WASHINGTON – An Iowa casino and racetrack is challenging the proposed loss of its tax-exempt status by the Internal Revenue Service, claiming it lessens the burdens of government and is a legitimate 501(c)(4) social welfare organization.
In a 15-page letter sent to the IRS' Chicago office this month, Marcus Owens, a partner with Loeb & Loeb in Washington representing Prairie Meadows Racetrack and Casino in the dispute, said he and the track were "puzzled" by the agency's decision to strip it of its nonprofit status. He argued that the track still functions as a social welfare organization despite the IRS' determination otherwise. Following an 18-month audit, the IRS determined in May that Prairie Meadows was operating in a business-like manner and was not serving its social welfare purpose as a 501(c)(4) organization. The service sent a Revenue Agent Report (RAR) to the track on May 12 that claimed Prairie Meadows was providing more-than-incidental private benefit and proposed removing its tax-exempt status.
"Prairie Meadows hereby protests the proposed revocation and requests that the IRS reconsider its position," Owens wrote in his June 8 letter. "Should the IRS maintain its position after such reconsideration, Prairie Meadows requests that this matter be transferred to the appeals office for review. We also request a hearing to present our arguments and factual corrections and to hear the appeals office's analysis of the case."
The IRS opened an audit of Prairie Meadows in November 2014, eventually concluding the track was not engaging in exempt activities and was not lessening the burdens of government, as outlined in the federal tax code's 501(c)(4) exempt requirements.
According to the IRS, a 501(c)(4) social welfare organization qualifies as tax-exempt if it operates exclusively for social welfare and is not organized for profit. To promote social welfare, an organization must "operate primarily to further the common good and general welfare of the people of the community," according to the agency.
In its RAR, the IRS claimed the track's gaming areas, banquet space, hotel, restaurant, ATM machines, and gift shop are unrelated to exempt purposes. It also claimed that Polk County, where the track is located, has insufficient involvement in day-to-day operations.
In response, the track argued that the restaurants and gift shop provide employment opportunities and additional revenue for payments back to Polk County. Prairie Meadows also said that it provides monthly reports to Polk County, which serves as the landlord of the track and assists in the facility's budget and future expansions.
The track is governed by a board made up of 13 members, four of which are Polk County representatives.
Owens acknowledged the county's role has diminished somewhat since the track opened 27 years ago, but for good reason.
"It is natural that, during the beginning years of a new project and while there is debt outstanding, Polk County would have a larger role in the oversight of the day-to-day operations," he wrote. "As the debts were paid off and as Prairie Meadows gained more experience as operator??? … Polk County may have reduced its daily oversight role, but it is still significantly involved in the high-level governance and planning of the facility."
Prairie Meadows opened in 1989 to "promote economic development, jobs, agriculture and tourism" for Iowa, according to its website. In his letter, Owens said it has provided "millions of dollars" to support economic development in Polk County since its founding. Prairie Meadows distributes its net receipts to local Iowa governments and charitable organizations.
Prairie Meadows has transferred $25.8 million in earnings to Polk County and $39.8 million into the local community through investments and contracts since its inception, according to Owens. He also said the casino provided 1,386 jobs in 2015 with wages and benefits totaling $54.3 million.
Prairie Meadows is required to make monthly rental payments to Polk County and must receive county approval to make improvements costing more than $100,000.
From 1989 to 2015, the casino and track paid rent totaling $264 million to Polk County and distributed an additional $411 million of net receipts to the county, the cities of Des Moines and Altoona, the Polk County School District and charitable organizations.
Prairie Meadows says on its website that it has given more than $1.4 billion in taxes, grants and charitable donations to the state, with $600 million of that going to Polk County.
"An application of accurate and relevant facts to the applicable law reveals that Prairie Meadows' activities continue to be consistent with its social welfare purposes within the meaning of 501(c)(4), and its public benefits to the community far outweigh any incidental private benefit," Owens wrote.
The IRS inquiry into Prairie Meadows' finances stemmed from an alleged whistleblower report, according to the Des Moines Register. The publication also said the track owes roughly $60 million in back taxes dating to 2012.
Prairie Meadows, located in Altoona, roughly ten miles from Des Moines, operates a casino, horse racetrack, and hotel as well as dining and entertainment options. It is the state's largest casino as well as Iowa's only licensed horse racing facility.
Polk County bailed the racetrack out of bankruptcy in 1993, and the track introduced gaming machines four years later to help spur economic growth. Its hotel opened in 2012.
The IRS also audited Prairie Meadows in 2005, where it determined the casino continued to qualify as tax-exempt. The casino has held tax-exempt status since 1989.
In his letter, Owens also said the IRS mistakenly referred to Prairie Meadows as a 501(c)(3) organization in its RAR.