Buying Racehorses


Get That Bill of Sale

Finding the"Right Horse:"

The Role of the Bloodstock Agent

By Andrew Havens

Success in the Thoroughbred business ultimately rests on the performance of your investment. In racing, the horses an owner buys must earn more than the aggregate cost of their purchase price and training expense, while foals sold at auctions must bring more than the cost of production. If they do not, the owner looses money. There really is no other way to make a profit, as ownership in itself does not generate income.

The key to success in this business is the horse. Quite often the best way to locate the right horse is with the assistance of a knowledgeable advisor, one who will exert the effort necessary to find the best horse at the best price.

Finding a competent bloodstock agent.

Most new owners begin as fans of the sport. When a fan makes the transition to owner, they are often confronted by the obvious questions: Where do I go to find a horse, and how do I know if it is any good? Quite often this is when an owner first realizes that an advisor is necessary, someone who can take the dream and turn it into reality.

But, how does one locate a competent bloodstock agent?

The best way to start is to contact the various industry associations and ask for recommendations. TOC, California Thoroughbred Breeders Association (CTBA), California Horsemen's Benevolent and Protective Association (CHBPA), or either of California's auction sales companies, Barretts or California Thoroughbred Sales (CTS), can provide you with a list of agents from which to choose. Call and talk with each agent about his or her experience, inquire about references, and ask for some real evidence - proof - that they have been successful at what they do.

There are a great many people around that will answer to the title of "bloodstock agent," but there is essentially no control or method of assuring their competence. Although the California Horse Racing Board issues bloodstock agent licenses with some screening by the stewards, the license is not required to conduct business, and I do not believe most agents have one. Since almost anyone who wants to can call themselves a "bloodstock agent," screening and checking references are extremely important.

What to Expect From an Agent

An agent should help you determine the best path to take to acquire the right horse. In doing so, the owner and agent must first evaluate certain personal factors, including the owner's objectives, the urgency of one's need for action, the amount of money the owner feels comfortable spending, and the owner's threshold for risk-taking.

Claiming, buying proven horses domestically or overseas, purchasing weanlings, yearlings, or two-year-olds privately or at auction sales, or breeding, are the customary methods of obtaining a horse. All offer their own particular advantages and disadvantages given what the individual owner wants from the business. In the end, a competent agent will describe these various paths to ownership, permitting the team to decide, together, which is the best path for that individual.

Valuable Advice

Searching for the right horse at the right price is where the services of a bloodstock agent are most important. They are engaged in this search on a daily basis, as this is their profession. A talented agent should have outstanding knowledge of the horse, specifically with regard to conformation, pedigree, value, overall class, and suitability for a particular purpose. The agent should also have expert knowledge of bloodstock markets, including which offers the best purchasing and selling opportunities.

As a basic rule, the true value of any given horse can only be determined in the context of value of comparative horses. Consequently, anyone advising an owner as to purchases or sales must be aware of the current status of markets for horses around the world, including the value of breeding stock, weanlings, yearlings, and stallion breeding rights. Remember, a competent agent will also have a solid understanding of the practical aspects of training, racing, breeding and raising horses, and basic husbandry and veterinarian issues, in addition to knowing the rules and regulations pertaining to sales transactions in the industry.

Purchasing at Auction

If an auction sale is the path chosen, then a good agent will make all arrangements necessary with the auction house to enable the owner to purchase horses at a sale. Accordingly, the agent will first obtain the sales catalogue and the appropriate applications for credit and agent authorization. He/she will discuss their charges for services in advance, disclosing all costs upfront. The customary fee for selecting and purchasing horses at auction is 5% of the purchase price, typically without extra charges for the agent's travel expenses. But, whatever the fee is to be, discuss the subject thoroughly, well in advance of the sale.

An owner should remember why it is that he/she has retained an agent and permit the agent to be responsible for the selection of the horses. In this context, "selection" includes pre-sale pedigree analysis and physical inspections, all of which should lead to development of a final list of those individuals that the owner may wish to place a bid. A good agent will know in advance what the horses are worth, and the owner should stick with these evaluations.

In general, the organization of information at a sale is extremely important and a somewhat difficult task given the large number of horses involved and the fast pace of an auction. Thus, the assistance of an experienced professional can keep an owner from making some very expensive mistakes.

In this regard, the agent should explain to an owner the particular sale's Conditions of Sale and limited warranties, which are usually printed in the front of the sales catalog. As auctions around the country have different "warranted conditions of horses," the owner should be made aware of these various conditions early on. This is an important consideration in determining the timing and extent of the veterinary examinations that should be performed on targeted horses, and incorporated into the owner's original plan.

Don't be afraid to ask the agent to explain the benefits and disadvantages of pre-sale and post-sale veterinary examinations. Also, ask the agent to determine and explain an owner's rights as a purchaser as set forth in the Conditions of Sale in the unfortunate event of a negative post-sale veterinary exam. A competent agent will know the particular auction company's procedure for disputing a sale and, if necessary, returning a horse.

