Wall Street Journal article on T-bred Tax incentives

[Suff]

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.
--------------------------------------------------------------------------------
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."

[Suff]

I know many people have thier opinions on Racing and how to change it or improve it... but this single article is clear evidence that racing will never substancially change because it is to fragmented.

I'm off tommorrow and I think I'll post an op-ed on the subject.

I surely thought a few members would be interested enough to comment on these tax changes... Only been 10 hours.. But I thought they'd be a run on this thread...

Because all the evidence anyone needs to conclude how racing is controlled and run by the elite is in that article.

[Observer]

Maybe some of us just aren't as sharp and need a little longer for this stuff to sink in and make sense??

[Suff]

Originally posted by Observer
Maybe some of us just aren't as sharp

That was my 2nd thought....

[Tee]

Originally posted by Suff


I surely thought a few members would be interested enough to comment on these tax changes... Only been 10 hours.. But I thought they'd be a run on this thread...

Because all the evidence anyone needs to conclude how racing is controlled and run by the elite is in that article.

I have seen it first hand, my uncle was a multi - millionaire. He owned, bred & raced thoroughbreds along with many other business ventures.

From where I'm sitting Suff, your last statement above about sums it all up.

[WINMANWIN]

Interesting article, As I hope the tax break is Re-Enacted at the End of 2005.This game will always be called THE SPORT OF KINGS,
The top players, that are left in this game ARE KINGS
Multimillionaires, many times over. To get tax advantages
at the sales. It's great for the game, the small buyer's can prosper also, with the current tax laws. I'm wondering about the current structure in claiming races,private purchases etc, that happen on a daily basis in the game. If a horse gets claimed, and breaks down, before the new owner gets to look at the steed, is that a write off ? and etc. If not, maybe that tax structure should be addressed, and then the laws would be well rounded, to help the industry in the coming years, As it certainly does need all the help it can get !

[VetScratch]

Many horse owners are confronted by ongoing uncertainty about how their racing operations may ultimately be classified by the IRS. Especially as a consequence of an IRS audit, racing operations may be classified as either a hobby or a passive activity. As a hobby, you cannot deduct expenses that exceed income. As a passive activity, racing losses cannot be deducted to offset income from other activities. This can make the new tax breaks a tricky proposition, as shown below.

The New Accelerated Depreciation Tax Break:

Aug-2003 Purchase 2YO Horse:       $50,000 (cost basis is $50,000)
Dec-2003 Depreciation Expensed:    $50,000 (adjusted basis is $0)
May-2005 Horse Claimed Away:       $25,000 (short-term gain is $25,000)

The long-term holding period for horses is two years, and short-term gains are taxable like ordinary income.

Obviously, if you are disallowed the full benefit of depreciation expensed in tax year 2003, the short-term gain in tax year 2005 may cause tax consequences that may make your 2003 depreciation election retrospectively regrettable.

See: http://www.toba.org/ownership/tax_issues.html

[Suff]

I'm interested in pursuing this topic deeper. I worked for a short time for Don Little. Owner of Centennial farms.. I have some first hand experience in this area. Before I plunge in with my opinions I want to call someone that is currently raising Money for his partherships and get a First Hand opinion on how the changes have effected thier ability to raise Money. Little's Partnerships deal with Regulation D investors only.

Reg D as defined by the Internal Revenue service is

1. a Net worth of 3 Million or more

2. Evidence of Taxable income over 300K for the previous two years

3. Reasonable evidence to demonstrate similiar income in the ongoing year.

If you don't meet this criteria you cannot invest. If you Hit a scratch Ticket for 700K? You are legally not a REG-d investor and could'nt invest.. in his or MOST venture captial funds, Hedge Funds, Bridge Loan deals or High End LLC or Limited Partner invesment vehicles.

But with that said.. The point I wanted to make now regarding the cost basis..

As a PASSIVE investor... any expenses associatted with the General Due diligince in the care and overseeing of your investment is also deductable and expensed dollar for dollar.

So when the Chairman of Pepsi-Cola flys a Private Jet into ALBANY... rents a House for a week at $5000.00 and watchs his Investment run.. That 25 grand he spent at Saratoga that week?
Funny money, all expensed, spend it Saratoga or give it to the IRS...