And so you have an industry where we know that the risk of losses, because of the hazards of lameness, sickness, soreness, the other things that are beyond anyones control, where we know that the expenses have gone up and these risks have multiplied and yet the standard of the $50,000 standard, which is certainly far less in terms of the 1940 dollar we believe certainly is one that has sufficient guidelines so that we are able to establish not only the business purpose but not have this thing go so wild so that there are no controls. I think one of the other interesting and significant points is that the mass of people who are in this industry are not a few wealthy people who have this as a hobby. The mass of people who are in this industry, for example, in the thoroughbred field, in the 1967 figures show that out of 28,000 winning horses, the average for the owner for that year was $3,000 of winnings. As a matter of fact the average was $800, but those 28,000 winning horses didn't exceed $3,000 in winnings for the owners in that year. By the same token in the standard bred industry, out of 20,000 winning horses in 1967, the owners of those 20,000 horses also averaged winnings of $800 a year. The great bulk of the people who are in this field are the people who are in this with relatively modest means, and to whom it is most important that they be in this to win, because they are not people who have the resources to afford doing something where they can keep on losing. We feel, however, and we know that the very difficult task that this committee has is to strike a balance, whereby the person who is in this as a bona fide business is protected, and that the few people who are abusing things should not be protected. We would respectfully submit that we think by uniformly treating this in terms of horseracing as a business as other businesses are treated that this would be one solution. For example, we subscribe to the idea that a capital gains period should be the same as it would be in a business or an industry. We also subscribe to the idea that just as a businessman who would sell his machinery in his business under section 1245 of the code to the extent that he is taking a depreciation on that machinery, and sells the machinery for a price that is above his present basis, that to the extent there has been depreciation, then he ought to pay ordinary income on that part of the profit reserving capital gains for the rest. We believe that that provision and that proposed amendment to 1245 could certainly apply in terms of the horseracing industry, and at the same time put them on an equal footing with other business men, In sum then we feel from past viewpoints, and we believe this is certainly true of the other States, and I won't repeat those figures, which the committee has before it, but in terms of the economy of these States, we certainly think that 270 would be a tremendously disruptive course and would in effect if not completely destroy, so hamper the horseracing industry that it would have a deleterious effect on the States involved. Thank you very much. The CHAIRMAN. Senator Anderson. Senator ANDERSON. A very fine statement. Senator CURTIS. I asked all my questions of the previous witnesses. Senator MILLER. The previous witnesses apparently were very much opposed to this 1-year holding period. In fact they were opposed to a 6-month holding period. Now you recommend a 1-year holding period. How do you reconcile your two views? Mr. FOGEL. My answer to that, Senator Miller, would be this. First of all, I believe, as you stated, sir, that the Treasury itself was willing to amend this to a 6-month period. Second, I would say that, if there could be a further amendment, so that the same type of treatment as is given to all other capital assets, it would certainly be preferable-namely, a 6-month period from the time the asset is acquired, that would put it on the same footing with all other capital assets. Senator MILLER. I agree with you, but that isn't what your recommendation is. As I read your recommendation or understood it, it was to go along with the 1-year holding after the horse becomes a breeder or a racehorse. Mr. FOGEL. The Commonwealth's position is that, if necessary, we would be willing to see this amendment adopted because we think the real crux of the problem is found in the proposed amendments to section 270. Certainly we think it would be preferable to have a straight 6-month holding period, but, if necessary, we think the people in the industry could live with the holding period as proposed in the amendment by the Treasury of the existing provisions of section 270. Senator MILLER. Speaking for myself, I just think it would serve to offer more problems than it would solve. I can't see much benefit from what we have now, but I can see some need for some other changes. But after what the previous witnesses testified, it seems to me that this would single out certainly the horse industry for special discriminatory treatment. It would be completely contrary to the method of operation. You have heard his testimony as to the 2-year-old and how it would have to be held to be a 3-year-old. The 3-year-old would have to be held to be a 4-year-old. I would think that that would be a pretty severe provision to throw at them, and I am not sure that I see the benefits that would flow from it to the Treasury. Mr. FOGEL. Well, sir, I think our position would be that to the extent that there could be equality of treatment along the line with all other businesses this would be fairer, bearing in mind as you point out and as the previous witness did that there are the facets of each industry that have to be considered, and I think this is one of the reasons why we feel that the broad brush stroke that has been applied in trying to lump everything together has perhaps produced some of these results. Senator MILLER. Thank you. The CHAIRMAN. Senator Jordan. ே (Herbert A. Fogel's prepared statement follows:) STATEMENT OF HERBERT A. FOGEL, GENERAL COUNSEL, PENNSYLVANIA HARNESS RACING COMMISSION My name is Herbert A. Fogel and I am General Counsel for the Pennsylvania Harness Racing Commission. I have been authorized by the