Horses bought at a sale must be removed from the grounds within 24 hours. It is the agent's responsibility to arrange for vanning. Likewise, most agents can assist in the selection of a farm, training center, or trainer, and may offer on-going advice as to the constantly changing condition of your horse and the resale market through the year.

Lastly, remember to consider the question of insurance. If insurance is desired, it should be arranged in advance so that any purchase is covered immediately upon the fall of the auctioneer's hammer.

Private Sales

The agent's responsibilities in a private sale include locating and evaluating a horse, negotiating a price and sales agreement, scheduling the appropriate pre-sale veterinary examinations, arranging for the disposition of funds, transferring the Jockey Club certificate, and producing a Bill of Sale. He/she will also most likely handle the insurance and shipping of the horse to its new destination. A commission on a private sale is again usually 5% to 10% range, but is ultimately part of the specific transaction agreed upon by the parties to the deal.

It is important for an owner's protection and is now required by law (see inset) that a Bill of Sale be produced specifically stating the amount of commissions paid to all parties.

Services Provided

In addition to serving as bloodstock consultants, agents may provide additional services such as equine insurance, stallion shares and breeding services, appraisals, pedigree and mating analysis, stallion advertising and promotion, international shipping, and racing partnerships. Some bloodstock agents provide a full range of these services, while others may specialize or become known for an expertise in a certain area such as training, for two-year-old sales, insurance, stallion seasons, auction sales representation, etc.

Most agents serve in the capacity of a broker, relative to an owner, in that they locate and negotiate the purchase of horses or provide services on behalf of an owner, receiving a fee based on the value of the particular transaction. On other occasions, an agent may receive a retainer for advisory or management services. Additionally, some agents represent their own interests alone or in partnership with other investors in speculative ventures.

What makes a bloodstock agent good at his/her craft goes well beyond merely negotiating transactions. A good agent must have sufficient expertise and knowledge of the field for his/her advice to be worthwhile. The agent must further conduct oneself professionally and ethically in all ways and in the best interest of one's client. Integrity in this business is a must, but it is of little value unless coupled with knowledge. In the end, it is crucial that a bloodstock agent be both ethical and knowledgeable.

Conclusion

Next to the leading rider finishing up the track on a 2-5 shot, there is almost no participant in the Thoroughbred industry more consistently maligned than the bloodstock agent. They are a loosely regulated bunch, operating in a business where "absolute truth" is hard to determine. Unfortunately, the profession lends itself to unprincipled opportunists who are often more salesmen than horseman.

Stories of unscrupulous agents are legion and some are even true. But this should not diminish from the importance of the profession nor, from the fact that there are a number of very knowledgeable and ethical agents who can provide an extremely valuable service to the Thoroughbred investor. Be certain that the agent you choose properly represents your best interests and those of the industry as a whole.

A Bill of Sale & Disclosure of Commissions

Now Required by Law

In 1992, owner Allen Paulson filed a lawsuit against his private trainer and a bloodstock agent accusing them of conspiring to defraud him in the sale of a number of horses. The case centered around the sale of Paulson's horse Loach, which was sold to the owners of Strike The Gold to serve as a "rabbit" for their late-running four-year-old.

A judge eventually ruled that the bloodstock agent and the trainer "caused a willful and malicious injury" to both sides in the transaction. In all, the case included five transactions and more than 20 horses. The judge ordered the trainer and the agent to pay damages to Paulson totaling $1,729,252.00.

Trainers and bloodstock agents working together to sell an owner's horse are not unique events. Together, they advise an owner on the price of a horse, find a buyer, and complete a sales transaction. Sadly, in some instances, the owner and the buyer are each presented different prices for the horse with the buyer given a price that is marked up over the one given the owner. When payment is made, the difference in the two prices is split between agent and trainer.

Fundamental to this markup method of obtaining a commission is that the buyer and seller are never made jointly aware of the actual selling price of the horse. In fact, they are entering into a sales contract without a mutual agreement on price. This works especially well when the principals are separated by something large like an ocean, or do not speak the same language.

To those who practice this method of commissioned sales, the unethical or fraudulent nature of the practice is rationalized away as a matter of degree. In this instance, there are some who will argue that it is traditional to compensate those involved in a transaction in this manner, but that the agent and trainer in the Loach deal marked up the horse too much and that a smaller markup would have been acceptable. This line of thinking is completely wrong. Any agreement in which the most basic points of the deal are kept secret from the principals is inherently flawed and inconsistent with the very concept of "agreement."

Fortunately, there has been legislation enacted to address the subject of horse sales. On July 21, 1994, the Governor of California signed into law an amendment to the Business and Professions Code #19525 relating to the sale of bloodstock. The amendment has two key provisions:

"No licensee or any other person may receive a commission, fee, gratuity, or any other form of compensation in connection with the sale or purchase of a racehorse, prospective racehorse, stallion or broodmare, unless the purchaser and the seller have agreed in writing to the payment of commission, fee, gratuity, or compensation."

