May 20, 2015 Department of the Treasury Internal Revenue Service CC:PA:LPD:PR (REG-132253-11) Room 5205 Internal Revenue Service P.O. Box 7604 Ben Franklin Station Washington, DC 20044 Re: Request for Comments on Pari-Mutuel Gambling Winnings in REG-132253-11 Dear Sir or Madam: Introduction The American Horse Council (AHC) appreciates the opportunity to provide this letter in response to the invitation by the U.S. Department of Treasury ( Treasury ) and Internal Revenue Service ( IRS ) for com ments on the proposal to amend the regulations under Treas. Reg. Sec. 31.3402(q)-1 regarding the reporting and withholding of gambling winnings on pari-mutuel racing. In the narrative to the rule proposal, Treasury and the IRS state that the racing industry has expressed concerns similar to those addressed in the rule proposal raised by other forms of wagering relating to when wagers with respect to horse races may be treated as identical. The AHC re-affirms that concern and encourages Treasury and the IRS to follow through on their statement that they intend to amend the regulations under Treas. Reg. Sec. 31.3402(q)-1 in a manner consistent with these proposed regulations with respect to pari-mutuel racing. The AHC supports that expressed intent and requests Treasury and the IRS to amend the regulations applicable to pari-mutuel racing to ensure that both the withholding and reporting of winnings from pari-mutuel wagering are appropriately updated so that they accurately and fairly reflect the realities of wagering on horseracing today. In particular, for the reasons discussed below, the AHC respectfully requests that Treasury and the IRS amend Treas. Reg. Sec. 31.3402(q)-1 to make it clear that the definition of the amount of the wager reflects the total amount wagered by a bettor into a specific pari-mutuel pool for purposes of determining whether any wagering proceeds paid to the bettor from that pari-mutuel pool are subject to withholding or reporting. In other words, all wagers 1616 H Street NW 7th Floor. Washington DC 20006. 202-296-4031. Fax 202-296-1970 Email: AHC@horsecouncil.org. Web Address: www.horsecouncil.org
placed in the same pari-mutuel pool should be treated as identical wagers. The American Horse Council The AHC is a Washington-based association that represents over 120 equine organizations before Congress and the federal regulatory agencies. AHC member organizations include all breeds, breed registries, national and state equine associations, racing associations and race tracks offering Thoroughbred, Standardbred, Quarter Horse and Arabian racing, horsemen s associations representing Thoroughbred, Standardbred, Quarter Horse and Arabian trainers, state horse councils, recreational associations, horse shows, veterinarians, farriers, rodeos, and other equine-related stakeholders. The AHC also includes individual horse owners and breeders, veterinarians, farriers, trainers, professional, amateur, and recreational riders, and commercial suppliers. Individually, and through our organizational members, the AHC represents several hundred thousand horse owners and others involved in all sectors of the horse industry. Economic Effects of Racing in the U.S. Horseracing has existed in the U.S. since colonial times. Today nearly 40 states have race tracks and more states have racing in the form of off-track wagering. Nearly every state has racehorse breeding farms, a large agri-business that is itself supported by racing. According to The Economic Impact of the Horse Industry on the United States, a study conducted by Deloitte Consulting LLP and commissioned by the American Horse Council, the racing industry produces a total economic impact on the U.S. economy of $26.1 billion and supports nearly 400,000 full-time jobs. Tens of millions of fans enjoy horse racing and wagering on it. Pari-mutuel racing and the money wagered on it are the engines that drive and support this economic structure. In addition, pari-mutuel wagering produces hundreds of millions of dollars in tax revenue to states and localities that have racing, racetracks or breeding farms. Wagering on Horse Racing Then and Now Tens of millions of taxpayers enjoy wagering on horse racing. Unlike casino games, the racing fan is not betting against the house. He/she is betting against the other bettors on that race that have bets in the same pool. Payoffs on winning wagers on U.S. horse races are determined through the pari-mutuel system of wagering, which means betting amongst ourselves in French. Because the players themselves establish the odds and therefore the payouts, the pari-mutuel system of wagering on horse racing is different from casino wagering, where the winning wagers are determined through fixed odds and the patrons are betting against the casino. Wagering on horseracing used to be a simple process 25 years. Patrons bet on horses to win, place or show, which meant to come in first, second, or third. But in the late 1980s, with better technology and more competition for big payouts from state lotteries 2
