Opinion ID: 199059
Heading Depth: 2
Heading Rank: 3

Heading: Petitioner's Horse Racing and Breeding Activity

Text: 11 Petitioner bought his first thoroughbred in 1955. In general, he spent between ten and twenty hours per week engaged in horse racing and breeding activities. Petitioner never trained or stabled any of his horses at or near his home in West Springfield, he did not own a farm or any equipment used to train his horses, and neither he nor members of his family rode the horses. On average, he retained his horses three to four years, giving him adequate time to assess their racing potential. Petitioner's best horses generally ran in races paying purses from $12,000 to $30,000.
12 Dating back to 1959, and continuing through the years in question, petitioner subscribed to various industry publications, including The Blood Horse and Thoroughbred Record. In addition to these periodicals, he read numerous horse racing and breeding books during this time. He also studied The Blood Horse Stallion Register, which was published annually. It contains information about thoroughbred stallions, such as pedigrees, racing records, and racing earnings. Petitioner used The Blood Horse Stallion Register to decide which horses to breed and which to buy.
13 Initially, petitioner's thoroughbreds were not high-quality horses. He believed, however, that giving the horses vitamin and mineral supplements would increase their value. To this end, petitioner, by his own account, was one of the pioneers in using nutrition and vitamin supplements as part of the diet for his stable of horses. Petitioner personally decided which vitamins and minerals to use, mixed them, and sent them to the trainers to give to the horses. Petitioner did not, however, keep records showing which vitamins or minerals he gave to each of his horses or the nutrition and diet of each horse.
14 As indicated, petitioner spent ten to twenty hours per week on his horse racing and breeding activity. He attended horse auctions to buy and sell horses. He talked to breeders. He visited the farms in Kentucky and tracks in New Jersey where he stabled his horses. He reviewed mail, and he prepared the vitamin and mineral supplements for the horses. In addition, petitioner signed all checks relating to the activity and reviewed all of the track purse and race results. 15 Petitioner went to England, France, and Germany in 1977 on a tour of breeding farms, race tracks, and training centers. Petitioner also toured similar facilities in Ireland on a date not specified in the record. Further, he took courses about horses at Cornell University in 1985, 1986, and 1990, and stud manager's courses in 1964 and 1970.
16 Westfield Gage (not petitioner) paid Mary Kuta to keep the records for petitioner's horse racing and breeding activity from 1955 through 1993. The record indicates that prior to 1992, Kuta spent ten to fifteen percent of her time working on the horse racing and breeding activity, and part of this time was spent gathering information for petitioner's tax returns. In 1992 and 1993, Kuta worked only on the horse activity. 17 Kuta decided which records of the horse racing and breeding activity to keep and how to keep them. Although petitioner conceded that he did not know exactly what types of records Kuta maintained, Harry Landry, a commercial race-horse breeder who was hired by petitioner as an expert witness, opined that petitioner's records were excellent and meticulous and were very much in line with industry practice. 18 Petitioner had a separate bank account for his horse racing and breeding pursuits from 1963 through the years at issue. Kuta maintained the expense records for these accounts. She kept copies of canceled checks, check registers, invoices, and other correspondence. Further, Kuta kept copies of invoices from petitioner's trainers and from farms where his horses were stabled. She also kept statements from racetracks at which petitioner's horses raced showing the race dates, his horses' standing in those races, and the total amounts that his horses won. Although Kuta did not regularly prepare records showing how much each horse earned, in a few of the years before the years in issue, she prepared a summary at the end of the year showing the earnings of each horse. 19 In addition, at the end of each year Kuta prepared summaries from race track statements to ensure that the Forms 1099 issued by the racetracks were accurate. She also used race track statements to ensure that the various expenses charged to petitioner by the tracks, such as jockey fees, were correct. 20 From 1959 to 1989, Kuta prepared disbursement spreadsheets which showed expenses of the horse racing and breeding activity by category. The spreadsheets were usually prepared at the end of the year, from information in the check register, and were used both to monitor expenses and for tax return preparation. In some years the spreadsheets listed disbursements chronologically; in other years, the spreadsheets listed disbursements by payee. The spreadsheets did not, however, segregate expenses by horse. 21 Kuta prepared index cards on most of petitioner's horses from around 1956 through the time of the trial which showed the name of the horse, its year of birth, its sire and dam, when petitioner acquired it and from whom, the purchase price, when petitioner disposed of the horse, and the name of the party acquiring the horse. Some index cards showed whether the horse had a jockey certificate number, which the horse needed in order to be eligible to race. Kuta prepared the index cards in part to show Kida which horses were depreciable and which were home-bred. 22 From 1974 to 1996 (excluding 1994), Kuta prepared yearly breeding schedules for petitioner's mares. These schedules generally included the name of each mare available for breeding, the name of the stallion to which it was being bred, and the breeding fee. If the mare was still carrying a foal from the prior year's breeding, the schedule gave the name of the stallion. Kuta prepared the breeding schedules to ensure that she had properly registered the foals and paid breeding fees and to determine whether a refund was due. 23 The record indicates that petitioner never conducted written business studies for his horse racing and breeding activity. Similarly, he never prepared a written business plan or budget for the activity.
24 Petitioner never hired business advisers or consulted with experts on the economic aspects of a horse racing and breeding operation. Petitioner did, however, use professional trainers, veterinarians, horse farms, breeders, auctioneers, and jockeys. 25 Petitioner hired four to nine trainers each year from 1985 to 1993. Petitioner frequently called the trainers and talked to them about which horses to race and which horses to train. He asked their opinion, and he often followed their advice. Petitioner did not, however, keep records regarding the performance or race results of the trainers. Further, petitioner did not require his horse trainers to submit plans of operations or any other written reports. The only written reports that the trainers submitted to petitioner were informal notes they occasionally made on their invoices. For example, trainer George Handy wrote on his May 1992 invoice that [c]olts are progressing ok., Morgan Rd seems to learn much faster than Go Go Tiger, both are galloping 1½½ each day now. 26 Regarding the sale and purchase of horses, petitioner relied on veterinarians, breeders, professional trainers, and auctioneers. It is not clear whether petitioner relied on a trainer or breeder when he decided which horses to breed; petitioner states that he did, but the Tax Court seemed to indicate otherwise. The record does show that petitioner personally arranged for his mares to be bred, and he personally reviewed and executed the stallion contracts. 27
28 Between 1955 and 1996, petitioner removed 124 horses from his herd by selling or giving them away. Despite this, petitioner increased the size of his herd over time, which grew to a high of eighty-four horses in 1990. 29 In the mid-1970s, in an effort to improve the quality of his horses, petitioner began to send his mares to be bred by Kentucky stallions which had excellent pedigrees but unproven racing records. Later, in 1990 or 1993, petitioner changed his breeding strategy again and began to use stallions with proven pedigrees and race performance.
30 When asked about cost control measures, petitioner stated, I didn't change operating methods to decrease expenses, I changed operating methods to make things better. Petitioner further testified that he did not care how much he paid for a breeding fee, although he did indicate that [w]e'd try to get the best for the money. Similarly, petitioner stated that his horses were easy to sell because he kept lowering the price until they sold, or he would just give them away. Finally, when asked why he continued to sink money into horse racing and breeding, petitioner simply stated I was determined to get the best horse, and I practically did it, but I'm running out of it, time.