Anyone receiving compensation connected with the purchase or sale of a horse in violation of this statute, that is without written agreement of all parties, may have their license revoked and be held liable for treble damages to the injured purchaser or seller. Further, any horse transaction conducted without written agreement outlining the commission structure would be unenforceable.

So, beware when buying or selling a horse that the sale requires two things: (1) a written agreement regarding any commissions paid to those involved; and (2) a written Bill of Sale specifically stating the purchase price of the horse. These requirements are based both on common sense and solid business practices and are intended to ensure that all parties to an agreement are in fact agreeing to the same terms. In all sales and purchases, demand to see the signed documents required by law, and remember the remedies available if someone has taken advantage of you.

Andrew Havens

The Art of Claiming

By Jerry Hollendorfer

Everyone hopes to own a stakes horse, or better yet, a Graded Stakes horse. However, the reality is that most of us own claiming stock. Despite that fact, it seems that in terms of personal satisfaction, we jump just as high and smile just as broadly when one of our claimers wins a race as those owners lucky enough to own a stakes winner.

While some owners are consumed by the desire to find and race only stakes horses, there is a significant number of horsemen who prefer to devote their time and energies to developing a powerful and lucrative stable of claiming horses. Sometimes this "preference" is driven by a personal desire to compete as often as possible, but in most instances it is purely a question of economics, i.e., what is most affordable to the particular owner.

In addition to financial considerations, and given the predominance of claiming races and the relative "abundance" of claiming stock, a prudent owner should always consider the inherent advantages and disadvantages of any claim. These considerations apply equally to both individual claims and to the claiming process in general.

General Advantages

It is widely accepted that claiming horses have established values. In other words, their performance on the track and the levels at which they are competitive are clear objective indications of a horse's value.

Purely from an investment standpoint, this makes the claiming horse a "less risky" investment; the speculative nature of assessing and establishing a horse's value is significantly reduced.

General Disadvantages

It is commonly recognized in the industry that there is a shortage of quality racing stock. In the claiming business this fact translates into more and more competition at the claiming box. Consequently, "getting outshook" is a fact of life.

Owners must also keep in mind that, as the competition for quality horses becomes keener and the available horse inventory more heavily scrutinized, it is in this environment that more "bad claims" are likely to occur. The heightened competition for good horses coupled with better purses makes all of us more willing to make riskier claims.

Opportunity to Invest

In comparison to equine purchases made at auction sales, in the claiming game there is a ready supply of horses available for purchase everyday. Accordingly, an owner can essentially change his/her stable's inventory on any given day.

Likewise, there are so many varied claiming levels that the average owner enjoys a diverse "menu" from which to select. If one is willing to look for horses to claim at racetracks other than the closest track, your opportunity to find a useful horse could be improved.

Points to Keep in Mind

A. Common mistakes to avoid

Don't make desperation claims. Each horse must be fairly and reasonably evaluated as to performance, available conditions, pedigree, and demonstrated earnings. Spend only as much as the evaluation indicates the horse is worth. Try to claim only horses at or near that price, and, above all, make certain they are as sound as possible.

B. Relying on "gut instincts"

To some extent, every claim represents some level of intuition or "gut instinct." However, that does not imply that the decision is in reality nothing more than a guess. To the contrary, in this context, intuition represents experience and innate skill.

No claim should be made unless the basic questions regarding value, condition, pedigree, etc. have been addressed. However, from that point forward, intuition is about as valuable as any other factor.

C. Building your stable through claiming

Only you and you alone should decide if this is your preferred method of operation. However, many horsemen, owner and trainer alike, have built successful stables on the athletic prowess and ability of the claiming horse. It is the most affordable means of developing or expanding one's stable.

Conclusion

Luck and skill are essential to the success of just about every business. However, the success of any claim relies primarily on the skill of the individual making the claim.

There is no simple means to teach one how to become adept in the claiming game. What must be taught is that there is no substitute for study and learned evaluation of a horse's potential and actual performance. As with any science or art, those who experience success and recognition are generally the hardest workers.

Factors to consider when claiming a horse.

By Gary Burke

Even though most of the news in horse racing is about the high-profile horses, most of the races are for claiming stock. I have been claiming horses for more than fifteen years and find it to be a preferred strategy for many owners and trainers.

While claiming is sometimes called a lesser way to participate, it helps owners because the value of the horse has been more clearly established. Additionally, the majority of these horses are ready to race within three weeks after they are claimed.

Following is a partial list of factors to consider when claiming a horse:

1. Can an equipment change improve the horse?
2. How about a surface change (i.e., dirt to turf)?
3. Will a different distance work?
4. How about different training techniques?
5. Are there any obvious physical problems?
6. What is the age of the horse?
7. Does the horse appear to be in good condition?
8. Do you like the way he or she walks?
9. What race conditions is the horse eligible for?