and casinos, racing developed multi-horse and multi-race wagering, called exotic wagering. Today, racing patrons may box bets, meaning a bettor can wager on various possible combinations of a group of horses in the same race; key one horse in one race in one position with combinations of other selected horses in the race; or wheel horses in multiple races with combinations in multiple races. The result is that the odds and potential winnings have become higher. While this has allowed horse racing to better compete with other forms of wagering, it has also dramatically increased the number of winning wagers subject to reporting and withholding under the current outdated IRS requirements. As noted, pari-mutuel wagering has become much more sophisticated, allowing patrons to bet various horses in various positions and various combinations, all in one or several races. The combinations in this exotic wagering mean not only that the odds have become higher, but also that the potential winnings have become higher. This also means that the amount that must be wagered to cover these various exotic bets, and have a reasonable chance of winning, has also become higher. While the pari-mutuel racing industry has responded to the competition from other forms of wagering to retain its viability, the federal rules regarding reporting and withholding of winnings have not. Outdated federal reporting and withholding requirements are limiting the racing industry s ability to compete with other forms of gaming today. They are also unfair and confiscatory to our patrons. Treasury and the IRS must respond to the present-day realities of wagering too by updating their regulations, as they have stated their intent to do in this rule proposal. The amount of funds invested by bettors in these present-day exotic wagers, especially those that are boxed, keyed or wheeled, is substantially more than traditional straight wagers. Bettors are willing to increase the amount of their wagers because such wagers cover more combinations of horses, thereby increasing their chances of winning and the amount won. It is this increased cost of the modern exotic wagers that necessitates the updated regulations the racing industry seeks and supports. This is because the full cost of exotic wagers is not currently being considered when applying the 300:1 ratio to such wagers under the current IRS regulations. Separate Pari-Mutuel Pools One important point not reflected in the current regulations is the fact that in spite of all these sometimes complicated combinations, pari-mutuel wagering still requires a separate pool for every type of bet that is made on a race or series of races. For example, every win bet made in each race goes into the win pool for that race, regardless of which horse is selected. There also is a separate pool in each race for each exotic bet, such as an exacta bet, regardless of the horses or the order of finish selected and even if that exacta bet is boxed. It is still a separate pool. There also is a separate pool for each exotic bet type involving multiple horses in selected races such as the Pick 3. Thus, when a person 3
holds a winning Pick 3 ticket, that person shares all of the money bet into that particular pool (less the takeout for track expenses, purses, and state taxes) with everyone else holding a winning Pick 3 ticket or tickets in that pool. Very, very, very few bettors win an exotic wager by wagering $2 only on the ultimate winning combination of horses. They bet various combinations of horses with boxes, keys, wheels or other combinations. Most pari-mutuel wagering on horse racing today involves picking a combination of horses to finish in an exact order, e.g. an Exacta, Trifecta, Superfecta, or Pick 6. To win, a bettor must often place wagers on numerous combinations in hopes of having the one single combination that pays off. To cover all these combinations the total wager must be considerably higher than $2 (or whatever the particular wager might be) and the total amount of that wager should be considered in determining whether the reporting and withholding provisions are applicable to winners. For tax withholding and tax reporting, however, guidance published by Treasury and the IRS states that for purposes of determining the ratio of wagering proceeds to the amount of the wager, the bettor is only allowed to consider the cost of the single winning combination. Simple fairness demands that if a bettor will potentially be taxed on his or her share of all money wagered into a pool, that bettor also should be allowed to include all the money he or she bet into that pool for purposes of calculating the amount he or she wagered. Unfortunately, that is not the case under current