Tax Roundup, 5/13/16: IRS prepares to yank Prairie Meadows casino social welfare tax exemption.

May 13th, 2016 by Joe Kristan

pmaltoonalogoAccounting Today visitors, click here for the story about IRS phone calling policy.

Snake-eyes. The IRS plans to strip the Prairie Meadows casino of its tax exemption, according to a report in the Des Moines Register:

The specific reasons the IRS yanked the nonprofit status remained unclear Thursday. Tom Flynn, the casino’s attorney, said they expect to receive the full audit by mail on Friday and have 30 days to appeal, which they will do.

“They are consistent with what they told us before. In effect, they think we are more of a commercial enterprise than what they think should be a 501(c)(4) nonprofit,” Flynn said in referencing the tax code that establishes the casino’s tax-exempt status.

If the casino’s appeal is unsuccessful, the federal tax break loss would be retroactive to 2012.

The casino is owned by Polk County, and it has given the area a peculiar system of municipal finance. From the Register report:

Des Moines, for example, figures to lose roughly $6 million a year dedicated to street and bridge repairs. And Polk County receives nearly $16 million in annual rent.

Des Moines estimates property taxes could increase an estimated 90 cents per $1,000 of valuation if an appeal fails. That would be about $68 a year for a home assessed at $150,000.

It has also, to my mind, had a corrupting influence on local government. It played a bit part in the infamous CIETC scandal, as much of the money stolen from the now-defunct jobs training agency was gambled away there. The casino has funded discretionary slush funds for county board members, who were allowed to direct the funds to the charity of their choice.

I’m not a specialist in exempt organizations and I have no inside information. I can only guess why the IRS wants to yank the casino’s exempt status. Prairie Meadows’ 2014 Form 990 describes the organization’s mission:

Pursuant to Internal Revenue Code Section 501(c)(4), Prairie Meadows Race Track and Casino is not organized for profit but is operated exclusively for the promotion of social welfare. The promotion of social welfare includes providing a source of recreation for the community, and providing a generally positive economic impact on central Iowa. 

IRS Publication 3079, “Tax-exempt Organizations and Gaming,” may provide a broad hint as to the casino’s problem (my emphasis):

Gaming is considered both a business and a recreational activity; it does not ordinarily promote social welfare. For example, Rev. Rul. 66-150 holds that a 501(c)(4) organization whose primary activity was to operate a social facility (including a bar, restaurant, and game room) is not exempt. Therefore, a section 501(c)(4) organization whose primary activity is gaming may jeopardize its exempt status.

In very limited situations, however, a social activity such as gaming may be considered a social welfare activity. The volunteer fire company described in Rev. Rul. 74-361, provided a club room for both on and off duty members of the department when they were not otherwise engaged in fire calls. The facility was not open to the general public. Access to the social club served to increase camaraderie of the firefighters and encouraged better performance of the department, thus promoting social welfare. 

While IRS publications don’t have the force of law, they normally reflect IRS enforcement policy. This seems to say that Prairie Meadows never fit well with IRS policy on exempt gaming. An IRS challenge might have been inevitable.

Why does the IRS care? The tax law is written to limit the ability of tax exempt organizations to compete with taxable private businesses, for obvious fairness reasons. If the government is running the business, the dangers are increased by the ability of a government-run business to use licensing and law enforcement tools against competing private businesses.

The casino’s Form 990 says it also files a 990-T, the form that non-profits file to pay “unrelated business income tax” on business income, but it doesn’t appear to pay significant income taxes, per Schedule IX of the Form 990. While Form 990-T is supposed to be public, I haven’t found a copy for Prairie Meadows.

Presumably central Iowa officials will bring what pressure they can to bear on the IRS to reverse the revocation. Given the policy laid out Publication 3079, I don’t think the IRS will back down.

Prior coverage: IRS may challenge exempt status of Prairie Meadows.

 

Source: Prairie Meadows Facebook

Source: Prairie Meadows Facebook

 

Peter Reilly, Tax Court Rules That Blogger Is Subject To Self-Employment Tax. Of course, that requires blogging income.

Paul Neiffer, What is Reasonable Compensation? “The bottom line is it is important to be consistent and document your compensation arrangements as this court shows.”

Tony NittiReasonable Compensation For C Corporation Shareholder-Employees: How Much Is Too Much? “If compensation is unreasonably high, the excess amounts may be recharacterized by the Service as dividends, causing the corporation to sacrifice a tax deduction.”

Jason Dinesen, Basics of Taxes, Part 4: Tax Benefits for College Students

Jim Maule, Disregarded Entities Affect All Sorts of Tax Issues

Marilyn Ames, What Duty/Ability Does the IRS Have to Notify Clients of Professionals It is Auditing? (Procedurally Taxing)

Robert D. Flach, WHAT ARE THE OBLIGATIONS OF A TAX CLIENT? “A Form 1040 is only as correct and accurate as the information provided by the taxpayer client.”

Kay Bell, Treasury had a good April, but budget deficit still grew

 

20140818-1

 

Joseph Thorndike, Why Should Trump Get Special Treatment for His Tax Returns? (Tax Analysts Blog). “Refusing to release a tax return sullies the reputation of a candidate, prompting endless rounds of damaging speculation. Just ask Mitt Romney.”

TaxProf, The IRS Scandal, Day 1100

Scott Drenkard, Whoops! Soda Tax Petition Signatures in San Francisco Come in One Day Late (Tax Policy Blog)

News from the Profession. Former CPA Says He Stole From Trust, Filed False Tax Returns To Protect His Wife (TaxGrrrl)

Share

Tags: , , , , , , , , , , , , , ,