TAX WITHHOLDING ON PAYOUTS

The National Thoroughbred Racing Association has endeavored to change the U. S. Treasury Department rules issued in 1978 pertaining to reporting and tax withholding on large winning bets on horse racing. The bettor must fill out IRS Form W-2G if he or she hits a 300-to-1 payoff and collects at least $6oo. When the payoff is $5,000 or more the IRS mandates that 25% be withheld by the racetrack or advance deposit wagering company.

As betting on pari-mutuel wagering on horses has evolved dramatically since 1978, the dominance of small win-place-show bets has yielded to exotic wagers wherein $6oo returns are not “large.”

A case involving Irish billionaire and racehorse owner J. P. McManus is an extreme example of a dispute over withholding on gambling winnings. Mr. McManus made his fortune as a currency and derivatives trader, a bookmaker, and an investor in sundry businesses, including Ladbrokes.

In 2012, Mr. McManus won $17.4 million from an American named Alec E. Gores (the type of bet was not disclosed). Mr. Gores paid Mr. McManus $12.2 million and withheld $5.2 million to cover taxes that might be owed in the United States.

The U. S. and Ireland are parties to a treaty specifying that citizens of either country cannot be taxed by both nations for the same income. Mr. McManus said he had already paid taxes on the gambling winnings in his putatively permanent residence of Ireland (i.e., via a €200,000 “domicile levy”) and asked the IRS for a refund.

(With homes and offices in Ireland, Switzerland, England, and Barbados, determining a “permanent residence” for Mr. McManus and other mega-wealthy world travelers for tax purposes is an elusive concept. Similarly, some American companies are doing mergers, called “inversions,” with smaller firms in tax-friendly nations for corporations, and Ireland is a preferred venue.)

In 2014, the IRS tentatively agreed with Mr. McManus’ contention but did not release the $5.2 million pending a review, which revealed that Mr. McManus did not pay taxes in Ireland in 2012.

A typical bettor hitting a rare lucrative wager and then having 25% withheld by Uncle Sam can’t empathize with Mr. McManus. A $5.2 million withholding likely did not constrain Mr. McManus’ betting whereas, say, $1,500 withheld on a $6,000 payout does indeed constrain the average bettor. It certainly has a negative effect on churn.

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