Sometimes scientists get it wrong. With time other scientists generally catch and correct the errors, but the initial efforts to explain the palomino color were wrong on two counts: first, the assignment of palomino dilution to the albino locus C (for color,now known to be the gene that codes for the enzyme tyrosinase) and second, the assumption that all dilute colors were palomino. We now know both are false, but the early investigators did explain why palomino does not and cannot breed true.
A palomino is, ideally, a horse the color of a new-minted gold coin with a white mane and tail. At one time, breeders tried to get them to breed true, and there are still breed registries based on palomino color. But two dark-skinned palominos, mated together, will produce only about half palomino foals, and many of them will not be the pure gold with white manes and tails wanted. Why?
Palomino is an example of what is sometimes called over-dominance or partial dominance. The color is due to a dilution gene, cream or cremillo, acting on a chestnut background. The locus is still called C, with primary alleles C+ and CCr. A single dose of cream will dilute red pigment to golden yellow, while having very little effect on black pigment—thus the dark skin. A double dose will further dilute the red to a pale cream hard to tell from white, and black to a shade that varies from a slightly dirty white to pale gray.

Palomino with a Bend Or spot on the neck, far more conspicuous on a palomino than it would be on a chestnut.
All horses, in fact all mammals, have two copies of each gene, one from the father and the other from the mother. If the basic color of the horse is chestnut and the horse has a cream gene from one parent and a non-cream gene from the other, the result will be a palomino. If one parent is a cremillo (the result of a double dose of cream acting on chestnut) and the other is chestnut all of their foals will be palomino. But if both parents are palominos, about a quarter of their foals will get the non-cream gene from both parents and will be chestnut, a quarter will get the cream gene from both parents and will be cremillos, and half will get one of each kind of gene and be palominos.
Cremillos are popular with some horse owners today, but at one time they were considered very undesirable by palomino breeders. They have pink skins and blue eyes, and they may be more subject to sunburn than horses with dark skin and eyes. They are not, however, albinos or due to any form of the albino gene. The cream gene has been found and sequenced, and a DNA test for cream is available.
Palominos don’t necessarily have a clear gold body color, or white manes and tails. Remember chestnuts have varying amounts of black hair sprinkled through the coat, and these black hairs will remain and become even more conspicuous if the red of the coat is lightened to gold. Some chestnuts even have what are called Bend Or spots, areas much darker than the body, or even black. These will be much more conspicuous with the C+ CCr combination..
Further, chestnuts often have manes that are self-colored or even darker than their bodies. These characteristics will carry over into the dilute animals, and it is not unusual to find palominos with considerable black shading or dappling, and black hair mixed into their manes and tails.
What happens if the cream gene is combined with a base color other than chestnut?

The effect of a single does of cream dilution on a bay, giving buckskin. There is considerable confusion between buckskin and dun, but this horse has the palomino or cream dilution.
One dose of cream on bay gives a buckskin, with a yellow body and black mane, tail, and lower legs. A double dose of cream gives a perlino, a cream horse with mane, tail and lower legs very slightly darker than the body, blue eyes and pink skin.
A single dose of cream on black may be missed entirely, and the horse just called black. Some blacks with a single dose of cream are slightly lighter than normal, and are called smoky. With a double dose of the cream gene, a black becomes a smoky cream, again with blue eyes and pink skin.
Although the darkest variants of cremillo, perlino and smoky cream can be distinguished from each other, the lighter variants are very difficult to tell apart. Often they are just called cream, the distinction becoming important only if they are bred.
A base color of brown or very deeply black-tipped bay? I saw one once in winter coat, and at first glance he looked like a blue roan. Looking closely, however, he did not have a mixture of black and white hairs; rather each hair had a cream base and a black tip. I was able to recognize the same horse in summer coat only because a stable employee pointed him out. In summer coat he was a typical seal brown.
I emphasized palominos with black skin because it turns out that gold horses with lighter skin (sometimes called pumpkin skin) are due to a completely different gene, champagne. I’ll talk about this later.
If you want to read some very basic information about genetics, especially genetics of coat color, have a look at http://bowlingsite.mcf.com/Genetics/Genetics.html
This is one way by which the cream gene is transmitted through generations without being identified. Horses born palomino, buckskin, and smoky black, but also carry the gray gene, have a hair coat that turns white as they age and are usually registered as “gray” rather than as their birth color. This is particularly a common occurrence in the Connemara breed. Horses sold after turning fully gray may surprise breeders by producing golden or cream offspring.
With grey and dominant white all bets are off on determining what color genes are carried unless you actually run DNA tests. I’ll talk about the grey and dominant white genes later.