Governor to appear before the Senate Finance Committee on behalf of the Commonwealth of Pennsylrania at these hearings. May I say, in the first instance, that the Governor and the other administration officials of the Commonwealth of Pennsylvania are most grateful to the ComBittee for affording me this opportunity to appear because of the grave economic consequences that would follow if the changes proposed by H.R. 13270 as an amendment to § 270 were adopted in their present form. The changes proposed by H.R. 13270 as an amendment to § 270 wherein "Items attributable to an activity shall be allowed only to the extent of the gross income from such activity unless such activity is carried on with a reasonable expectation of realizing a profit" could rapidly result in drastic curtailment of Standardbred and Thoroughbred horse racing in the Commonwealth of Pennsylvania, with a resultant loss of state revenues, as well as employment to many thousands in the Commonwealth whose economic livelihood depends on Standardbred and Thoroughbred racing and its related industries. In 1968, the Commonwealth of Pennsylvania received in direct taxes from parimutuel harness racing alone a sum in excess of seven million four hundred thousand dollars. Pari-mutuel thoroughbred racing in Pennsylvania commenced for the first time in 1969. It is conservatively estimated that barness racing will Field in excess of eight million dollars in revenue in 1969, and thoroughbred racing another five million, making a total of thirteen million dollars as direct taxes from this source. In addition, the City of Philadelphia has a dire need for taxes for education, a need that plagues so many other major cities in the country. Philadelphia received almost two million dollars in direct taxes from pari-mutuel wagering for its public schools in 1968. In 1969, it is estimated that this figure, through the combined revenues of harness and thoroughbred racing, will approximate three and one-half million dollars. In areas of the State other than Philadelphia in which harness racing tracks are located, approximately a million dollars in taxes were raised in 1968 for smaller communities needing funds to improve their sewage and water disposal plants. These sums will also be substantially increased in 1969. The figures cited do not take into account other substantial revenues which the Commonwealth derives from sales taxes on food and other items sold both on and off the tracks in connection with the conduct of the pari-mutuel racing industries. Pennsylvania, in this connection, is but representative of the thirty states that have pari-mutuel racing. For the year 1968 alone, the tax revenue from racing to these states were in excess of $426,800,000. The proposed changes will seriously affect, if not destroy this source of revenue, at a time when this Committee is well aware of the monumental problems confronting the states in their efforts to raise the necessary tax revenues in order to continue to furnish necessary services. Quite apart from the loss of tax revenues, however, the impact upon the economy of the Commonwealth would be even more devastating. In Pennsylvania alone there is a capital investment in racing plants of approximately fifty million dollars. All facets of the horse industry in Pennsylvania, including the land in use for raising and breeding horses, represent an investment that is well in excess of one hundred million dollars. The payroll at the tracks alone for grooms, trainers, waiters, maintenance men and others who find gainful and useful employment through the operation of pari-mutuel racing in Pennsylvania is in excess of ten million dollars annually. The salaries of all others who are employed in all facets of the horse industry, including the feed and breeding industries, brings the annual payroll to well in excess of fifty million dollars. These figures projected for the thirty states would indeed demonstrate the very substantial contribution to the overall economy made by horse racing and relating industries. The administration in Pennsylvania is mindful of the purposes behind the Tax Reform Act of 1969 and, indeed, the Commonwealth not only realizes, but supports the need for tax reform in many areas. The concern, however, is that in attempting to bring about needed reforms in certain areas, the wording of § 270 is such that it could result in bringing about a result which we know is not the intent of the drafters of this legislation; namely, the virtual destruction of the horse racing industry. $213 of H.R. 13270,* in particular, which sets forth the general rule withont reference to dollar limits could be interpreted to eliminate the thousands of persons who own horses on an extremely modest scale and whose gross income from this activity in the years in which they do not have good winning horses often does not exceed three to four thousand dollars per year, while their expenses are in excess of that amount. According to the thoroughbred record on distribution of earnings for all 1967 horsse that started in races, there were 28,743 thoroughbreds with winnings of $3.000.00 or less, and the average winnings of this group were $802.00 for each winning horse. This includes over 70% of the horses starting and does not include the number of horses trained on which expenditures were made that were not even able to enter races due to lameness or sickness. In harness racing, 20,473 horses earned less than $3,000.00 per horse, with the average earnings of this group totalling only $863.00 per horse. Again, this number represents 75% of the horses that actually started, and does not include horses which were trained and for reasons cited were unable to enter races. Horse racing, by its very nature, is a hazardous undertaking due to sickness, lameness and other hazards which are unpredictable. § 213 of H.R. 13270, as written, could drive the bulk of the owners out of the business since the bulk of the owners are, indeed, the small owners. The probable result would be that there would not be enough horses to fill the races, thus depriving the Commonwealth of this source of revenue collected in 1968 as the result of the activity of 1,750,000 patrons