Economic and Tax Implications of Thoroughbred Racing

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There's more to horse racing than a fast horse.

Sunday Silence: Many will recognize the name of the 1989 Kentucky Derby winner even though they have never set foot on a racetrack. This horse failed to bring $17,000 as a yarling but then went on to win almost $5 million as a three-year-old before being sold for a reported $10 million to Japanese breeding interests.

Figures such as these make all but the most risk-averse investors sit up and take notice. Certificates of deposit lose their appeal as investors contemplate the fame, glory and financial rewards of horse racing. Are such rewards really possible, or is the more likely scenario heralded by the 1991 bankruptcy of famed Calumet Farm in Kentucky's bluegrass region? To answer this question, this article examines the economics of thoroughbred horse racing and the accompanying tax implications.

TRAINING COSTS AND REVENUE

Exhibits 1, 2 and 3, pages 52 and 53, show training bills at three major race tracks in the United States. Approximately 80% to 90% of horses in training do not earn enough to cover training costs. In addition to a per diem charge currently ranging from $45 to $85, depending on locale, a variety of miscellaneous charges results in monthly horse training costs of at least $2,000. As the Aqueduct bill (exhibit 3) shows, a horse's trainer is entitled to 10% of any money the horse is fortunate enough to win. Some trainers even take (pay) the stable help out of a horse's winnings.

The proliferation of off-track betting opportunities has led some investors to believe purses will increase substantially as wagering becomes more accessible. Thoroughbred racing, however, is characterized by parimutuel takes ranging from 17% to 25%. This means that for each dollar wagered, the track, horsemen and state divide between 17 cents and 25 cents and return the remainder to the wagering public. These figures do not compare favorably with the 5% to 6% take by casinos in Las Vegas …