IRS regulations and interpretations. Withholding and Reporting Requirements Current IRS rules require a racetrack to withhold federal taxes of 25% from bettors who realize gross proceeds of more than $5,000 from a wagering transaction, if the amount of such proceeds is at least 300 times as large as the amount of the wager. The rules allow the amount of the proceeds from the wager to be reduced by the amount of the wager. The racetrack must prepare a Form W-2G for the individual and turn over those funds to the IRS. In addition, a winning bettor is also issued a Form W-2G by the track and it is reported to IRS if the amount paid with respect to the wager is $600 or more and the proceeds are at least 300 times as large as the amount of the wager. Obviously, the definition of the amount of the wager is critical to this equation. Unfortunately, neither the Internal Revenue Code ( IRC ) nor the IRS regulations provide a definition of the amount of the wager. Treas. Reg. Sec. 31.3402(q)-1(c)(1)(ii) does address when amounts paid with respect to identical wagers are treated as paid with respect to a single wager for purposes of calculating the amount of proceeds from a wager. In this regard, the regulation states: 4
Amounts paid after December 31, 1983, with respect to identical wagers are treated as paid with respect to a single wager for purposes of calculating the amount of proceeds from a wager. For example, amounts paid on two bets placed in a parimutuel pool on a particular horse to win a particular race are treated as paid with respect to the same wager. However, those two bets would not be identical were one to win and the other to place, or if the bets were placed in different parimutuel pools, e.g., a pool conducted by the racetrack and a separate pool conducted by an off-track betting establishment in which the wagers are not pooled with those placed at the track. In addition, the Instructions for Forms W-2G and 5754 treat multiple wagers in the same pari-mutuel pool as separate wagers. The Instructions state: For multiple wagers sold on one ticket, such as the $12 box bet on a Big Triple or Trifecta, the wager is considered as six $2 bets and not one $12 bet for purposes of computing the amount to be reported or withheld. The regulations and Instructions ignore the fact that even though the $12 box ticket represented the placing of a $2 bet on each of six different combinations, all of those wagered amounts were part of a single pari-mutuel pool, i.e. either the Big Triple pool (more commonly referred to today as the Pick 3 pool) or the Trifecta pool, depending on the bet. Problems Raised by Current Regulations and Alternatives As discussed above, for both withholding and reporting purposes, to determine the amount of proceeds from a pari-mutuel wager, the amount received is reduced by the amount of the wager and to determine if the 300 to1 ratio has been met, the proceeds from a wager also must be at least 300 times the amount of the wager. However, the regulations do not provide a definition of amount of the wager, and the Treasury and the IRS are using outdated and unfair methods to calculate the wagering proceeds. This results in many bettors being over-withheld upon and hurts them and the industry as a whole. For this reason, a large and important segment of the pari-mutuel wagering public is subject to withholding on winning wagers that are not really over $5,000 and 300 times greater than the amount actually wagered. This is unfair and confiscatory in many reallife instances. Were a bettor to walk into a racetrack and bet $2 on just the right order of finish of the three winning horses in the trifecta, the winning wager may result in winnings over $5,000 and would be 300 times greater than amount of the wager. But that is not how people bet today. Bettors wager on multiple horses in various orders with boxes, wheels, and keys, involving multiple horses and multiple combinations. They have to wager far more than just $2 to cover all these various combinations and have a reasonable expectation of 5
winning. While the potential payoff is attractive enough to do this, the results with respect to withholding and reporting based upon how IRS is interpreting the amount of the wager now makes it far less attractive when they do win. As explained below, many of these serious bettors end the year with substantial amounts being unjustly withheld in the federal treasury. The IRS should use its regulatory authority to revise and update the regulations to define the amount of the wager when multiple bets are placed in the same pool to avoid this unjust result. Treasury and the IRS should provide a more comprehensive definition of amount of the wager to include the total amount wagered by a bettor into a specific pari-mutuel pool to reflect the current realities of wagering at racetracks today. In doing so, Treasury and the IRS