IRS Socks It To NYRA

[Pace Cap'n]

NEW YORK -- The Internal Revenue Service is seeking $1.6 billion in taxes and penalties from the bankrupt New York Racing Association, a major hurdle for the group's bid to exit Chapter 11.

But in a filing Tuesday with the U.S. Bankruptcy Court in Manhattan, NYRA, which owns and operates the three biggest race tracks in New York state, said it owes the IRS no more than $5 million.


Among other things, the IRS said the NYRA should have reported the "handle," or all the money bet at race tracks and offsite betting locations as income on its tax return. The NYRA only reported a portion of those proceeds, its "takeout," as income on its returns.

The IRS is known for being a llittle goofy sometimes, but how in the world could they take the position that money taken and held for payment pending the outcome of wagers income? Banks aren't taxed on deposits, why should a racetrack?

This could be huge.

sports.espn.go.com/sports/horse/news/story?id=3090330 (http://sports.espn.go.com/sports/horse/news/story?id=3090330)

[DeanT]

That is hilarious.

Someone should take an IRS agent to the track. All will be well.

[Turntime]

For the IRS, it's perfectly acceptable to have laws that are unfair as long as 'gambling' is involved. When paying taxes on Horse Racing activities you must count total $$ cashed as gross income, then subtract your wagers (losses) on Schedule A. Not a problem except that once you reach a certain level of gross income you start to lose your deductions. You could then find yourself in the silly position of having lost money for the year and having to pay the IRS thousands extra to boot. And, unlike other business ventures, you can't claim a loss or carry losses over to another year. For those horseplayers that think of themselves as 'investors' and not 'gamblers', the government does not agree with you.

What the IRS is doing to NYRA sounds a bit similar. I wonder if counting the 'handle' as gross income might change the tax rate or limit deductions in some way. Interesting to see how this turns out.

[gIracing]

well, the money to fund the war has to come from somewhere :cool:

there is no way this stands up.

If it does, banks will have to start reporting all deposits as revenue

Every track in the country will have to start doing hte same, which would put tracks out of business, which would drive up the unemployement, which won't happen

It could get as silly as even coin machines would then, all money put in to get out change could be seen as revenue.

It has to stop somewhere. this is nothing more than them kicking NYRA while they were down. Now, I'm not a NYRA fan, but just no.... the IRS needs to look in the mirror.

Why not work with the industry, like europe does, drive more people to gamble and make more moeny out of it THE RIGHT WAY instead of milking a 70 year old woman

[OTM Al]

I know the IRS is a federal level organization, but the timing of this makes one wonder if certain state senators had some involvement in nudging this along to help discredit NYRA. Perhaps one needs a tin hat to believe this, but it does come at a convenient time for some....

[harnesslover]

The IRS is known for being a llittle goofy sometimes, but how in the world could they take the position that money taken and held for payment pending the outcome of wagers income? Banks aren't taxed on deposits, why should a racetrack?

This could be huge.

sports.espn.go.com/sports/horse/news/story?id=3090330 (http://sports.espn.go.com/sports/horse/news/story?id=3090330)

$5 MILLION versus $1.6 BILLION?? That's a bit of a gap.. Good god

[trigger]

"The IRS case involves four other areas of taxation. They are:

— The IRS asserts that NYRA should not have deducted a portion of stakes and purses because it believes they are paid, at least in part, out of the gross handle, which is not reported as income by NYRA, and not out of NYRA’s takeout, which is reported as income. As a result, the IRS believes NYRA understated taxable income by $541-million.

— The IRS asserts that NYRA should not have deducted what it believes is NYRA’s own portion of stakes and purses because it believes that allocations and payments were coming from gross handle and not from NYRA’s own funds. In this area, the IRS believes NYRA understated taxable income by $151-million.

— The IRS asserts that NYRA improperly deducted payments to backstretch workers, who are employed by horsemen and who are not NYRA employees. Deductions totaling $6.9-million should be disallowed, the IRS maintains.

