Taking a Stride Back: Dirt Track Changes Coming to the Bluegrass

By: Eric Finke, Staff Member

Horse racing returns to the Bluegrass as Lexington once again becomes the horse capital of the world.[i] This spring will offer the last meet on the current synthetic track as the President of Keeneland, Bill Thomson, announced last week that “a state of the art dirt track” will once again become the racing surface. [ii] Keeneland has long been the final tune-up for many horses that have hopes of running in the Oaks and the Derby at Churchill Downs.[iii]

In 2006, Keeneland introduced its current synthetic track to increase the safety of horses under the stress of racing on dirt.[iv] This safety trend was seen nationwide as the California Horse Racing Board went so far as to require tracks, including the famous Santa Anita Park, to lay down a synthetic surface by 2007.[v] A surface switch proved to be a success based on studies of the Equine Injury Database.[vi] As recent as 2013, there were only 0.43 breakdowns per 1000 starts at Keeneland on the synthetic track surface, while the overall breakdown rate across the nation on dirt surfaces was 2.11 per 1000 starts.[vii] In the midst of all this change, Churchill Downs continued using a dirt surface, causing many owners to begin bypassing tracks like Keeneland, in favor of dirt.[viii] Horse owners that once eyed the Blue Grass Stakes as the premier event for testing the Derby waters have begun to stay away in recent years.[ix] World famous horse trainer Todd Pletcher has refused to run on a synthetic surface with a true frontrunner in his stable, preferring to run on a consistent dirt surface that would be comparable to what Churchill Downs has to offer.[x]

It is not surprising, albeit unfortunate, that courses including Keeneland are now reverting to the original dirt despite statistic proof of synthetic’s beneficial health results. Weather conditions in the United States are not as ideal some say, as compared to other continents like Europe where synthetic has been a great success.[xi] Expensive maintenance costs of synthetic tracks are cited as a reason to change back to dirt for others.[xii] New York Times sports columnist Joe Drape writes about the Keeneland announcement and who it is really serving, “Who’s more important: the equine athletes who put on the show, or the commercial breeders and captains of industry who sit on boards and in the box seats? We got the answer, and it’s sad.”[xiii] Contrary to these sentiments surrounding the reversion to dirt, Josh Rubenstein, Vice President of Del Mar Surfside Race Place, said, “We want absolutely the safest surface possible and feel returning to dirt will allow us to do that.”[xiv]

It is no secret that the culmination of the horseracing season, the Breeders Cup, has been held on the dirt tracks of Santa Anita Park and Churchill Downs the last four years straight.[xv] Thomason made reference to this unofficial dirt expectation, “It hasn't been laid down as a condition ... but we also know one of the things it does impact is our horsemen who have their horses going through those traditional dirt races coming to the Breeders' Cup."[xvi]

With so much potential being left out of both the starting and ticket gates, Keeneland is presumably under pressure to revert back to a surface that will draw the best competition once again. Avid fans of Keeneland horse racing and sports are left with an unsettling question after these various arguments: Is this most recent change to horse racing being done for the love of the sport, or purely for the love of money?

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[i] VisitLex: About Lexington, http://www.visitlex.com/about/, (last visited Apr. 9, 2014).
[ii] Alicia Wincze Hughes, Keeneland to replace synthetic racing surface with return to dirt track, Kentucky.com (Apr. 2, 2014), http://www.kentucky.com/2014/04/02/3174914/keeneland-to-replace-synthetic.html.
[iii] Keeneland spring meet offers Derby, Oaks preps, Washington Times (Apr. 3, 2014), http://www.washingtontimes.com/news/2014/apr/3/keeneland-spring-meet-offers-derby-oaks-preps/.
[iv] Natalie Voss, Keeneland’s Switch Back to Dirt Track Could Appeal to Breeder’s Cup and Derby Contenders, Business Lexington (Apr. 7, 2014), http://bizlex.com/2014/04/keeneland-switch-back-to-dirt-track-could-appeal-to-breeders-cup-and-derby-contenders/.
[v] Hughes, supra note 2.
[vi] Equine Fatality Summary: Keeneland, Equine Injury Database, http://www.jockeyclub.com/pdfs/eid/Keeneland.pdf (last visited Apr. 9, 2014).
[vii] Supplemental Tables of Equine Injury Database Statistics for Thoroughbreds, The Jockey Club, http://jockeyclub.com/pdfs/eid_5_year_tables.pdf (last visited Apr. 9, 2014).
[viii] Voss, supra note 4.
[ix] Hughes, supra note 2.
[x] Don Agriss, Up the Backstretch: A back-to-nature movement in racing, The Island Packet (April 3, 2014), http://www.islandpacket.com/2014/04/03/3039209/up-the-backstretch-a-back-to-nature.html.
[xi] Voss, supra note 4.
[xii] Andrew Beyer, Keeneland reluctantly will be digging the dirt once again, Washington Post (Apr. 9, 2014), http://www.washingtonpost.com/sports/othersports/keeneland-reluctantly-will-be-digging-the-dirt-once-again/2014/04/09/080dbb3a-bfff-11e3-b574-f8748871856a_story.html.
[xiii] Joe Drape, A Track’s Shift to Dirt Adds to Horses’ Risks, The New York Times (Apr. 3, 2014), http://www.nytimes.com/2014/04/04/sports/in-a-tracks-decision-horses-are-the-losers.html?hpw&rref=sports.
[xiv] Joe Tash, Del Mar Fairgrounds to replace synthetic track with dirt, Del Mar Times (Apr. 9, 2014), http://www.delmartimes.net/2014/04/09/del-mar-fairgrounds-to-replace-synthetic-track-with-dirt/.
[xv] Breeder’s Cup, http://www.breederscup.com/history/event-year (last visited Apr. 9, 2014).
[xvi] Hughes, supra note 2.

