EC March/April, 2004

With a good economy it is quite plausible that enterprising individuals could reap profits by syndicating worthwhile stallions.  In the 1980s and well into the 1990s there was a significant number of syndicated stallions that did well for investors as well as the managers of the syndicates.  I will discuss some of the key features of this type of business venture.

Also, it is well worth pointing out that a significant Tax Court case held that the taxpayer showed a businesslike purpose in connection with a horse activity by purchasing a fractional interest in a stallion even though the taxpayer had virtually no prior experience with horses [Trafficante v. Commissioner, T. C. Memo l990-353].

Horse syndication can be attractive to those who decide to enter a horse activity upon retirement.  Syndicating a quality horse can generate supplemental income after retirement, and one can utilize previous business contacts in order to sell shares.

Since a stallion syndication is not considered a security interest, generally speaking, it is possible to market the investment without registering the offering with any governmental securities office.  The individual shares are simply deemed fractional interests in the horse.  Each party owns part of the horse.  The advantage of a fractional interest ownership is that each owner is entitled to guaranteed breedings to the stallion each year, without further costs other than maintenance fees, which are generally modest.  Also, the fractional shareholders delegate management duties to the syndicate manager so that there are no costs or worries associated with day-to-day care of the animal.  Further, the breeding rights entitle you to breed to a horse that might otherwise be out of range in terms of price.  You still “own” a part of the horse, which you might otherwise not be able to afford.  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. 

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.  A lawyer’s tax opinion should also accompany the agreement to assure investors that the agreement conforms to the tax laws.

The Syndicate Manager is required to keep 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.

Another advantage for members of the Syndicate is that installment payments are often available, making it affordable to start up a horse activity.

Mortality insurance on the horse is factored into the annual maintenance fee, but if some members don’t pay for their share in full, the promoter may require them to obtain separate mortality insurance on their shares, with the loss payee designated as the Syndicate Manager.

The Syndicate is not a separate taxpaying entity, nor is it a partnership entity, and each co-owner is responsible for filing his or her own tax return in which deductions are made.

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 industry since l98l.  He serves clients in all 50 states, and can be reached by telephone at (3l0) 278-0203 or by e-mail at johnalancohan@aol.com.]

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