As you can readily conclude, it is very important to have a professional point of view to help make these decisions. Hence, the quality of the owner/trainer relationship will insure long- term involvement and success.

There is nothing more exciting and gratifying than claiming a horse, moving it up in class, and winning a race. For one brief moment the thought goes through your mind, "You clever devil."

Conformation: Developing an "Eye" for a Horse
By John W. Russell

There are many mysteries about horse racing that are hard to explain, but judging and evaluating horses' conformation need not be
as subjective an exercise as many horsemen would like to suggest. However, it is also true that there is no formula to define the
perfect horse, and what is written here would not come close to describing the complexity and function of the bone, muscle and sinew of the optimum Thoroughbred racehorse. Good horses come in different sizes, so it is important that any dimension from one given anatomical point to another must be in good relational balance to the entire horse. Thus the tape measure may best be used to measure a buyer's bankroll, and not a horse. When a horse is running there are basically three components at work: the head and neck are providing balance, the hind quarters, loins, and hind legs produce forward thrust, and the shoulders and forelegs provide a pivot and bear the vast majority of weight. It is, therefore, a great benefit to the trained eye to see a horse in action when evaluating him, but fundamental truths can be appreciated in the standing horse that is squarely balanced on four legs.

Hind End Provides Propulsion
The hindquarters, when being seen from the side, should present a large triangle with the three corners being the point of the hip,
point of the butt and the stifle (see Diagram 1). The two most important sides of this triangle, hip to point of butt and hip to point of stifle should be approximately equal, and each to the same length as that of the horse's back. The length of the gaskin, from the stifle to the hock should be slightly longer and never shorter than the length of the hind cannon bone. Ideally, the hindquarter should appear to be deep and the gaskin long. The angle of the hind leg is critical. Too straight a hock is just as bad as a crooked or sickle hock. To determine a correct angle, an imaginary line running upward through the length of the gaskin should point at the point of the hip, and a line running up through the cannon bone should point at the point of the butt (Diagram 1). Viewed from behind, the hindquarters should be symmetrical and well muscled over the hips and barely narrower than the horse's rib cage. (Diagram 2). Also from the rear, the gaskin, well muscled, should slant slightly in from the stifle to the hock, but never should the hocks turn in, and they should be directly vertical above the fetlock. If all of these ingredients are in place, the horse should appear well balanced with no exaggerated dimensions. A short back is most desirable; the withers being about the same height as the hindquarters. The slope of the shoulder will determine the length of the stride when the horse is running, but will also dictate this when he is walking. The scapula, or shoulder blade, provides an obvious ridge that defines this slope, which should be about 40 degrees from a vertical line running up from the point of the shoulder.

Front End Bears Majority of Weight
The front legs bear the majority of weight of the running horse and rider, and therefore are far more susceptible to injury than the hind legs. Consequently, horsemen will spend a prodigious amount of time evaluating the front legs before a purchase. The forearm should be longer than the cannon bone, and should present a visually straight line with it from any point of observation (Diagram 3a). An almost unforgivable fault is when, viewed from the side, the knee is back (Diagram 3c), giving an almost concave appearance to the front of the leg. A knee that is slightly forward is of less concern, but in extreme cases, will put undue strain on the suspensory ligaments in the fetlock (Diagram 3b). When viewed from the front, anything less than perfect alignment of all the bones of the front legs are less than desirable (see Diagram 4). It is true, however, that there have been many very good horses (e.g. Real Quiet) with less than perfect legs, but any deviation from correct increases the possibility of injury, if not inhibiting the horse's ability. Of no less importance, the pasterns and the hooves should line up well, and viewed from the side, should present approximately the same angle to the ground as the shoulder. The length of the pastern should be no longer than twice the length of the hoof. A heavy, barrel chest is undesirable, and should not be as wide as the hips. On the other hand, the girth should be as deep as possible as this is where the lungs are, and their capacity to absorb oxygen when stressed is largely related to their size. The neck should be set on perpendicular to the slope of the horse's shoulder and should be longer than the back. Finally, although somewhat more subjective, an attractive head should be wide between large eyes with the jaw bones, at the throat, at least four inches apart. But bear in mind what one legendary horseman once said: "No one knows what's inside a horse until he shows you," and that particularly applies to the head of any horse.

While a racehorse with "correct" conformation may not necessarily be the fastest, such an individual usually proves to be more durable than a poorly-conformed horse. It's important, therefore, to have a good understanding of conformation when selecting horses.

John W. Russell retired after training more than 50 stakes-winners of over 100 stakes, including Eclipse Award winners Susan's Girl and Track Robbery.


Selecting the Business Form Best for Your Stable

By Joost van Adelsberg, CPA

Choosing the appropriate business form fro the operation of your stable is one of the most important decisions you can make. This article is intended to provide a cursory overview of the tax concerns and other factors you face when making that decision. But remember, before any final decision is made, obtain professional advice.

