04/10/2008 11:00PM

Bettors take beating from tax man


NEW YORK - Of the millions of Americans who will be grinding their teeth between now and midnight Tuesday when their income taxes are due, none will be grinding them harder than citizens who had the misfortune to cash reportable parimutuel tickets in 2007.

It doesn't matter whether they won or lost for the year and whether their annual handle is in the thousands or the millions. Anyone who had any so-called "winnings" reported to the Internal Revenue Service faces uniquely unfair and punitive tax treatment.

The problem stems from the failure of the IRS or the racing industry to acknowledge that racetrack betting has changed drastically since the current codes were written in the early 1970s. Exotic betting pools that can produce reportable payoffs began as a novelty and a sliver of the national betting handle but have become a staple of the game and a multibillion-dollar business. Yet payoffs of more than $602 at odds of 300-1 or greater are still treated as windfalls which must be reported and frequently withheld. A person who bets $50,000 a year into such pools and gets back $40,000 has lost $10,000 pursuing his hobby and should not be subject to tax or withholding on his proceeds. The IRS, however, believes he has won $40,000 and comes looking for a slice of that if it hasn't already taken one.

In theory, a horseplayer who keeps careful records can deduct his losses up to the amount of those winnings, but only in theory. You can't simply net out your losses against your winnings. The craziest part of the code is that proceeds have to be declared as income on one part of the tax form while any offsetting losses have to be claimed as an itemized deduction. They don't reduce a taxpayer's obligation under the Alternative Minimum Tax, and sometimes can't count at all if the taxpayer has already maxed out his Schedule A deductions.

It remains a mystery why the racing industry has not taken aggressive action, if only out of self-interest: Literally hundreds of millions of dollars are taken out of circulation each year through needless withholding, overtaxation, and the black-market ticket-cashing scams that turn fearful players into tax criminals. The National Thoroughbred Racing Association has pursued the matter legislatively with little luck. It is hard to believe that the sport's many politically well-connected owners and breeders, who would benefit directly from higher handle and thus higher purses if the situation were addressed, can't make better progress behind closed doors with their friends in the Treasury Department or in the halls of Congress.

Two simple changes need to made. First, the withholding threshold needs to be raised from the current absurdly low $5,000 to a true windfall level of $25,000 or more. Second, players should be able to apply losses against winnings before their gross proceeds are erroneously declared as taxable income.

In addition to galvanizing support for these changes, which would improve track handle more than all current advertising and promotions combined, tracks should continue to reduce minimum bets, one of the few ways of exempting exotic payoffs from tax liability: a $6,000 for $2 superfecta is subjected to $1,500 in withholding, and a $3,000 for $1 payoff is reported to the I.R.S. and creates a tax liability for the player, but a $300 for $0.10 payoff dodges the taxman altogether.

New York's threat to OTB foolhardy

New York City Mayor Michael Bloomberg continues to insist he will simply shut down the city's Off-track Betting Corporation on June 13 if it is not given a higher share of the betting handle. Employees are scheduled to receive formal layoff documents this week to comply with a requirement of 60 days' notice.

As petulant and misguided as Bloomberg is being by threatening to fire 1,500 employees and deprive the city of millions in annual OTB profits, he has an even more reckless ally in City Councilman Robert Jackson, a former labor activist who represents District 7 in upper Manhattan. At a city council meeting Wednesday, Jackson called on Bloomberg simply to start withholding OTB's statutory payments to the state, tracks, purses, breeders, and regulators and "make them sue you for it." He referred to these entities as "pigs feeding on our corn."

If Bloomberg or the city is foolish enough to follow Jackson's call to illegal action, all it will accomplish is an immediate cutoff of racetrack signals to city bettors and an even earlier financial blow to the city than the mayor's threatened shutdown would cause. Bloomberg and Jackson don't seem to understand that if they manage to shut down New York City OTB, customers will simply move their business to out-of-town and out-of-state bet-takers who would be more than happy for the additional patronage, leaving the city with no corn at all.