By John Alan Cohan, Attorney at Law
Stallion Syndicates, a mode of co-ownership that applies to all types of horses in all breeds, have been a popular vehicle for people engaged in breeding activities for over 40 years.
During the 1980s, many people syndicated high quality stallions as investment and tax strategies. These were thought to have the advantage of spreading risks of loss and sharing maintenance costs, as well as attracting investors to situations that could generate significant profits for all parties involved.
Today, the Securities and Exchange Commission continues to regard 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 and is entitled to breeding rights. Care of the stallion is delegated to a Syndicate Manager who has day-to-day charge of the animal.
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.
The principal business advantage of a Stallion Syndicate is that each co-owner is assured of long-term breeding rights to the stallion at a fixed price, usually with a live foal guarantee.
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 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.
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.
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. Legal counsel should be consulted to properly draft Syndicate Agreements and to ensure 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 1981. He can be reached at: (310) 278-0203, by e-mail at [email protected], or you can see more on his website at JohnAlanCohan.com.