— Ross wrote that the IRS believes that New York’s off-track betting facilities receive “such a grand benefit from the shared pool of NYRA races and offer nothing in return, [so] there must be some form of cost allocation.” Accordingly, relying on Internal Revenue Code, the IRS allocated to OTBs a portion of NYRA’s expenses based upon the percentage of handle generated by OTBs. The IRS believes deductions totaling $347-million should be disallowed."

http://www.thoroughbredtimes.com/national-news/2007/November/01/Internal-Revenue-Service-sets-sights-on-NYRA.aspx

[kenwoodallpromos]

"Ross wrote that the IRS believes that New York’s off-track betting facilities receive “such a grand benefit from the shared pool of NYRA races and offer nothing in return, [so] there must be some form of cost allocation.”
What does this mean in plain English?

[trigger]

"Ross wrote that the IRS believes that New York’s off-track betting facilities receive “such a grand benefit from the shared pool of NYRA races and offer nothing in return, [so] there must be some form of cost allocation.”
What does this mean in plain English?

I'm guessing....the IRS is saying that the NYRA is providing services to the NYOTB's for free (i.e. a gift) and, that's all fine and good, but the feds are not going to pay for NYRA's largess by allowing NYRA to deduct the cost of the free services to the NYOTB's from NYRA's bottom line (and reducing taxes paid).
Any comments from CPA's out there?

[kenwoodallpromos]

So far to me it sounds like NYRA is claiming there free service should be considered a chariity deduction and deductible.

[Brisson]

at first i laughed at the IRS point of view, after reading a bit further, its not so laughable, they make some very valid points..... $1.6 BILLION !!!...OUCH !!!.....That would be GAME OVER

[OTM Al]

It would be game over for the sport, not just NYRA.

[gIracing]

horse racing survived the great depression, world war 2 and D Wayne Lukas. I'm sure it will find a way to get past a little tax fraud.


I'm with the previou sposter.. lauged at first but after reading.. they make some valid points. you can't run an entire side business and not pay taxes on it.

Game over? more like FINISH HIM!!

[Premier Turf Club]

It would be game over for the sport, not just NYRA.

That's correct. Every track, ADW, OTB, etc. would be forced to close immediately if the IRS' position was accepted by the courts.

[highnote]

That's correct. Every track, ADW, OTB, etc. would be forced to close immediately if the IRS' position was accepted by the courts.


Unfortunately for us handicappers there are a lot of people in this country who would love for gambling businesses to close up shop immediately.

One problem I have with all of this is, why the hell did it take the IRS so long to make this ruling?

Does that mean all money that goes into slots at Yonkers is not being accounted for properly. And by properly, I mean by the new IRS rules.

In the end, if the government of NY wants to own the racetracks badly enough they will find a way to do it. Now, what happens to the tax debt if NYRA does not own the land? Does that mean the state of NY is going to pony-up 1.6 billion? Does that mean NYRA will get a refund of all the state property taxes they have been paying for the past 30 years?

I always knew the NYRA franchise controversy was going to be one of the big battles of the century. I didn't think the IRS would be the deciding factor, though!

[MakinItHappen]

Wow! Allegedly, cheating the Gov't out of $1.6B and still bankrupt!?! WTF? Think we might have some management issues? :confused:

I'm guessing....the IRS is saying that the NYRA is providing services to the NYOTB's for free (i.e. a gift) and, that's all fine and good, but the feds are not going to pay for NYRA's largess by allowing NYRA to deduct the cost of the free services to the NYOTB's from NYRA's bottom line (and reducing taxes paid).
Any comments from CPA's out there?

Essentially, Trigger, I think you are correct, however, I think this may be the shakiest one of the four primary IRS accusations. First, I will qualify my opinion by saying I am not intimately familiar with the relationship between the NYRA and the NYOTB, but common sense would tell me that the NYRA is providing their signal to the NYOTB and apparently is not charging them for this product (per the IRS). Apparently, the IRS feels they should be charging the NYOTB something so there would be more income to tax. But since they aren't charging the NYOTB's the IRS is recommending to disallow a certain allocated portion of their expenses as some sort of "penalty" to the NYRA.

