The Internal Revenue Service claims Prairie Meadows racino in Altoona, Iowa should lose its 501(c)(4) nonprofit status and pay an estimated million in back taxes and penalties owed from 2012 to 2014. Prairie Meadows has appealed that ruling.
However, according to a recently released IRS audit, if Prairie Meadows wins its appeal, the IRS may claim the operation’s tax-exempt status only applies to horse racing. The operation’s slot machines, table games, hotel, restaurant and other non-racing revenue streams would be taxed as “unrelated business,” auditors stated.
Either situation could significantly affect local governments and charitable organizations that receive tens of millions of dollars from Prairie Meadows each year.
The racino has an annual surplus of more than $20 million, after paying salaries, operating expenses and $15.6 million in annual rent to Polk County. But the IRS audit stated even though Prairie Meadows gives away all of its profit, “The operation of gaming activities is not an exempt activity. This is a commercial activity that is carried on by for-profit entities and does not contribute importantly to the accomplishment of an exempt purpose.” The audit said the racino must offer a non-business service that reduces a government burden.
Prairie Meadows lost $23.6 million on horse racing in 2014 alone, according to figures provided by the track. Making just racing a tax-exempt activity would mean those losses could not be claimed as tax deductions at the casino. Currently, Prairie Meadows handles the racetrack like an operating expense: most of the cost is tied to winning horse owners’ racing purses, which are paid for by the casino’s slot machines and table games. Prairie Meadows Chief Financial Officer Brian Wessels said, “You can’t separate horse racing from the casino. When there was only horse racing here, the facility went bankrupt.” That occurred in the pre-slots days of the mid-1990s; revenue from the slots brought Prairie Meadows back from the edge of ruin.
The outcome of the case Regardless of the outcome of Prairie Meadows’ appeal, the $60 million owed in back taxes and penalties will likely change, according to Prairie Meadows officials and tax law experts.
Andy Grewal, a law professor at the University of Iowa who specializes in federal tax research, said the track most likely will owe less than $60 million in back taxes and penalties. “Typically, the IRS casts a wide net to begin with, and the actual settlement number could be smaller,” he stated. Still, Grewal added, “It could take years, and if it goes to litigation, a decade would be hardly unusual.”
