Participating on a panel that would outline the many challenges for today's Thoroughbred owner, Jack Knowlton, managing partner of Sackatoga Stable, used something of an apologetic tone in acknowledging that his partnership is the rare owner to be in the black.
That panel, titled "Stubborn Optimism: The Economics of Horse Ownership," convened Aug. 11 at the Racing and Gaming Conference at Saratoga in Saratoga Springs, N.Y. Knowlton acknowledged that a big key to that success was selling the breeding rights to their second classic winner Tiz the Law , who stood the 2026 season for $40,000 at Ashford Stud, near Versailles, Ky.
Sackatoga first made a splash with dual classic winner Funny Cide. While the New York-bred winner of the Kentucky Derby (G1) and Preakness Stakes (G1) earned millions of dollars in purse money and brought great thrills for his owners; as a gelding he didn't provide that final money-making option for his owners.
"Funny Cide, as I mentioned, was a gelding. He made more than $3.5 million dollars, and then he retired to Kentucky Horse Park and was a big fan favorite for 17 years until he passed away a couple years ago," Knowlton said. "The nice thing about Tiz the Law—and what every owner of a colt is hoping for—is he was good enough to have someone want him as a stallion."
Before his COVID-19-season victory in the Belmont Stakes (G1), contested first of the three classics in 2020 and at 1 1/8 miles, Tiz the Law captured the Champagne Stakes (G1) at 2 and Holy Bull Stakes (G3) at 3. Knowlton recalls the deal with Coolmore's Ashford Stud coming together after that Holy Bull win.
"We were approached by a number of stallion farms and, fortunately for us, Coolmore-Ashford in Kentucky was very interested," Knowlton said. "We ended up doing a deal with them, and we're gratified to see how successful he's been."
While Knowlton outlined a dream coming together, other owners on the panel outlined various challenges that included a highly competitive market for horses as Thoroughbred breeding has declined, that competition carrying through to the claiming levels, increased day-rate expenses, difficulty in the condition book providing a good fit for their horses to race, and a confusing tax landscape.
Attorney Brian Culnan, who operates Epona Racing Stable, outlined a highly competitive atmosphere at the claiming level in New York and Kentucky.
"If you are going to run a horse up in Kentucky or up here at Saratoga, and you want to have a chance to win that claiming race, you pretty much know you're not bringing that horse home (because the horse will be claimed)," Culnan said.
Breeder of the grade 1-placed 2020 Kentucky Derby starter Ny Traffic, Culnan would like to see a restructure of purse payouts to acknowledge there is value in horsemen starting horses. He said horsemen who are able to send out a sound horse for races should be better compensated beyond the top placings, as their horse's presence in the field brings value to the race.
"It seems to me that every owner should probably get $3,000 for their horse starting," Culnan said. "I'm not just picking that number out of thin air. The reason I came up with that number is that we'll run a non-winners of two allowance race, and we know it's going to have a five- or a six-horse field, and that's going to go. The guy who finishes last in that race is guaranteed $3,000 under the purse structure that we have here.
"Now, I compare that to a situation where the first weekend of the meet (at Saratoga Race Course) we ran in a $50,000 starter allowance race. It's a 12-horse field. Everybody on TV says this is the best betting race. We're the 7-2 favorite, but our horse runs out of the money, sixth; the first loser under the current purse structure. I walk away with $475. Now, how does that make sense?"
Brent Malmstrom, who maintains a racing stable of about 30 horses typically racing at the claiming level, was one of two panelists to say that Thoroughbred ownership seems to bring scrutiny from the Internal Revenue Service.
"I don't mind sharing with the audience that I'd never been audited by the IRS until I got into this business," said Malmstrom, who has been recognized by Ernst and Young as an influential global chief financial officer. "In the first three years I was in this business, we got audited. ... We took it all the way to federal tax court in San Francisco, and we won, and so we're one of the few that actually beat the government on the hobby loss rule."
The IRS' hobby loss rule says that if an activity is not engaged as a for-profit entity, net losses cannot be used to offset other personal or business income. It requires all gross income earned from the hobby to be reported, but does not allow deductions of associated expenses or losses against that income.
Panelist Justin Andreozzi, a partner at Lippes Mathias where he focuses his practice on individual and corporate tax cases and criminal litigation, also believes the IRS takes a close look at Thoroughbred owners. He encourages owners to put in writing business plans and strategies that express an aim to make money in racing horses.
"Keep your notes, take the things that you've learned, send emails, put it in minutes to your business manager, your partners, your spouse, your team—whoever you work with in this industry," Andreozzi said. "Put it in writing that you are trying to make a profit. When you look back and see that you lost money for the year, lost money for the last three years; put in writing your ideas on making money. Write about the ideas based on the things you've learned for how you're going to make money, how you're going to turn things around.
"Put it in writing. It's going to pay dividends later."