A Horse Owner’s Tax Checklist

By: Matthew Doane, Staff Member

With tax day upon us, horse owners must be cautious if they are attempting to deduct business expenses related to their horse activity. Section 183(a) of the Internal Revenue Code states, “[i]n the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.”[i] If an activity is not “engaged in for profit,” provision (b) of section 183 allows deductions only to the extent of gross income derived from the activity.[ii] Deemed the “hobby loss rules,”[iii] this means that if an individual’s horse activity does not rise to the level of “engaged in for profit,” but is simply a hobby, then that individual will only be able to deduct allowable expenses up to the threshold of income they have received relating to the activity.[iv] This can lead to serious tax implications if a taxpayer was planning on horse-related expenses being deductible, primarily larger tax liability, or in the case of previous tax year where a taxpayer included the deductions, an audit by the IRS. In 2011, this exact situation occurred, leading to a Tax Court opinion that provides some guidance to horse owners and the deductibility of horse-related expenses. [v]

In Blackwell v. Comm’r., the petitioners, Mark and Patti Blackwell, were seeking a redetermination of tax deficiencies on their 2005 and 2006 federal income tax returns, relating to the deductibility of business expenses related to their horse-breeding operation, Fresh Horses Farm.[vi] The main issue in the case, as laid out by Judge Swift, was “whether petitioners’ horse breeding activity constituted an activity carried on for profit under section 183.”[vii] The court relied upon Section 1.183-2(b) of the Income Tax Regulations, which sets forth a nonexclusive list of nine factors that are to be considered when deciding whether an activity has an “actual and honest profit objective.”[viii] The nine factors considered in the case include: 1) Manner in Which the Activity Is Carried On; 2) Expertise of the Taxpayer; 3) Time and Effort Expended in Carrying On the Activity; 4) Expectation That the Horses May Appreciate in Value; 5) Success in Other Activities; 6) History of Income or Losses; 7) Amount of Occasional Profits; 8) Financial Status; and 9) Elements of Personal Pleasure.[ix]

In Blackwell, the court, after examining all nine factors, held that the “petitioners’ motive, efforts, and investment in carrying on their FHF horse activity during the years in issue” was indicative of a “profit objective.”[x] The court’s holding centered around such facts as the petitioners’ substantial preparation and education associated with entering the horse business, the considerable amount of time and energy invested in the horse activity, and their dedication to proper business planning and book keeping procedures related to their horse activity.[xi] While the outcome in Blackwell was a positive one for Mark and Patti Blackwell, horse owners this tax season must still be mindful of the nine factor checklist set out in 1.183-2(b) of the Income Tax Regulations and examined in Blackwell v. Comm’r. to properly deduct expenses relating to their horse activity. 

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[i] 26 I.R.C. § 183(a) (2014).
[ii] See id. § 183(b).
[iii] Peter Reilly, Horse Breeders Win in Tax Court, Forbes (Aug. 13, 2011), http://www.forbes.com/sites/peterjreilly/2011/08/13/horse-breeders-win-in-tax-court/.
[iv] See 26 I.R.C. § 183(a)-(b) (2014).
[v] See generally Blackwell v. Comm’r., No. 29287-09, T.C. Memo. 2011-188 (2011).
[vi] See id. at *6.
[vii] Id. at *1.
[viii] Id. (citing Dreicer v. Comm’r, 78 T.C. 642, 645 (1982)).
[ix] See id. at *6-*8.
[x] Id. at *8.
[xi] See id. at *6-*8.