These are three fundamental factors you should consider when deciding on the form your business will take:

1) Taxes
2) Liability
3) Management formalities and complexity

The tax considerations identified in this article are primarily driven by personal income tax concerns. However, estate taxes can have a significant impact upon the choice of business form as well. Where estate taxes are an issue, the stable owner should consult with an estate planning professional to assure compatibility with the overall estate plan.

Equine Business Form Choices
Sole Proprietorship
A sole proprietorship is a business conducted by one individual, in that individual's name, without the formality or fiction of a separate legal entity. The owner merely utilizes a certain portion of his or her personal assets for business purposes.

Since no separate tax entity exists, no separate income tax return is required. Rather, the owner separately reports stable income on Schedule C of Form 1040. Income is taxed at rates identical to the owner's individual rate, which can be as high as 39.6% Federal and 11% California. Obviously, this form of business entity leaves little room for tax planning.

Since a sole proprietorship business is indistinguishable from the individual owner, any liability of the business is the liability of the owner. This means that all of the assets of the owner are subject to all of the debts and liabilities incurred by the stable.

At the risk of stating the obvious, this form of business entity is the most informal and easiest to operate. Nonetheless, one must be careful to maintain separate records and accounts for all stable operations to assure that you receive the most advantageous tax treatment possible.

General Partnership
The tax laws define a general partnership as an association of two or more persons who organize as co-owners to carry on a business for profit. In this context, a "person" can include individuals, other partnership, corporations, or other associations. Likewise, a "business" includes every trade, occupation, or profession.

Both Federal and State tax laws treat a partnership as a conduit or "pass-through" entity. That is, items of income and expense are determined at the partnership level and passed through to the owners each year on Form K-1. The partner then reports this income on his/her personal income tax return. Because of their simplicity, partnerships are a popular form of business.

The partners in a general partnership are liable for all debts arising from the acts of the other partners performed in ordinary course of the partnership's business. In the case of individual partners, all of their assets are potentially subject to the debts of the partnership.

Its partners manage a partnership, but the partners may appoint one or more "managing partners" who have primary management responsibility. Ostensibly, however, all partners can act on behalf of the partnership.

Limited Partnership
A limited partnership is a partnership formed by two or more individuals under the limited partnership laws of a given state. The partnership must have one or more general partners, and one or more limited partners. Only the general partner may participate in the management of the partnership. Limited partners have no right to participate in management. If they do participate in management, they may lose the protection of limited liability.

A limited partnership is taxed the same as a general partnership. Consequently, they are a popular estate-planning tool, especially where they operate similarly to a closely held business.

The liability of a limited partner for partnership debts is "limited" to the extent to the partner's investment. However, the general partner remains personally liable for all debts of the partnership.

Remember, a limited partnership's formation must strictly comply with the laws of the state in which it is organized.

Corporation
A corporation is created by state law and is a recognized legal entity separate and distinct from its owners or "shareholders". A corporation may be formed only through compliance with state incorporation statutes.

A corporation is taxed separately from its owners. Income and loss is determined at the corporate level, with taxes paid at rates up to 34% Federal, and 9.3% California. Any after tax profits distributed to shareholders are included in the shareholder's taxable income as dividend income. This is commonly referred to as "double taxation", and is probably the greatest disadvantage to doing business as a corporation.

Although shareholders are liable for the acts of the corporation and its agents, they are only liable to the extent of their investment.

A corporation is managed by its Board of Directors and officers. These directors and officers are not required to be shareholders. The corporation can only act through its agents, whose authority is derived either from the corporation bylaws or by action of the Board of Directors.

These formalities make corporations cumbersome for small business owners, particularly in the racing business.

S-Corporation
An "S Corporation" is a social form of corporation, which for federal income tax purposes satisfies the qualification requirements of Subchaper S of the Internal Revenue Code. Notwithstanding, the corporation must be organized under the normal state corporation law requirements.

A qualifying S corporation is taxed in a manner similar to a partnership. That is, all income and expense items are determined at the corporation level, and a form K-1 distributed to each shareholder who, in turn, reports the income on their individual tax return.

An S corporation receives the same liability protections as a regular corporation with one important exception. In an S Corporation, it is common for the shareholders to also serve as the officers and directors of the corporation. Consequently, these individuals can be held personally liable for their acts and decisions made in the ordinary course of the business.

An S Corporation is limited to 35 or fewer "shareholders", who must generally be individuals. Although, an S corporation, which is organized under the same laws as a regular corporation, will have the same business formality requirements as a standard corporation. Many states, including California, have "small corporation" statutes allowing for much more informal management practices.

Conclusion
There is no right or wrong form of business entity when setting up a horse racing or breeding operation. An owner should choose the form best suited to one's individual, tax, liability, and/or management concerns.

When in doubt, seek professional assistance and follow the advice give and that law applicable to your situation.

Joost van Adelsberg is a CPA with the accounting firm Coopers & Lybrand in its San Diego office. Mr. Van Adelsberg specializes in tax questions involving high net worth individuals.