Geez, talk about kicking a guy when they are down, lol, first the NYRA is bankrupt, as is, and now you want to get creative and try to disallow an allocated portion of their deductible expenses because you don't like their business model? PLEASE! I mean, even if they prevail on this position, do they have a hope in hell of ever seeing a dime of this? Perhaps this IRS agent should have spent their time more productively and handicapped Thursday's Pick 6 carryover at the Big A instead of dreaming up this finding. (NOTE- I would recommend putting a $2 cap on that ticket though given their apparent depth of understanding of horse racing, in general.)

Again, I may be missing something here, because I sincerely doubt that the NYRA is providing this "grand benefit" to the NYOTB and "receiving NOTHING in return", as the IRS is alleging. Isn't the concept here that the NYRA provides the rights and signal to the NYOTB and the NYOTB provides the bricks, mortar, equipment, furnishings, personnel, etc. to accept and process wagers thereby benefitting the NYRA through increased "takeout" / net handle / reportable income? This is hardly NOTHING. :confused:

Secondly, even if they were to have their way and the NYRA charged the NYOTB an amount approaching the $347 Million which is being disallowed, in the grander scheme of things this would generally result in 0 additional tax revenues? NYRA income goes up, NYOTB income goes down and IRS receives roughly same amount. Big Whoopee!

The other 3 allegations, if true, sound more compelling but perhaps that can be another post...

Best of Luck Everyone!

MakinItHappen

[highnote]

I heard Bob Costas say that sports is unscripted drama.

Well so is the NYRA franchise renewal process.

Shouldn't the NYRA monitors have warned NYRA about this?

Why wasn't any of this determined earlier?

This seems politically motivated to me. Maybe it isn't, but the timing makes it appear that way.

[MakinItHappen]

That's correct. Every track, ADW, OTB, etc. would be forced to close immediately if the IRS' position was accepted by the courts.

I am going to give the IRS the benefit of the doubt here and say that their assertions are being mischaracterized here. I do not believe they are taking the position that the Gross Handle should be taxed without the ability to deduct what is paid out in winnings as some here seem to be under the impression.

It seems to me that they are asserting that the NYRA is deducting expenses which are paid out of gross handle as opposed to the net handle, while only including in income an amount equal to the net handle. If this is correct, this would appear at best to be incompetent bookkeeping/tax preparation, and at worst tax fraud.

I would be shocked if this impacted most tracks, ADW's, OTB's, etc. I would suspect that most are fully compliant.

Hopefully, this is all just a big misunderstanding attributable to an IRS agent's lack of understanding of the industry and the track's accounting methods. I find it hard to believe that an organization of this size would attempt to deduct the payment of expenses of this magnitude if they were derived from any source other than its reported income.

In summary, this will be interesting to follow, but this position will not be the death knell of horse racing. Carry on with your normal handicapping activities and rest comfortably!

Best of Luck To Everyone!

MakinItHappen

[Pace Cap'n]

I am going to give the IRS the benefit of the doubt here and say that their assertions are being mischaracterized here. I do not believe they are taking the position that the Gross Handle should be taxed without the ability to deduct what is paid out in winnings as some here seem to be under the impression.

It seems to me that they are asserting that the NYRA is deducting expenses which are paid out of gross handle as opposed to the net handle, while only including in income an amount equal to the net handle. If this is correct, this would appear at best to be incompetent bookkeeping/tax preparation, and at worst tax fraud.

I would be shocked if this impacted most tracks, ADW's, OTB's, etc. I would suspect that most are fully compliant.

Hopefully, this is all just a big misunderstanding attributable to an IRS agent's lack of understanding of the industry and the track's accounting methods. I find it hard to believe that an organization of this size would attempt to deduct the payment of expenses of this magnitude if they were derived from any source other than its reported income.

