06/19/2014 12:53PM

Crist: See Jane get fleeced by the IRS

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Dick and Jane go to the racetrack. Each makes a $2,000 wager that pays off $5,200, for a profit of $3,200. Well done, Dick and Jane – but why does Dick get to keep his whole $5,200, while Jane has $1,300 of her $3,200 profit withheld by the Internal Revenue Service?

The difference is that Dick made a $2,000 win bet on a winning 8-5 shot who paid $5.20. Jane, on the other hand, bought a $2,000 pick six ticket (5 x 5 x 5 x 4 x 2 x 1, let’s say) that won and paid $5,200. Why should this make a difference? It shouldn’t, but it does.

According to the IRS, Jane’s $5,200 is subject to federal tax reporting and withholding while Dick’s is not, even though they had identical investments and payoffs.

Thanks to an antiquated and illogical IRS policy, withholding thresholds apply only if a winning bet both exceeds $5,000 and pays off at odds of 300-1 or higher. The IRS correctly deems that Dick’s odds are 1.60-1, and thus his payoff is not subject to withholding. It then incorrectly dips into Jane’s pocket under the outrageous premise that when she turned $2,000 into $5,200 – the exact same result as Dick’s win bet – what she somehow actually did was to make a single winning $2 bet that paid off at odds of 2,499-1.

Even by its own demented logic that Jane has made 1,000 different bets, the policy is completely unfair. She gets no credit for the 999 losing bets she supposedly made – the withholding is based on a completely mythical $5,198 profit, not her actual $3,200 profit.

Her actual cost basis is entirely ignored. Had she invested $6,000 instead of $2,000, she would have actually lost $800, but the IRS still would have stepped in and taken another $1,300. I am not making that up. You can lose $800, and the IRS withholds $1,300 from your “winnings” because you supposedly had a windfall profit on a single $2 bet, not a net loss on a $6,000 investment.

This crazy rule is the product of a time 40 years ago when racetrack wagering was completely different from what it is today. More than 90 percent of the handle was on win, place, and show wagering, which never had 300-1 tax implications, and the withholding regulations applied to a relative handful of transactions that may have been true low-investment/high-return windfalls.

Today, wagers into pools where the $2 payoff can easily top 300-1 account for more than half of the mutuel handle. More important, virtually no one ventures just $2 on a superfecta or a pick six. Most horseplayers make boxes and part-wheels of the sort that led to Jane’s buying a $2,000 pick six ticket. So, why do we pretend that she made a single $2 bet and hit the lottery?

This policy is costing the racing industry tens, if not hundreds, of millions of dollars every year by taking money out of circulation (i.e., customers’ pockets) that otherwise would have been repeatedly re-bet, and by driving high-end players away from the game entirely. Anyone who routinely invests in exotic wagers will be overwhelmed by withholdings. One successful pick six player testified a few years ago that his annual withholdings were roughly four times his actual annual profits and that he had needed to open lines of credit against his home just to have enough cash to continue playing until some refunds eventually arrived. (And for several technical tax reasons, those refunds never get you squared up because of glitches involving the alternative minimum tax and the deductibility of losses on state tax returns.)

The National Thoroughbred Racing Association understands the issue and has been working behind the scenes to get a reform bill passed for a decade, with no success, from a lack of interest or understanding. So, this year it is taking a new approach. It has asked the Treasury Department for “clarification” of the cost-basis policy, meaning that the 300-1 rule has to be applied to the actual cost of the bet that was made – $2,000 in the case of Jane’s pick six, $48 on Joe’s $2 four-horse trifecta box, or whatever any bettor’s ticket actually cost.

The NTRA has started a petition supporting this “clarification” here. Anyone who wants to see racing prosper should sign it right now, even if you intend never to make anything more exotic than a show bet. Besides being the fair thing to do, it would lift parimutuel handle immediately, which would improve purses and facilities, which would improve racing.