also should delete the discussion in the Instructions regarding the treatment of multiple wagers because the Instructions ignore the fact that even though the $12 box ticket represented the placing of a $2 bet on each of six different combinations, all of those wagered amounts were part of a single pari-mutuel pool. By not including all amounts wagered by a taxpayer into the same pool for a particular bet as the amount of the wager, the incidence of withholding and reporting have greatly increased with the growth of exotic wagering and become unfair, extending past the original intent of the law. In addition, This rapid rise in withholding and reporting of winning wagers has a dramatically adverse effect on pari-mutuel wagering, pulling money out of circulation and depressing pari-mutuel wagering at a time when the industry needs more exotic wagering, not less, to remain competitive in a rapidly changing and very competitive gaming and wagering environment. This antiquated policy is costing the horse racing industry a great deal. Here is how one frequent patron describes the situation that currently exists for horseplayers in the parimutuel business: This policy [of considering only the cost of the single winning ticket] 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.) Steven Crist, Daily Racing Form, June 19, 2014. This is not an unusual scenario in today s pari-mutuel racing world. 6
What the pari-mutuel wagering industry needs is an updated and equitable approach to the determination of the amount of the wager. Practical Effects of the Current Regulations Versus Updated Regulations When the current regulations relating to reporting and withholding were enacted in the 1970s, approximately 90 percent of all pari-mutuel wagering occurred on straight win, place, and show wagers. Today, approximately 67 percent of all pari-mutuel wagering occurs on exotic wagers. As illustrated by the examples that follow, the current practice of not treating all wagers made by a bettor into the same pool as the amount of the wager produces pari-mutuel winnings that are exaggerated and unfairness is often the result. Example under Current Regulations Assume an individual decided to make a Trifecta wager (selecting the first-, second-, and third-place finishers in a race, in exact order). To improve his or her chances of winning, the individual selects a group of seven horses in the race and requests a Trifecta box. As explained above, by boxing the bet, a bettor wins if any three of the seven horses finishes one-two-three (in any order). A seven- horse Trifecta box involves 210 different mathematical combinations. If the bettor bets $20 on each combination, the total amount wagered is $4,200 ($20 x 210). After the race, the bettor holds a winning ticket that paid $6,100 (which is odds of 304-to-1 under the Instructions which limit the amount wagered to only the single $20 combination). In accordance with the Instructions, the racetrack would withhold $1,520 because the rules treat the $20 paid for the one winning combination as the only amount wagered. The withholding is computed as follows: $6,100 Proceeds from wager ($20) Amount wagered $6,080 Winnings x 25% Automatic withholding $1,520 Withholding tax The individual, however, has really only won $1,900 ( $6,100 winnings less $4,200 wagered). Consequently, after the withholding tax is taken out, the person is left with a net of only $380, making the withholding rate 80 percent of the actual winnings. The racetrack also would report $6,080 in winnings on which tax would be owed by the individual unless the person can successfully navigate the challenges of seeking a refund 7
on his/her return in the following year. The individual may be able to get back the over-withholding in Example A by claiming the balance of what was bet on the Trifecta as a miscellaneous itemized deductions on his/her tax return when it is filed the following year. But withholding by this procedure takes the money out of the wagering cycle for a long time. And, if the person is subject to the Alternative Minimum Tax (AMT), as many American are, he/she would not be able to claim the loss against the winnings because miscellaneous itemized deductions are not allowed to be deducted in computing AMT. It is also possible that the bettor would not be able to claim the losses against the winnings if that person does not itemize when filing their return but uses the standard deduction, or if the person is subject to limits on the amount of his/her deductions due to income. Not only is this unfair and confiscatory to the taxpayer who won, it has serious detrimental ramifications for the racetracks and other wagering facilities and stakeholders that share in the betting handle, as explained elsewhere. Example under Proposed Change The pay-off computations for the winning Trifecta outlined in the example above are changed by