In summary, this will be interesting to follow, but this position will not be the death knell of horse racing. Carry on with your normal handicapping activities and rest comfortably!

Best of Luck To Everyone!

MakinItHappen

This is perhaps this first instance of someone coming to the defense of the IRS.

How do you differentiate between gross and net handle? Has anyone ever heard of such a distinction? How could expenses be paid from gross handle, yet have funds available for payment of wagers? (with the exception of Mr. Dahlman, which may figure into this.)

Since this is the first instance of tracks supposedly being required to report income based on handle, it is not likely any other racing entities are in compliance. The IRS could not very well compel NYRA to report income in such a manner and not have it impact the entire industry.

It could be due to an agents lack of understanding of the business, but the citation(s) indicate at least some rudimentary research into the subject. In a previous career, I represented clients during IRS audits, and was continually shocked and appalled at the auditors' lack of knowledge of both tax regulations and basic accounting principles. Hopefully, in a case of this size and magnitude, they would have their top agents assigned, if indeed they have any "top" agents. In any event, it is going to be very costly for NYRA to either defend or settle this matter.

[Pace Cap'n]

I'm guessing....the IRS is saying that the NYRA is providing services to the NYOTB's for free (i.e. a gift) and, that's all fine and good, but the feds are not going to pay for NYRA's largess by allowing NYRA to deduct the cost of the free services to the NYOTB's from NYRA's bottom line (and reducing taxes paid).
Any comments from CPA's out there?

This is most likely correct. An analogy would be imputed interest on a loan. If I loan you 100K, and say just pay me back when you can, no interest, then when and if the IRS hears of this, they are going to require you to declare the unpaid interest as income.

[MakinItHappen]

How do you differentiate between gross and net handle? Has anyone ever heard of such a distinction? How could expenses be paid from gross handle, yet have funds available for payment of wagers? (with the exception of Mr. Dahlman, which may figure into this.)


Below is a link to an article that illustrates as an example the various components of the gross handle. These pie charts demonstrate rather clearly the potential complexities associated with tracking and understanding the many potential components of "net handle" under various wager origin scenarios.

http://www.calracing.com/pdf/Takeout-WhoGetsWhat.pdf

Net handle would exclude the portion of monies that is returned to the public plus any other components the NYRA chose to exclude from its reported income. It sounds to me like the IRS is asserting that the NYRA excluded certain of these components (ie- funds earmarked for purses) from its income yet included payment of them as deductions from its income. If true, this would not be appropriate and is the source of the problem.


Since this is the first instance of tracks supposedly being required to report income based on handle, it is not likely any other racing entities are in compliance. The IRS could not very well compel NYRA to report income in such a manner and not have it impact the entire industry.

While it is likely true that other racing entities do not report gross handle as income, I do not believe this is a problem as long as they have good accounting and do not try to make improper deductions. I believe in the case of the NYRA, the IRS believes that there were improper deductions combined with perhaps some accounting/tracking deficiencies, so they threw a flag on the play and said effectively "start with gross handle as income and make your deductions from there, and see what you get for taxable income." I believe they are suggesting this as a means of fleshing out the asserted inappropriate deduction.

OK, now back to the easy stuff... :lol:

Best of Luck Today, Everyone!

MakinItHappen

[Pace Cap'n]

MIH--thanks for the link. Obviously I need to study that a bit.

[highnote]

This is most likely correct. An analogy would be imputed interest on a loan. If I loan you 100K, and say just pay me back when you can, no interest, then when and if the IRS hears of this, they are going to require you to declare the unpaid interest as income.


I'm not disagreeing with you. But I don't see the IRS's logic. Who are they to tell a company or person much interest they have to charge for a loan -- or if they have to charge interest at all?

Maybe the business owner sees making a no interest loan a way of generating goodwill, or even future business -- sort of like a loss leader -- you know, like when a restaurant charges $1.99 for 2 eggs, toast and coffee. The restaurant probably loses money on that particular meal, but it brings in customers.

I bought a car using zero percent financing. Is the IRS going to go the auto manufacturer and tell them they owe taxes on implied interest?

