Archives for February 2016

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.

Copyright © 2016 Horse Racing Business

Observing change in the retail horse racing industry is like watching molasses roll downhill or grass grow. I’ve rarely seen a commercial enterprise jeopardized by competition that is so reluctant to try something new to reverse the trajectory. In particular, I’m referring to resistance to testing the effects of reduced takeout rates on wagers.

This generalization certainly does not apply to top executives at all racetracks and advance deposit wagering operations (and, in some states, governmental rules and regulations greatly constrain racetracks in markedly lowering takeout rates). Kentucky Downs and Keeneland, for example, are bettor-friendly racetracks that have endeavored to offer more attractive pari-mutuel offerings, but even so, their takeout rates are still sky high when compared to alternative gambling products.

In order for a scientific experiment to be of value in estimating mathematically how sensitive handle is to changes in takeout rates for various types of bets (or price elasticity of demand), three conditions must be met.

First, takeout rates must be lowered sufficiently to make a difference to bettors. Small percentage reductions won’t be attractive.

Second, reduced takeout rates have to be in place long enough, for at least six months, to allow for the information to disseminate among bettors and get a true reading of efficacy.

Third, the experiment absolutely has to include multiple racetracks across the country. If only one or two racetracks are used in the experiment and handle increases, that won’t indicate to what extent bettors from other racetracks were simply shifting their bets. The key questions are: was there a net increase in pari-mutuel wagering overall and, if so, by what percentage? At least five or six geographically dispersed racetracks are needed to at least partially rule out the possibility that increased handle at the racetracks in the experiment was the result of cannibalization of betting at other racetracks.

The modus operandi in the retail horse racing business is to study and talk a strategic issue to death, which does not provide much hope that six or seven racetracks would agree to participate in a takeout-reduction experiment over a six-to-twelve month period of time.

The response at most racetracks to stagnant pari-mutuel handle has been to maintain or even raise takeout rates. The underlying assumption must be that the vast majority of bettors (those not receiving rebates) are insensitive to levels of takeout rates, which aggregate wagering declines year-after-year demonstrate is just flat-out wrong.

Copyright © 2016 Horse Racing Business

So far, there are 368 nominees for the 2016 Kentucky Derby, consisting of 335 colts or ridglings, 30 geldings, and 3 fillies. With the point system making it difficult for fillies to qualify, it is a wonder that any were nominated. Seventeen nominees were bred in countries besides the United States. More horses may be nominated as the late period lasts until March 21.

What is striking about the list is that it is dominated by two trainers and one owner. Bob Baffert is the trainer of record of 35 of the nominees and Todd Pletcher is the trainer of 28. Chad Brown is a distant third but still has an impressive eleven nominees. Thus Baffert and Pletcher together account for 17% of the nominees. Zayat Stable, owner of American Pharoah, has 15 nominees.

Currently, there are eight horses with odds of less than 20/1 in Las Vegas and Baffert and Brown each train one of them.  Here’s the list of eight along with their odds and their trainer.

Mohayman 4/1 (Kiaran McLaughlin)
Mor Spirit 8/1 (Bob Baffert)
Nyquist 10/1 (Doug O’Neill)
Exaggerator 12/1 (Keith Desormeaux)
Smokey Image 12/1 (Carla Gaines)
Airoforce 14/1 (Mark Casse)
Shagaf 15/1 (Chad Brown)
Greenpaint Crusader 18/1 (Dominick Schettino)

Steve Haskin’s “Derby Dozen” in the Blood-Horse includes five of the eight but does not contain Smokey Image and Shagaf. The Haskin list has Greenpoint Crusader on top with Brody’s Cause (Dale Romans, trainer) picked for second.

It will be interesting to revisit this post on the night of Saturday, May 7, 2016 to see how things changed from the doldrums of winter. The winner of the Kentucky Derby may not be in the Las Vegas top eight or on the Haskins list. I’ll return to this subject a couple of times between now and Derby week.

Copyright © 2016 Horse Racing Business