Points to Keep in Mind When Forming a Partnership

By Drew J. Couto, esq.

The vast majority of horses running today are owned by partnerships. Generally speaking, a partnership allows people who would not otherwise be able to afford to own and race a horse to enjoy the same thrills and experiences as those better able to afford horses on their own.

The law defines a partnership as an association of two or more persons who own or co-own a business for profit. The partnership can either be "general" or "limited". Individuals in a general partnership share in the profits, are responsible for managing the business, and are personally liable for partnership debts.

A limited partnership differs in that it consists of one or more general partners, and one or more limited partners. Under the law, a limited partner is not bound by the obligations of the partnership. Limited partners contribute capital and share in the profits but take no part in management of the business, and, therefore, incur no liability with respect to partnership obligations beyond their contribution.

Typically, limited partnerships prepare lengthy, detailed agreements, spelling out the rights and fatties of all involved. General partnerships are a far more common form of horse ownership. However, unlike a limited partnership, general partners quite often do not prepare partnership agreements, or otherwise reduce the terms of their arrangement to writing.

Now, as a lawyer, I should be critical of the fact that partners rarely prepare formalized partnership agreements. However, I am not. In one sense it is refreshing to be involved in an industry where an individual's work is truly their bond. Moreover, experience has taught me that despite what lawyers will tell you, detailed contracts and agreements rarely guarantee that problems, disputes, and most importantly, litigation can be avoided. Nonetheless, prudence does require that I suggest partners consider preparing formal partnership agreements, or at the very least, discuss and agree amongst themselves as to certain important recurring issues.

Although all owners hope never to be involved in a partnership dispute, it is good, sound business practice to have given consideration to and to have reached an agreement on the following issues.

Name of Partnership and Racing Silks
Many partnerships run under the names of the individual partners, while others run under a stable name. Occasionally, it becomes an issue among partners as to whose "colors" the horse will compete in on a given day. This simple but significant issue should be addressed from the start. If an agreement is difficult to reach, partners should consider rotating the "colors" under which a horse competes.

Terms of the Partnership
Like marriage, the term of a partnership varies, with some longer than others. The termination of a partnership is generally referred to as its "dissolution". A partnership may exist for a specified duration, continue until death, or until one or more of the individuals decide to leave the partnership. Unless the proper arrangements have been made in advance, the decision to leave the partnership will not relieve one of ongoing liability for partnership debts and obligations.

Profits, Expenses, and Losses
The profits and losses of the partnership are shared among the partners in accordance with their percentage of ownership. However, each partner is individually liable for all debts and obligations if his/her partners are unable to contribute their share.

Fortunately, many trainers recognize that one owner's involvement may be limited and often look only to that individual for their proportionate share of training expenses. However, the decision to do so is a courtesy, and nothing more. As a consequence, ascertain for yourself that your partner is one whom you can trust and who has the financial resources to fulfill their obligations as an owner.

Tax Considerations
Partners pay taxes for only those revenues they actually earn. They are not responsible for taxes incurred by other partners on their proportionate share of earnings. Nonetheless, all partners should be familiar with applicable IRS and State taxation regulations, including IRS Code Section, 704(c).

Given that the majority of owners are involved in this industry as business owners, a prudent owner must be vigilant of these tax regulations and limitations.

Partnership Books
Although not always done, it is advisable for partners, either individually or collectively, to maintain "books" which accurately reflect income, expenditures, assets, and liabilities. These books may be essential to the determination of tax liabilities or disputes among partners. If the books are maintained collectively, every partner is entitled to inspect the books at anytime.

Where it is determined that one partner shall maintain the "books" on behalf of the partnership, it is advisable to issue periodic "accountings" of partnership financial affairs. The partners should agree that each accounting should be final and conclusive as to issues among partners 30 days after receipt. This agreement should prevent prolonged disputes over long past transactions.

Management and Authority
As indicated above, in a general partnership each partner must have an equal voice in the management of the partnership. By operation of law, each has authority to bind the partnership in the making of contracts or other arrangements. The partners are bound by fiduciary duties to one another not to encumber or sell the horse without complete agreement among partners. Generally speaking, a partner's remedy against a third party who has provided services to the partnership is limited. However, with respect to the partner acting improperly, there are no such limitations other than those provided in bankruptcy.

Purchase Options on a Terminated Interest
Upon the death or withdrawal of a partner, a partnership is deemed to have "dissolved". Unless agreed upon prior to dissolution, the partnership's assets, in this case the horse, must be sold for fair market value, with each partner sharing in the proceeds in accordance with their percentage of ownership.

To avoid the need for a public sale, the partners can agree to the termination value of the asset prior to dissolution. In such cases, the agreement of the partners should provide that a partner or a number of the partners may acquire the interest of the other at a specified price. However, predicting an accurate, fair value of the horse is quite difficult and may arguably be unfair to the individual leaving the partnership.

So, consider all of the circumstances involved before making a decision as how best to value the partnership asset upon death or withdrawal of a partner.

