11/02/2007 12:00AM

IRS ignorance no laughing matter

EmailNEW YORK - Every few weeks you'll see one of those wacky news stories where some nice old granny on a fixed income gets a bill from the phone company for something like $4,325,000. The utility quickly admits that some addled clerk or software gremlin inadvertently moved the decimal point five places to the right on what should have been a $43.25 bill, the granny gets an apology and a fruit basket, and everyone has a good laugh and moves on.

There appears no such happy ending in store for the New York Racing Association, which has been hit with a $1.64 billion claim from the Internal Revenue Service in unpaid taxes and penalties for the years 2000-2005. The claim is clearly as preposterous as granny's seven-digit phone bill, since it exceeds NYRA's gross revenue for that period, much less any operating profit. NYRA says its actual liability is somewhere in the $5 million to $15 million range, less than 1 percent of the IRS's calculations.

The irony of the situation, and perhaps its speck of silver lining, is that this bizarre claim is based on the same fundamental misunderstanding of gambling economics that the IRS has imposed on only one other class of taxpayers: People who bet on horses and have the misfortune of occasionally cashing a reportable ticket over $600 deemed to have paid off at 300-1 or higher.

The IRS requires that the proceeds of such tickets be declared as gross income but that offsetting losses and expenses can be itemized as deductions only on a different part of the tax form. This does not balance out, because there are limits on deductions and because an increasing number of taxpayers are subjected to the antiquated alternative minimum tax, which kicks in and is calculated on the basis of gross income regardless of perfectly legitimate deductions.

The claim against NYRA is based in part on a parallel line of thinking: The IRS believes NYRA should be paying taxes based on the gross handle bet on its races, not in its share of the takeout. This is the same failure to distinguish gross proceeds from net profits that bedevils gamblers at tax time every year. NYRA never sees 80 percent of its gross handle, which is immediately redistributed among winning bettors. Most of the remaining 20 percent takeout goes to purses, operational expenses like track payroll and upkeep, state taxes, breeders' awards, and the like - items that the IRS is now insanely claiming are improper deductions. It's exactly the same as a horseplayer who wins $38 for the day despite cashing a $700 trifecta. The IRS wants to tax him on the $700, not the $38.

A hearing has been set for Dec. 6 on the government's claim, which NYRA's chief executive, Charlie Hayward, has called "ludicrous." Brian Rosen, a NYRA attorney contesting the claim, wrote in a brief, "It is clear from these IRS documents that, despite examining NYRA's books and records for three years, the IRS still does not understand the basic economics of NYRA's business."

Meanwhile, NYRA's increasingly dwindling and desperate rivals for the New York racing franchise are trying to turn the obvious government mistake to their advantage. Hank Sheinkopf, a political consultant who worked on the 1996 Clinton campaign, has been retained by Capital Play, the Australian outfit that may now merge with what is left of Empire Racing, the once-formidable bidder that has been renounced and abandoned in recent weeks by Churchill Downs, Delaware North, Magna Entertainment, the New York Thoroughbred Horsemen's Association, Woodbine Entertain-ment, and even Marylou Whitney.

Sheinkopf released a statement Wednesday saying in part, "Racing is supposed to generate money for education. Instead, NYRA is bankrupt and the IRS is seeking $1.6 billion from them. NYRA's era of mismanagement must be ended."

Perhaps Capital can next call for an end to the fiscal irresponsibility of senior citizens who refuse to pay their $4.325 million telephone bills.

You would think that someone in racing, an industry whose boardrooms are filled with top-rank financiers, could sit down with IRS and Treasury officials and explain the Economics 101 of the gambling business and make this issue go away. When it was just horseplayers who were being treated unfairly, there apparently was no impetus. Now that the IRS is going after the racetracks where these barons race their horses, perhaps that overdue conversation will finally take place.