who wagered a total in excess of 126 million dollars. Indeed, the effect would be the same upon all thirty states, in which 65,460,000 patrons in 1968 wagered in excess of $5,226,000,000.00, to bring about the tax yield of almost one-half billion dollars. Although the small owners incur losses frequently until they are fortunate enough to develop a horse or horses that can recoup these losses, the over-all picture, including the revenues obtained by the states, is not one of a "loss" industry. In addition to the approximately one-half billion dollars in state taxes, about one-third of a billion dollars in purses will be paid to the owners of competing horses in 1969. Assistant Secretary Cohen, on page 29 of his statement before this Committee, states: "The Administration urges the adoption of this proposal as an effective means of dealing with cases where the tax losses are being used to subsidize the hobbies of wealthy taxpayers." We believe the objective can be attained wtihout destroying the entire industry with the concommitant ill effects on thousands of small taxpayers and thousands of other persons whose livelihood depends on the business of horse racing. Specifically, we believe that there are several approaches which we would respectfully submit for consideration by the Committee that can achieve the desired result of eliminating the abuses and at the same time not destroy the horse racing industry itself. First, the proposal that the holding period for horses be at least 365 days after such animal normally would have first been used for its intended purpose before capital gains treatment will be afforded is certainly one that we heartily endorse. We believe that this would go far toward eliminating the abuses of some who are not interested in the sport or the industry, but merely interested in a tax shelter. Second, we submit that depreciation rules akin to those set forth in § 1245 of the Internal Revenue Code be adopted, as proposed in H.R. 13270, with respect to the sale of horses and other livestock. We believe that it would be equitable for those in the horse business to have the horses treated in the same manner a businessman has personal property, such as machinery, treated upon the sale of that property. Specifically, to the extent that depreciation would be taken (whether straight line or accelerated), upon the sale of the animal, the tax treatment would be as follows: if the price is in excess of the adjusted basis of *(§ 213 contains the amendments proposed to § 270 of the IRC of 1954.) the animal, the amount in excess of the adjusted basis which is realized that is etal to depreciation taken should be taxed as ordinary income with capital gains treatment being restricted to the balance received. The enactment of the Changes to § 1245 of th Internal Revenue Code which includes livestock would be sufficient to curb any abuses presently in the industry. As such, § 211 of the House Reform Bill relating to the denial of capital gains when there exists a surplus in an excess depreciation account, should be deleted. In short, we feel that there is no need to place a heavier burden on the horse indusrty than is presently placed on other businessmen. Third, we submit that the proposed changes to § 270 of the Internal Revenue Code be entirely deleted. We believe that such legislative changes, rather than the changes proposed to $270, would achieve the result of correcting the abuses and, at the same time would permit the thousands of legitimate and bona fide persons who own and breed horses to remain in this industry. In enacting these changes, the States would not be losing a vital source of revenue and the thousands of persons employed in this industry would continue to earn their livelihood in this manner. Again, may I thank the Committee for the opportunity that was afforded me on behalf of the Commonwealth to submit these views. The CHAIRMAN. Now we will hear from the attorney general of the State of Delaware, the Honorable David P. Buckson. Please proceed. STATEMENT OF HON. DAVID P. BUCKSON, ATTORNEY GENERAL OF THE STATE OF DELAWARE Mr. BUCKSON. Thank you, sir. I have been an owner, breeder, trainer, and driver of harness horses for many years. Insofar as they apply to the racehorse industry, I oppose the various legislative proposals-including H.R. 13270-which would restrict the deduction of farm losses against non farm income; would provide for the recapture of depreciation on livestock; and would change the "hobby loss" test from the purpose and motivation to make a profit, to "reasonable expectation" of making a profit. My basic point is a simple one. Each of the pending proposals-not to mention the totality of them-would ill advisedly and needlessly jeopardize a vital source of important revenue to many States, including Delaware-namely taxes yielded by parimutuel wagering at race tracks. These revenues amounted to $426 million in 1968 and will approximate one-half billion dollars in 1969. At the same time, I would add that on a net basis, the effect will be to shut off a source of substantial Federal income tax revenues. The State of Delaware has a direct interest in this proposed legislation. It is threatened with the loss of $7 million which it presently realizes from horse racing in the form of direct parimutuel taxes. This is vitally important to a State as small as Delaware. Beyond this, the Delaware Legislature has recently appropriated substantial funds to stimulate race horse breeding in Delaware and this is rapidly becoming an important farm industry to the State of Delaware. I do not lightly state that the pending proposals threaten the survival of parimutuel racing. My reasons for making this statement are set out below and are based on the knowledge I have accumulated in the many years I have spent in my various capacities in the racehorse industry. Let me first direct your attention to the Treasury's estimates of the revenue which would be raised by the farm loss, depreciation and hobby loss provisions of H.R. 13270, as recited in Senator Metcalf's testimony before this committee on September 22, 1969. His testimony states as follows-and I quote-that the Treasury's estimate of the |