Death of a Partner
As indicated above, a partnership is dissolved by the death of any partner. In most instances, when a partner dies, the remaining partners are obligated to sell the horse(s) at a public sale. As an alternative, partners may agree that the value of a deceased partner's interest ca be ascertained by means other than auction. When doing so, partners should agree that the purchase pf a deceased partner's share includes the assumption of any and all obligations or liabilities previously or prospectively arising from that interest. Likewise, they should insist that the surviving partners agree to "hold harmless" the deceased partner's heirs and estate from all liability and obligations arising from the partnership.

In essence, by executing this provision a partner agrees to bind his/her estate to sell the horse to the other partners at a given price, or at a price to be determined by a mechanism established in the agreement.

Applicable Law and Venue
Given that many partnerships consist of individuals living in different counties, states, and/or countries, it is prudent to specify the law that will be applicable to any dispute among partners. In addition, the partnership agreement should specify the place where all disputes will be resolved. This is quite different that specifying the law to be applied.

Lastly, partners should consider and specify whether disputes among partners will be resolved through litigation or alternatively, through arbitration or mediation.

Conclusion
Obviously, this is not an all-inclusive list of the issues relevant to a partnership. The article is intended simply to identify certain common issues and concerns partners should discuss when forming a partnership.

There are several useful reference books available which address these issues in more detail. Most provide examples of partnership agreements. These books are useful, and informative, but do not completely negate the need to consult legal counsel and/or a proficient accountant. Obviously depending on the value of the horses involved, the number of partners, and/or the concerns of the individual partners, the cost of obtaining an appropriate partnership agreement will vary.

However, for those of you simply looking for a reference source or guidance, my I suggest the following publications:
Equine Legal Handbook
Gary R. Katz, Half Halt Press
Distributed by Equine Research Inc.
(800) 848-0225
The Complete Guide for Horse Business Success
Janet E. English, CPA,
Distributed by Equine Research Inc.
(800) 848-0225
Legal Aspect of Horse Farm Operations
James H. Newberry, Jr.
Distributed by University of Kentucky, College of Law
(859) 275-2921
Law for the Horse Breeder
Kenneth A Wood
Distributed by Wood Publications, Inc.
(858) 756-3382

Drew J. Couto serves as President of the TOC.

How to Form a Partnership

Pooling your assets can give you the chance to buy more horses of better quality--and it can be more fun too.

By Tracy Gantz

Ask any Thoroughbred owner-nothing compares to the thrill of winning. Whether your horse comes from the clouds to nail the frontrunner or stubbornly stays on the lead to thwart all challengers, when your number goes up first on the tote board, you giddily head straight for the winner's circle.

The fun increases exponentially when you have friends with you to share the experience, especially if all of you own the horse in partnership. Take a look at the winner's circle the next time a partnership wins--it's one big excuse to party. Partners often come out to the track together, have some lunch, go to the paddock to shake hands with the jockey, and maybe take photos of each other. Then if they win, the high-fiving in the winner's circle becomes an epidemic, with a sea of broad grins eagerly facing the camera for the official winner's photo. "I enjoy my partners," said Tony Scott, who has several partnerships on horses trained by Doug O'Neill. "I like seeing them at the track. I like going to dinner with them. I like having other people to celebrate with and go to the winner's circle."

Partnerships flourish today not only because it's fun to win races with your friends, but because it gives people a way to buy better horses and more horses than they could afford on their own. “I'd rather take a 25% interest on three horses instead of buying one horse because you might pick the wrong one," said Freddie Carvajal, who owns horses in partnership with trainer Caesar Dominguez. Carvajal said that by buying several horses, he and his partners have a much better chance of making money.

"We bought Weekend Squall in Kentucky for $20,000," Carvajal said. "We made over $100,000 with her and sold her for $260,000."
Gary Margolis and Tom Tuttle are among the partners in groups put together by trainer Wally Dollase. You have to be able to buy good horses to be competitive," Margolis said. "I was in the partnership on Deputy Commander and Helmsman." Added Tuttle, "The only down side to partnerships is the loss of control. But you can go to the winner's circle with a minimal amount of investment."

So how do you put together a partnership? It's easier than you think.

Have Common Goals
People in successful partnerships agree that the most important factor is for all partners to have the same goals for their horse
operation.

"Avoid partners who don't have the same theory in racing as you do," advised Scott. "In my partnerships, we claim horses from $20,000 up to about $62,500. We try to get the best horses we can, go racing, and have fun."

Your trainer should also have the same goals you do.

"Find the type of trainer you're looking for," Tuttle said. "If you're looking for a Derby horse, find someone who races two-year-olds. Another trainer might have older horses or grass horses. Each partnership has a different direction and thrust."

You and your partners should also agree on how to make decisions affecting the partnership, when to buy or claim a horse, and when to sell a horse.

Rollin Baugh, a bloodstock agent who has put together many partnerships, emphasized the importance of knowing how to end a
partnership and knowing what to do if a partner wants out or defaults on a bill.

