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:: General Livestock - Chapter 6 - Horse Industry Issues
Introduction
Operations
dealing with horses will
encompass a variety of end
results. Whether the operation
is dealing with race, show,
work, or special purpose horses
will determine the level of
investment and "polish" which is
applied to the appearance of the
operation. Without getting into
specifics by breed, the
following will recount the
possible structure of the
operations.
According to
the U.S. Department of Commerce,
International Trade
Administration, most U.S. horse
meat is exported to Europe where
it is especially popular in
Belgium and France. Horses are
covered under the Federal Meat
Inspection Act and thus must be
slaughtered under federal or
state inspection. Any carcasses
slaughtered for sale must be
inspected. There are no quality
or yield grades for horse meat.
Horse meat is also used in some
pet foods.
Although many
Americans have an aversion to
eating horse meat, the horse
meat industry is now rivaling
the beef and pork industries in
the amounts of fresh meat
shipped abroad. In 1994, meat
from 109,353 horses was shipped
overseas. In Sweden horse meat
outsells lamb and mutton
combined. It is also commonly
consumed in Spain, Italy,
Switzerland, Germany, Austria,
and the Netherlands, but it is
most popular in Belgium and
France.
See the
write-up for beef cattle for the
general concepts of this type of
operation.
Horses
(equines) federally inspected:
1984:
130,825
1989: 342,877
1993: 184,320
1994: 109,353
Most horse
operations will be breeding
race, show, work or special
purpose horses. Ancillary
operations for training and
boarding will also be included
in this MSSP segment.
Training
operations will take in horses
and provide feed, boarding, and
training appropriate to the
purpose of the horse. Race
horses, whether thoroughbreds,
quarterhorses, walkers,
trotters, or other types, will
be provided appropriate training
over a period of time. Show
horses, likewise, receive
extensive training and grooming.
The trainers will charge fees
for feed and board on a daily
rate and charge out the training
at flat rates, hourly rates, or
may accept an interest in the
horse as a fee. This type of fee
requires determination of value
for inclusion as income in the
current year. The amount
determined as income would
become the basis of the
interest. The horse owner would
recognize the transfer of the
interest as a sale and realize a
gain or loss on the transfer as
it relates to the basis of the
horse. See F.C. McDougal et al.
(1974) 62 TC 720 for this court
decision.
A boarding
facility will normally provide
only feed, board, and general
care. These services will be
priced out on a daily basis with
special charges for unusual care
situations as they arise. The
necessity of veterinary services
would be an example of unusual
situations.
Breeding work
horses will entail many of the
same aspects of other breeding
operations without the high
level of appearance. Emphasis on
the work characteristics of the
horses is common with purebreed
considerations downplayed.
Working horses would be those
used in other operations for
draft purposes or herding and
rounding up other animals.
Riding fences in rugged terrain
to determine and execute repairs
would be another function of
work horses.
Special purpose
horses would include those
trained for rodeo, riding,
hackney, or other such uses.
Some overlap of other areas may
be possible. The market for
these horses is not extensive
but lack of recordkeeping might
result in tracking difficulties.
Race and show
horses will likely be
100-percent registered purebreds
with detailed tracking
information available in the
taxpayer's records and through
the breed associations. The
larger, more serious operations
will limit activity to animals
with known breeding lineage of
successful animals to attempt to
maximize potential. Seldom will
a horse with an unproven lineage
rise to the top of the sport.
When this does occur, these
animals will be highly
documented to ensure
profitability from future
breeding activities.
Expenses
related to horse breeder
operations will include
purchases of animals, veterinary
fees to keep the animals in the
best health condition,
facilities for boarding,
feeding, and training, fees for
breeding services (either stud
or artificial insemination,)
insurance coverage of the
animals to compensate for losses
due to injury or accident,
advertising and promotion, and
specialized feed materials.
Events, shows
and races, involving the animals
will require entry fees which
are deducted as current
expenses. A certain type of
race, known as a "futurity",
involves periodic payments of
entry fees toward a future
event. These payments are also
deducted currently even though
the animal may be unable to
participate for any number of
reasons.
Race horses
have been subject to
"syndication," the partitioning
of ownership among, typically,
up to 40 shareholders. The
syndicated shares often contain
breeding rights for the owners
in addition to rights to
profits. See IRC section 464 for
the technical definition and
application of rules for farming
"syndicates."
Stud services
are a common source of income
for owners of recognized
successful animals. The services
may carry guarantees related to
conception. A private treaty is
a one-on-one breeding agreement
which may have any type of
special arrangement imaginable.
No foal free return (NFFR)
allows subsequent year attempt
if no foal is conceived in
current year. No foal no fee
(NFNF) guarantees foal or no
liability is incurred. Neither
NFFR nor NFNF are common in the
United States. The live foal
guarantee likely carries a
higher stud fee due to the
additional financial risk to the
stallion owner. If no live foal
is produced, the mare may return
for service or, possibly,
another mare may be substituted.
These guarantees may affect
income.
Weaning foals
takes place from 4 to 6 months
of age. Colts, as young as
12-months, can impregnate mares.
However, normal usage as a
stallion will not take place
until 2 years. The decision to
castrate, geld, colts will often
be made between 1 and 2 years of
age, depending on the ability to
keep the colt separate from
mares. Training will begin early
with temperament being the
primary goal. Eventual addition
of saddle and bridle will
prepare the foal for being
mounted by the age of two years
when it has achieved the
majority of its growth. A 3-year
old should be in its prime and
require only fine tuning
training for further
improvement.
Industry Facts
The horse
industry is not standard in its
marketing of animals. Horses are
not generally sold in quantities
like other animals. Individual
sales are the norm and factors
related to subjective
characteristics of the horse
greatly affect pricing.
Issues
IRC Section
1231
Transfer of an
interest percentage in an animal
in exchange for training or
other services is considered a
sale or exchange which results
in the recognition of gain or
loss for the fair market value
of the interest transferred
compared to the basis of the
animal. See F.C. McDougal et al.
(1974) 62 TC 720 for the related
court decision.
Treas. Reg.
section 1.1231-2(c)(1) provides
that
"* *
*Whether a horse is held for
racing purposes shall be
determined in accordance
with the following rules:
-
A horse
which has actually been
raced at a public race
track shall, except in
rare and unusual
circumstances, be
considered as held for
racing purposes.
-
A horse
which has not been raced
at a public track shall
be considered as held
for racing purposes if
it has been trained to
race and other facts and
circumstances in the
particular case also
indicate that the horse
was held for this
purpose. [accompanying
clarification included]
-
A horse
which has neither been
raced at a public track
nor trained for racing
shall not, except in
rare and unusual
circumstances, be
considered as held for
racing purposes."
[Examples follow in the
regulations.]
IRC Section
61
Animals not
fitting the requirements of the
operation will be culled and
sold. These sales may be through
auctions or sale barns, but may
be directly to buyers.
Documentation may be less
detailed on these sales than
sales of high quality animals.
Syndication
sales will normally involve
significant amounts to be
recognized. Stud services will
be a recurring source of income
in many instances.
IRC Section
168
Certain horses
are 3-year property, including,
IRC section 168(e)(3)(A)
-
any race
horse which is more than 2
years old at the time it is
placed in service,
-
any horse
other than a race horse
which is more than 12 years
old at the time it is place
in service.
Any other horse
which qualifies for depreciation
will be 7-year property.
Within the
horse industry, a horse is
considered to have been born on
January 1 of the year of birth
for designation as a 1-year old,
2-year old, etc.
Geldings cannot
be placed in service in a
breeding operation except in
working or "teasing
applications.
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