If you have time, would like to hear your opinion. Thanks.

[Pace Cap'n]

My opinion is much the same as yours.

However, the IRS takes the position that if you derived economic benefit from the advance (which you most likely did, but may be disputed), then they are entitled to a portion of that benefit. It is determined by the general market interest at the time.

While I don't have first hand knowledge, I think it would be a safe bet that the car companies are indeed accounting to the IRS for the interest they are allowing you to forgo, and such expense is figured into the retail sales price of the vehicle.

The toast and eggs thing gets back to gross receipts.

[highnote]

My opinion is much the same as yours.

However, the IRS takes the position that if you derived economic benefit from the advance (which you most likely did, but may be disputed), then they are entitled to a portion of that benefit. It is determined by the general market interest at the time.

While I don't have first hand knowledge, I think it would be a safe bet that the car companies are indeed accounting to the IRS for the interest they are allowing you to forgo, and such expense is figured into the retail sales price of the vehicle.

The toast and eggs thing gets back to gross receipts.

Ultimately, I suppose, the IRS can do whatever it wants. I'm sure they will push as hard as they can until Congress steps in.

[alydar]

MIH,

Thanks for the great link on takeout. I think that your insights as to what the IRS is asserting is probably right on. It will be interesting to see how this develops. Based on other things that have come out about NYRA's accounting I wouldn't be surprised if the IRS is in fact, on to something. We will see, they could also be completely off base. I would like to think that before they went public with this type of allegation that they would have done their homework regarding basic pari-mutuel accounting.

[DJofSD]

...these lyrics from a flat bed truck:


Pride and joy and greed and sex
Thats what makes our town the best
Pride and joy and dirty dreams and still surviving on the street
And look at me, Im in tatters, yeah
Ive been battered, what does it matter
Does it matter, uh-huh
Does it matter, uh-huh, Im a shattered

Dont you know the crime rate is going up, up, up, up, up
To live in this town you must be tough, tough, tough, tough, tough!
You got rats on the west side
Bed bugs uptown
What a mess this towns in tatters Ive been shattered
My brains been battered, splattered all over manhattan

Uh-huh, this towns full of money grabbers
Go ahead, bite the big apple, dont mind the maggots, huh
Shadoobie, my brains been battered
My friends they come around they
Flatter, flatter, flatter, flatter, flatter, flatter, flatter
Pile it up, pile it high on the platter

- Glimmer Twins

[NYPlayer]

I...but this position will not be the death knell of horse racing. Carry on with your normal handicapping activities and rest comfortably!



It could well be the death knell of NYRA though. It seems there's no bottom to depth of incompetence in that orgranization.

I'm not really worried about anything. There are plenty of other tracks out there, but I guess I should find another ADW just in case NYRA goes kaput. At this point, it wouldn't surprise me if I wake up one day and all NYRA operations are suspended. It seems the whole situation is headed that way.

[OTM Al]

This has nothing to do with incompetance. I'm sure every track does their tax calculations in much the same way as NYRA. This is a political attack, plain and simple.

[Indulto]

This has nothing to do with incompetance. I'm sure every track does their tax calculations in much the same way as NYRA. This is a political attack, plain and simple.Who do you think is behind it?

[OTM Al]

Those who get their graft by getting someone other than NYRA in control of the franchise. A certain leader of the NYS senate comes to mind. As I said, I am aware that we are talking federal vs. state officials here, but be sure with these people favors are owed and never forgotten. Whether many of you realise this or not, if such taxation becomes legal, you better start learning how to cap the races from Europe and Australia. Consider that NYRA had a total handle of about 13 billion over the 5 year period (figures I have seen show total handle being between 2.5 and 2.8 bil a year). If you figure they kept 20% of that in takeout, that is 2.6 billion before any purses, wages, maintenace, payments to the state, etc is done and the fact that they probably have paid some of their taxes already you see just how increadibly stupid this attempt is. And its your tax money paying for this behavior.....