Get It in Writing
Though the easiest way to start a partnership might be a handshake, a written agreement spelling out what to do in certain contingencies can help you avoid many problems. For example, if a partner defaults on a bill, a written agreement could stipulate how long he has to pay and whether his interest in the horses could be forfeited for non-payment.

A written agreement could also set rules on how decisions are made. Often the partner with majority interest has the final say, but that doesn't have to be the case.

"Every partner has veto power on the financial decisions in our partnerships," Tuttle said, though Dollase, as the professional
trainer, makes the day-to-day decisions.

Dominguez casts the deciding vote in his partnerships. "If it's 50-50, he makes the decision in the best interest of the partnership," Carvajal said.

Scott relies on O'Neill's expertise when it comes to claiming horses. "Any partner can recommend a horse to claim," Scott said.
"But the final decision is Doug's. If he tells us not to claim the horse, then we don't."

A written agreement can also stipulate how a partnership is funded, another aspect with no concrete rules. Some groups put up enough money to buy a horse or horses and then bill the partners for their share of the monthly expenses. Others use some of the start-up funds for the early bills.

"I always keep some money in reserve so that the partners don't have to pay monthly expenses," Scott said. Margolis said he estimates what a year's worth of expenses will be and keeps that in escrow so that he doesn't have to go back to his partners for more money.

Who Keeps the Books?
Owners, whether they are in a partnership or not, rely on their trainer's expertise to condition their horses. In some cases, however, a trainer can offer you even more help and might be interested in becoming one of the partners. You can make whatever arrangement works for you, your partners, and your trainer.

For example, Dominguez often owns an interest in the horses he trains. Carvajal said that Dominguez puts the partnerships together and does the paperwork, even billing the partners separately for their percentage of the expenses. "He's the captain who runs the ship," Carvajal said.

You or one of your partners can do the accounting yourself, however, or you can hire an accountant. Margolis is a CPA, an advantage for his partners. Scott is an attorney, which allows him to manage the partnership without hiring outside help.

"I don't want to spend partnership money on legal fees," Scott said. "We want to use the money to buy horses."

Peggy Johnson, speaking at a Thoroughbred Owners of California ownership seminar, said that she and her partners take turns keeping the books. Each year a different partner receives that task.

And if the idea of keeping books fills you with dread, you can join one of the many large-scale partnerships with general partners who take care of those details. Bear in mind, though, that these people often receive monetary compensation for their efforts. So it's wise to inquire about those operating expenses in advance and then make your own decision as to whether the cost is worth it.

How Active Are You?
If you decide to own horses in partnership, you should decide whether you will be an active or passive partner.

If you tell your partners," Just tell me when the horses are running and send me my bills or profits," you will likely be deemed a
passive partner. This can impact your ability to write off your horse business against other income on your taxes. The IRS often
determines whether you are passive or active based upon the records you keep and whether you spend 500 hours or more annually engaged in your horse business.

It's best to be an active partner, not only for tax purposes, but because it's more fun. Being active means attending the races, coming out in the mornings to watch your horses work, going by the barn to see what's happening to your horses. And let's face it, that's why you want to own a racehorse, isn't it?

Tracy Gantz serves as TOC's Deputy Director for Southern California.


TOC's Free Partnership Directory

TOC is currently updating its Partnership and Syndicate Directory for 2002. The directory includes the names, contact numbers, and general information of many partnerships that operate racing stables in California.

The directory is free. Simply contact the TOC office by mail (285 W. Huntington Drive, Arcadia, Calif. 91007), by phone 800-994-9909 within California or 626-574-6620), or by e-mail at tocguestbook@toconline.com.

The TOC office also has sample partnership agreements available, as well as the California Horse Racing Board forms for General
Partnerships (for use with three or fewer partners) and for Statement of Multiple Ownership (four or more partners).

Questions to Consider When Forming a Partnership

The following are some of the questions you might think about before forming your partnership. Any or all could be addressed in a written partnership agreement.

• What are the primary goals of the partnership and do all partners share the same goals?
• How long will the partnership last and how will the partnership be dissolved?
• Who will train the horses and how will trainers be chosen?
• How will the partnership make decisions?
• What name(s) will the horses run in?
• Whose silks will the horses run in?
• Who is responsible for the bills and in what proportion?
• Who will keep the books and write checks for the bills?
• Will the partnership hire a lawyer and/or accountant?
• Who will keep the partners up-to-date on the partnership's activities and how often?
• How will disputes be handled, i.e., via a lawyer, arbitration, mediation?
• If a dispute arises, in what location will it be resolved and under what law?
• What provisions are made in case one partner defaults on a bill?
• If someone wants to leave the partnership, how will that be handled?
• What happens if a partner dies?
• May all partners see their horses whenever they want and if not, when may they visit?
• What provisions are in place if a horse doesn't run to expectations?
• Will profits go back into the partnership or be disbursed to the partners?