one of the racing industry's bigsupporters in Congress.A prime example of the incentives' lure is the case of Bob Lewis, aformer Anheuser-Busch Co. wholesaler from Southern Californiawho is one of the most successful owners in racing: Two of hishorses, Silver Charm in 1997 and Charismatic in 1999, have wonthe Kentucky Derby.Mr. Lewis had planned to sit out the sales this year. But the taxbreaks "did give me some motivation," he says. Mr. Lewis bought18 yearlings in September, for a total of $8.6 million.Owning a thoroughbred is not too different from betting on one:Chances are, you're going to lose money. Most people go into thebusiness because they love racing.
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Page 2
But a favorable tax code helps. In 1986, when Congress took away various breaks from horseowners -- including some widely abused tax shelters -- the industry virtually collapsed.Here's how the new tax breaks work: Investors who spend less than $400,000 in one year cantake up to $100,000 as an expensing write-off. Under previous law, the limit was $25,000.Bigger spenders don't get the $100,000 write-off but are allowed a first-year depreciation"bonus" of 50%, in addition to regular depreciation. There's no dollar limit to what can beclaimed.That can result in big savings. Say an investor pays $200,000 for several young horses. Thefirst-year write-off, including depreciation, would come to $155,357. Assume another individualpays $500,000 for yearlings; that write-off would total $276,787 in bonus and regulardepreciation. The National Thoroughbred Racing Association has been circulating suchexamples to promote the tax cuts to owners.Of course, there are other factors putting some thoroughbred owners in a buying mood, from arecovering stock market to a rebounding economy to accumulated demand from the recent lossof thousands of in-utero foals to an illness of uncertain cause. But the tax breaks enhance whathorse people call "churn," the way money flows through the industry like a champion'sbloodlines."The economic model changed drastically when the depreciation schedule changed," says JimSquires, a retired newspaper editor who owns nearby Two Bucks Farm, where 2001 KentuckyDerby winner Monarchos was bred. Hanging out in the walking ring behind the sales pavilion,Mr. Squires was just outbid on a mare, so he'll wait a few days for cheaper horses before heraises his hand again.The breaks haven't fulfilled all the industry's wishes. For awhile, investors thought the extrawrite-off applied to mares that were retired from racing and ready for breeding. The InternalRevenue Service recently issued a temporary ruling that it didn't.Even so, those breaks the IRS permits "are certainly motivating people," says Lexington horsetax attorney Douglas Romaine. Mr. Lewis, who also took advantage of the boom to sell somemares, warns his fellow investors to keep a cool head."You don't let the tax incentive influence you to the degree that you overlook the fundamentalsof the horse," he says. "Remember what you're trying to accomplish here."