defining the amount of the wager as the actual dollars wagered by that individual into the Trifecta pool for that race. The wager in this scenario results in no withholding as the twin tests of winnings of more than $5,000 and odds of at least 300-to-1 or more are not met: $6,100 Proceeds from wager $4,200 Amount wagered $1,900 Winnings In this example, the winning payout of $1,900 is less than the $5,000 threshold and the proceeds from the wager ($6,100) are far less than 300 times the amount wagered ($4,200). Policy Rationale for Updating the Regulations Today approximately 30 million Americans wager on pari-mutuel horse racing each year. Due to the growing popularity of exotic wagering across all fan groups, virtually any bettor may be subject to reporting and withholding on winnings that are not fairly calculated. Every one of horse racing s more than 1,200 wagering service sites must calculate, track, withhold and forward to the IRS any federal tax due on winnings of more than $5,000. This process requires the expenditure by these wagering service sites of thousands of man-hours processing withholding obligations and producing Forms W-2G. In addition to the time spent processing withholding and reporting, the current withholding rules reduce revenues and economic benefits generated by the racetrack. 8
Statistics show that each pari-mutuel dollar returned to the bettor in the form of winnings is re-bet seven times throughout the course of a day. Tax withholding reduces the amount of re-betting, which not only has an effect on the bettor and the track, but also reduces the collection of additional tax revenues that are paid by each racetrack operator on its net revenues. In addition, the states that have legalized and regulated horse racing also share a percent of the betting handle, the total amount wagered on each race. For this reason, when the amount wagered is reduced because it has been withheld and taken out of the betting churn by the IRS, the amount that goes to each state from the handle is also reduced. Specific Proposed Rule Changes In light of the foregoing, the AHC respectfully requests that Treasury and the IRS exercise their regulatory authority to revise and update Treas. Reg. Sec. 31.3402(q)-1 to reflect innovations and changes in today s modern pari-mutuel wagering strategies by providing a definition of the amount of the wager that includes the total amount wagered by a bettor into a specific pari-mutuel pool for purposes of determining whether wagering proceeds from that specific pari-mutuel pool are subject to withholding and reporting. The AHC further requests that Treasury and the IRS revise the discussion in the Instructions regarding the treatment of multiple wagers in a manner that includes the total amount wagered by a bettor into a specific pari-mutuel pool when determining whether wagering proceeds are subject to withholding. Summary The current regulations relating to pari-mutuel reporting and withholding should be updated, as outlined above, for the following reasons: In the absence of a specific regulation concerning the definition of the amount of the wager, the horse industry is forced to rely on the Instructions for Forms W-2G and 5754. The guidance provided by these Instructions does not reflect today s wagering strategies and opportunities in which the vast majority of wagers are multi-horse and multi-race exotic bet types but instead reflects a bygone era when almost all wagers were straight win, place or show bets that had virtually no chance of exceeding the 300:1 ratio of wagering proceeds to the amount of the wager; The Instructions assume that a bettor has won more than he or she has actually won based on a calculation of the amount of the wager that ignores the actual investment in a single pari-mutuel pool; Due to this outdated and unfair method of calculating the amount of the wager, excessive withholding and reporting are taking bettors winnings out of circulation money that otherwise would be repeatedly re-bet; Undue withholding and reporting of winnings and the resulting lack of rebetting, depresses pari-mutuel wagering and the benefits that wagering 9
supplies to all stakeholders, including federal and state governments, which derive significant tax revenue from pari-mutuel wagering, as well as the nationwide agri-business that pari-mutuel wagering supports; An update to the regulations to reflect today s pari-mutuel wagering strategies will result in fairer and more accurate reporting and withholding by taxpayers and is consistent with IRC Section 3402(q) and basic tax policy; and Modernization will reduce burdensome and needless paperwork systemwide. The AHC appreciates this opportunity to comment on this rule proposal. If you have any questions, or if we can be of any assistance, please contact us at 202-296-4031. Thank you. Sincerely, James J. Hickey, Jr. President 10