Economic and Tax Implications of Thoroughbred Racing

By Hereth, Russell H.; Talbott, John C. | Journal of Accountancy, November 1993 | Go to article overview

Economic and Tax Implications of Thoroughbred Racing


Hereth, Russell H., Talbott, John C., Journal of Accountancy


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 or Atlantic City and may limit how much the public wagers on racing.

HOBBY LOSS PROVISIONS

Since it is possible for a thoroughbred horse owner to lose money, the "hobby loss provisions" of Internal Revenue Code section 183 need to be considered. In general, this section says taxpayers cannot deduct expenses greater than the income from an activity if they do not engage in it for profit. Taxpayers normally bear in the burden of proving a profit intent. Section 183 does, however, permit taxpayers to shift the burden of proof to the Internal Revenue Service when they show a profit in any two of seven years for horse-related activities, in which case there is a "general presumption of profit intent."

Proving a profit movie hinges on each activity's facts and circumstances. Treasury regulations section 1.183-2(b) specifies nine relevant factors to consider in determining whether an activity is a hobby or a business:

1. The manner in which the taxpayer carries on the activity. 2. The expertise of the taxpayer and his or her advisers.

3. The time and effort the taxpayer expends carrying on the activity.

4. The expectation that assets used in the activity may appreciate in value.

5. The taxpayer's success in carrying on other similar or dissimilar activities.

6. The taxpayer's history of income or losses with respect to the activity.

7. The amount of occasional profits earned, if any.

8. The taxpayer's financial status.

9. Elements of personal pleasure or recreation related to the activity.

No one factor, or even a majority of factors, ensures the courts will determine an activity to be profit-motivated.

Several studies were conducted in the early 1980s to analyze the courts' reliance on the nine factors. Each study applied a different method of analysis to identify and rank the factors and each reached a different conclusion. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Economic and Tax Implications of Thoroughbred Racing
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.