Tax Matters – Emerging Viability of Stallion Syndications

128 – August/September, 2013 (click here for complete digital article)

by John Alan Cohan, Attorney at Law

 

Stallion syndications have been a popular vehicle for people engaged in breeding activities for over 40 years. Stallion syndications are a form of co-ownership in which each investor acquires a fractional interest in the promoter’s stallion, with breeding rights. The arrangement provides for lower costs to the participants, spreading risks of loss, and sharing of maintenance costs. Each participant is entitled to annual breedings to the stallion. Syndicates were initially popularized in the Thoroughbred racing industry.

There are tax benefits for all members of a stallion syndicate. Each investor is entitled to depreciate the cost of the fractional interest, and to deduct maintenance costs from one’s income tax. In addition, investors may decide to lease a broodmare, and those costs are tax deductible. Of course, this is with the caveat that the taxpayer has the intention to be engaged in an activity for profit.

Sometimes a syndicate is formed in order to pool resources to purchase a top quality stallion.

Generally, the Securities and Exchange Commission regards stallion syndications as “non-securities,” which means that the promoter can freely advertise and solicit the general public to buy stallion shares as long as the agreement is in correct legal form. Each investor becomes a co-owner of a fractional interest in the stallion.

Drafting a Syndicate Agreement is crucial to any horse syndication because there are important legal considerations, not to mention the importance of making the agreement compatible with Federal tax law considerations.

The stallion stands at the syndicate manager’s farm with the manager who has day-to-day charge of the animal. Also, the syndicate manager is responsible for keeping accurate books and records of the syndicate to show all income and disbursements involved, and other information pertinent to the syndicate including veterinary reports, breeding schedules, the pedigree information of mares nominated to the stallion, and other details. Each co-owner, in turn, must keep separate business records in accordance with IRS regulations applicable to horse activities.

A good Syndicate Agreement will specify the duties of the manager, what sort of voting rights are conferred on the co-owners, and what sort of marketing plan or strategy will be implemented to promote the foals of the stallion produced under the Syndicate.

Mortality insurance on the horse is factored into the annual maintenance fee.

Syndicates may be regarded as a partnership for federal income tax purposes, in which each co-owner is allocated a portion of the income, expense and depreciation for their own income tax returns.

In order to market a syndication, the promoter needs to own or plan on acquiring a well-established stallion that has popular appeal and an outstanding record. Only then can purchasers be persuaded to enter into the deal. Also, it is helpful to have a formal appraisal of the animal.

Stallion syndications today are still a viable means to cut down on costs, and can be a prudent economic alternative to outright ownership of high quality stallions. Legal counsel should be consulted to properly draft Syndicate Agreements and to insure that applicable tax and securities laws are taken into account. John Alan Cohan is a lawyer who has served the horse, livestock and farming industries since l98l. He can be reached at: (3l0) 278-0203, by e-mail at johnalancohan@aol.com, or you can see more at his website: www.johnalancohan.com.